Directors Not Liable Under S.138 NI Act If Cheque Dishonour Occurs During IBC Moratorium: Bombay High Court - 2025-07-05

Bombay High Court Quashes Cheque Bounce Case Against Directors, Citing IBC Moratorium

Nagpur, India – In a significant ruling clarifying the interplay between the Negotiable Instruments Act, 1881 (NIA) and the Insolvency and Bankruptcy Code, 2016 (IBC), the Bombay High Court has quashed criminal proceedings under Section 138 of the NIA against former directors of a company undergoing liquidation.

The Nagpur bench, presided over by Hon'ble Smt. Justice Urmila SachinJoshi-Phalke , held that directors cannot be held vicariously liable for cheque dishonour when the cause of action arose after a moratorium was declared under the IBC, as they had ceased to be in charge of the company's affairs.

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Case Background

The case involved six criminal applications filed by Mr. Yatendra Singh Panwar and three other former directors of "Venus Rolling Mills Private Limited" (the accused company). They sought to quash several cheque bounce complaints filed by "Ganga Iron and Steel Trading Company Limited."

The complainant alleged that Venus Rolling Mills had issued 16 cheques in October and November 2022 to settle outstanding dues, which were subsequently dishonoured with the remark "account closed." Consequently, criminal complaints were filed against the company and its directors under Sections 138 and 141 of the NIA.

Arguments of the Parties

The directors (applicants) argued that they could not be prosecuted for the offence. They highlighted a crucial timeline: - Two of the applicants, Smt. Neha Panwar and Mr. Narendra Singh Panwar , had resigned as directors in 2017 and 2015, respectively, long before the cheques were allegedly issued. - The company itself had initiated a Corporate Insolvency Resolution Process (CIRP) before the National Company Law Tribunal (NCLT), Mumbai. - On April 22, 2019 , the NCLT admitted the petition, declared a moratorium, and appointed a Resolution Professional (RP), effectively suspending the Board of Directors. - The complainant was officially informed by the RP on May 9, 2019, not to deposit the cheques. - The company later went into liquidation by an NCLT order dated June 9, 2022 , and all powers of the directors were vested in the appointed liquidator.

The applicants contended that when the cheques were presented in late 2022 and the statutory notice was issued, they had no control over the company or its bank accounts. Therefore, they could not be deemed "in charge of, and responsible to the company" as required under Section 141 of the NIA.

Conversely, the complainant argued that the directors were responsible for the day-to-day affairs of the company when the liability was incurred and were thus vicariously liable for the dishonoured cheques, which were issued against a legally enforceable debt.

Court's Analysis and Legal Principles

Justice Joshi-Phalke meticulously analyzed the provisions of the IBC, particularly Section 14 (Moratorium) and Section 17 (Management of affairs by RP), alongside Section 141 of the NIA (Offences by companies).

The Court distinguished this case from precedents like P. Mohanraj vs. Shah Brothers , where the cause of action under the NIA arose before the moratorium was imposed. In the present case, the cheques were presented, dishonoured, and the legal notice was issued in October 2022—well after the moratorium was declared in 2019 and the liquidation order was passed in June 2022.

The judgment emphasized a key finding from the record:

"Thus, it reveals that moratorium was declared vide order dated 22.4.2019 and liquidation process was initiated and liquidator was appointed by the NCLT Mumbai vide order dated 9.6.2022 much prior to the alleged issuance of cheques dated 27.10.2022 to 2.11.2022."

The Court further noted:

"As soon as the Resolution Professional was appointed by order dated 22.4.2019, the powers vested with the Board of Directors were further ceased by the order of the NCLT Mumbai dated 9.6.2022 I.e. prior to issuance of cheques. Therefore, powers vested with Board of Directors were to be exercised by the Resolution Professional..."

Accepting the applicants' submissions, the Court concluded that once the CIRP began and a liquidator was appointed, the directors were legally stripped of their powers. They had no authority to manage the company's funds or fulfill the demand made in the statutory notice.

The Verdict

The High Court ruled that prosecuting the directors under these circumstances would be an abuse of the process of law. The Court observed:

"...hence applicant Nos.1 and 3 were not the person incharge of the company and was not having any authority to sign the cheques and, therefore, cheques in question which are subject matter of the complaints were not valid cheques."

Based on this reasoning, the Court allowed all applications and quashed the criminal proceedings (Criminal Case Nos. 691/2023, 696/2023, 695/2023, 693/2023, 692/2023, and 694/2023) pending against the former directors.