Court’s Decision
The Bombay High Court, Nagpur Bench, quashed criminal proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act against the former directors of Venus Rolling Mills Private Limited, holding that proceedings initiated after the moratorium under the Insolvency and Bankruptcy Code are barred, and directors who had resigned or ceased control before cheque issuance cannot be vicariously liable.
Facts
The applicants, former directors of a private company engaged in steel and iron goods, faced multiple complaints under Section 138 of the Negotiable Instruments Act for dishonoured cheques issued towards an alleged outstanding liability exceeding seven crore rupees. The cheques, dated October–November 2022, were dishonoured with endorsements of “account closed,” leading to criminal complaints. The applicants contended that two directors had resigned in 2015 and 2017, while others ceased control in 2019 when the National Company Law Tribunal, Mumbai, admitted insolvency proceedings and declared a moratorium. A resolution professional took control, and eventually, the company underwent liquidation. The cheques in question were allegedly issued as security prior to insolvency, and the company had informed the complainant not to deposit them post-moratorium.
Issues
- Whether proceedings under Section 138 of the Negotiable Instruments Act are maintainable after the moratorium under Section 14 of the Insolvency and Bankruptcy Code is declared.
- Whether former directors who resigned prior to the issuance of the cheques or ceased control due to insolvency proceedings can be held liable under Section 141 of the Act.
Petitioner’s Arguments
The petitioners argued that:
- Applicant Nos. 2 and 4 resigned as directors in 2017 and 2015 respectively, well before the cheques were issued, and were not in charge of company affairs.
- Applicant Nos. 1 and 3 ceased control after the declaration of moratorium by NCLT Mumbai on 22 April 2019 and the subsequent appointment of a resolution professional, who took over management under the Insolvency Code.
- Cheques were allegedly issued as security before the moratorium, and complainants were informed not to deposit them.
- Proceedings under Section 138 are barred under Section 14 of the Insolvency Code, which prohibits initiation or continuation of proceedings against the corporate debtor during the moratorium.
- They relied on Vishnoo Mittal v. Shakti Trading Company (2025), Manoj Toshniwal v. Alucast Engineering (2023), DCM Financial Services v. J.N. Sareen (2008), and Nikhil P. Gandhi v. State of Gujarat (2016) to argue for quashing proceedings under the moratorium.
Respondent’s Arguments
The complainant opposed the applications, arguing:
- Cheques were issued towards discharge of legally enforceable debts, which were dishonoured, justifying proceedings under Section 138.
- Demand notices were duly served, and proceedings are maintainable as directors were responsible for the company’s day-to-day affairs.
- Section 141 of the Act allows vicarious liability of directors responsible for business conduct.
- The complainant relied on P. Mohanraj v. Shah Brothers (2021), Ajaykumar Goenka v. Tourism Finance Corp (2023), K&K Foundry Pvt Ltd v. Goyal Iron (2024), and Sunita Palita v. Panchami Stone Quarry (2022) to argue that proceedings under Section 138 can continue despite insolvency if directors were responsible at the time of default.
Analysis of the Law
The Court examined:
- Section 14 IBC: Moratorium bars initiation or continuation of proceedings against the corporate debtor.
- Section 17 IBC: Management vests with the resolution professional during CIRP, suspending the board’s powers.
- Section 32A IBC: Discharges corporate debtor from prior offences post-resolution, except for responsible persons.
- Section 141 NIA: Vicarious liability on persons responsible for business conduct at the time of offence.
- The Supreme Court in P. Mohanraj held that Section 138 proceedings are covered under the moratorium.
- Liability under Section 141 depends on actual control and responsibility, not mere designation as director.
Precedent Analysis
- P. Mohanraj v. Shah Brothers (2021): Section 138 proceedings fall within moratorium under Section 14 IBC.
- Vishnoo Mittal v. Shakti Trading Company (2025): Proceedings under Section 138 during moratorium are barred.
- DCM Financial Services v. J.N. Sareen (2008): Proceedings cannot continue against persons not responsible during the offence.
- Nikhil P. Gandhi v. State of Gujarat (2016): Liability under Section 141 depends on being in charge during the offence.
- The High Court applied these to clarify that once the resolution professional takes over, directors cannot be held liable for subsequent transactions unless they exercised control.
Court’s Reasoning
The Court found:
- The moratorium under the IBC commenced on 22 April 2019, with a liquidator appointed on 9 June 2022, prior to cheque deposit and dishonour in October–November 2022.
- The directors had resigned or ceased control due to the moratorium, and the complainants were notified not to deposit the cheques.
- Under P. Mohanraj and Section 14 IBC, proceedings under Section 138 NIA are barred during moratorium.
- Vicarious liability under Section 141 requires being in charge during the offence; resignation letters and statutory filings demonstrated the petitioners had ceased control prior to cheque issuance and therefore could not be held liable.
Conclusion
The Bombay High Court:
- Quashed all criminal proceedings under Section 138 and 141 of the Negotiable Instruments Act against the petitioners.
- Held that proceedings were barred under the moratorium declared by the NCLT under the Insolvency Code.
- Clarified that directors who had resigned or ceased to be in charge before cheque issuance could not be vicariously liable under Section 141.
Implications
- Reinforces that proceedings under the Negotiable Instruments Act are barred during the IBC moratorium.
- Clarifies directors cannot be held criminally liable under Section 141 if they resigned or ceased control before cheque issuance.
- Establishes a clear safeguard for directors under IBC, requiring actual control and responsibility for vicarious liability.
Summary of Cases Referred and Their Relevance
- P. Mohanraj v. Shah Brothers (2021): Proceedings under Section 138 NIA are barred under Section 14 IBC and applied to quash the proceedings.
- Vishnoo Mittal v. Shakti Trading Company (2025): Reinforced barring of proceedings during moratorium.
- DCM Financial Services v. J.N. Sareen (2008): Liability requires control during the offence.
- Nikhil P. Gandhi v. State of Gujarat (2016): Clarified directors’ liability depends on control, not mere designation.
- Other cited cases reinforced principles of vicarious liability and IBC’s moratorium protection.
FAQs
1. Are cheque bounce cases maintainable during the Insolvency Code moratorium?
No, the moratorium under Section 14 of the Insolvency Code bars proceedings under Section 138 of the Negotiable Instruments Act.
2. Can former directors be held liable for dishonoured cheques if they resigned before the cheque date?
No, liability under Section 141 requires control during the offence; resigned directors are not liable.
3. Does the Insolvency Code protect directors from personal liability for company cheques during CIRP or liquidation?
Yes, if control passes to the resolution professional, former directors cannot be held vicariously liable.