IBC Moratorium Not a Shield for Directors in Cheque Bounce Cases: Bombay HC Sets Aside Discharge Order [Read Order]
The High Court noted that Section 32A of the IBC, which provides for liability for prior offences, bars prosecution only against the corporate debtor and not against the individuals responsible for the company's conduct.
Cheque-bounce-case-Taxscan
Cheque-bounce-case-Taxscan
In a recent ruling, the Bombay High Court held that the moratorium imposed under the Insolvency and Bankruptcy Code, 2016 (IBC) does not bar criminal proceedings against natural persons, such as directors, for offences committed under the NI Act, even if the insolvency proceedings were initiated prior to the cheque's dishonour.
The Court allowed a criminal writ petition filed by Ortho Relief Hospital and Research Centre,petitioner setting aside an order that had discharged the directors of a company in a cheque bounce case under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).
The petitioner had extended a loan of Rs. 15 lakhs to the company, M/s Anand Distilleries, against a cheque signed by its director, Abhaykumar Bhambore. The cheque was dishonoured in December 2018, leading to a criminal complaint. However, the directors were discharged by the trial court, which held that since insolvency proceedings against the company had commenced prior to the cause of action for the cheque bounce, the complaint was not maintainable.
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The division bench of Justice M.M. Nerlikar rejected this reasoning, observing that the Supreme Court has consistently held that proceedings under the IBC and the NI Act operate in different spheres. The Court relied on a catena of Supreme Court judgments, including P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., Ajay Kumar Goenka v. Tourism Finance Corporation of India Ltd., and Rakesh Bhanot v. Gurdas Agro Private Limited, to underscore that the liability under Section 138 is personal in nature and penal, not merely a civil remedy for recovery.
The High Court noted that Section 32A of the IBC, which provides for liability for prior offences, bars prosecution only against the corporate debtor and not against the individuals responsible for the company's conduct. The Court distinguished the Supreme Court's decision in Vishnoo Mittal v. M/s. Shakti Trading Company, clarifying that the ratio laid down by the larger benches of the Supreme Court in the aforementioned cases is the settled law.
Accordingly, the Nagpur Bench quashed the discharge order and set aside the trial court's decision, allowing the criminal proceedings against the directors to continue. The Court emphasized that the directors cannot escape their personal liability under Section 141 of the NI Act by citing the company's insolvency.
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