Cheque Dishonouring Case become Invalid when cause of Action arose after Declaration of Moratorium under IBC Moratorium: Supreme Court [Read Judgement]

The Supreme Court ruled that proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) against the former director of the company cannot proceed if the cause of action for the offense of check dishonour arose subsequent to the company's moratorium being declared under the Insolvency & Bankruptcy Code, 2016 (IBC).

Vishnoo Mittal, the appellant before this court has challenged the order of the Single Judge of the Punjab and Haryana High Court by which the appellant’s petition under section 482 of Criminal Procedure Code, 1973 (‘CrPC’), seeking quashing of proceedings initiated under Section 138 of Negotiable Instruments Act, 1881 (‘NI Act’) against the appellant, has been dismissed.

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The appellant was the director of M/s Xalta Food and Beverages Private Limited (hereinafter ‘corporate debtor’). There was a contract between the corporate debtor and the RespondentM/s Shakti Trading Company where the respondent was to function as a super stockist of the corporate debtor. As a consequence of the business relationship between the two companies, the appellant, in his capacity as director of the corporate debtor, had drawn eleven cheques in favour of the respondent of varying amounts, the total amount being Rs.11,17,326/- (approximately). These cheques were dishonoured on 07.07.2018.

 A legal notice under Section 138 of the NI Act was issued to the appellant by the respondent as the cheque amounts were not furnished to the respondent by the bank. Consequently, in September 2018, a complaint was filed before the appropriate Court by the respondent against the appellant for offences under Section 138 of NI Act. Meanwhile, on 25.07.2018, insolvency proceedings against the corporate debtor, of which the appellant was the director, commenced and a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 ( ‘IBC’) was imposed. On the same day i.e. 25.07.2018, the interim resolution professional (‘IRP’) was appointed in regard to the corporate debtor.  

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On July 25, 2018, the moratorium was proclaimed. Before the moratorium was declared, the check was issued and returned. However, following the moratorium, the demand notice was sent out on August 6, 2018. Since a moratorium had already been placed on July 25, 2018, the cause of action for the offense under Section 138 of the NI Act would begin after 15 days, computed from August 6, 2018, and would be on August 21, 2018.

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The Court reasoned that when the moratorium is put in place, the board of directors' authority is suspended and the Insolvency Resolution Professional (IRP) takes over management of the corporate debtor. For actions they are no longer allowed to do, directors are consequently exempt from accountability.

The bench, which included Justices Sudhanshu Dhulia and Ahsanuddin Amanullah, figured that the appellant (director) was not in charge of the corporate debtor at the time the notice was sent because he had been suspended from his role as director of the corporate debtor as soon as IRP was appointed on July 25, 2018. Thus, in compliance with the IBC's provisions, the IRP was to execute the authority granted to the board of directors. According to section 17 of the IBC, the appellant was unable to return the amount since all of the corporate debtor's bank accounts were run in accordance with the IRP's directives.

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The Court further clarified that the S.138 NI Act cause of action arises when the money is still outstanding fifteen days after the demand notice is sent, not when the check is dishonored. As a result, the Court dismissed the check dishonor action against the appellant and granted the appeal.

To Read the full text of the Order CLICK HERE

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