1. Conviction under Section 138, Negotiable Instruments Act — Company liquidation and moratorium under Insolvency and Bankruptcy Code — Challenge to condition for suspension of sentence. (Para 1 , 3 , 4 , 6 , 8 , 10 , 12 )
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2025 Supreme(SC) 1538
SUPREME COURT OF INDIA
DIPANKAR DATTA AND PRASHANT KUMAR MISHRA, JJ.
Shashankbhai Jayantibhai Shah – Appellant
Versus
HDFC Bank ltd. And others – Respondent
Criminal Appeal No. 5606 of 2024 with Criminal Appeal No.5607 of 2024
Decided on : 23-04-2025
Important Points
Criminal liability under Section 138 of the Negotiable Instruments Act is personal and remains enforceable against directors or personal guarantors, regardless of the company's liquidation or the moratorium under the Insolvency and Bankruptcy Code (IBC), as IBC protections do not extend to penal actions.
Subject
Criminal Law - Negotiable Instruments
Act Referred
Headnote
(A) Negotiable Instruments Act, 1881 - Section 138 - Insolvency and Bankruptcy Code, 2016 - Personal liability of directors for dishonored cheques despite company liquidation - The appellant was convicted for dishonored cheque and sentenced to two years and compensation. The statutory liability under Section 138 continues irrespective of corporate proceedings. (Paras 6, 12, 18)
(B) Insolvency Proceedings - The legislative intent of the IBC allows individual actions for dishonored cheques outside corporate moratorium protection, emphasizing personal accountability. (Paras 16, 17)
Facts of the case:
The appellant, convicted under Section 138, appealed against the affirmation of his conviction amidst the company's liquidation. The High Court directed the deposit of 25% of the cheque amount pending appeal.
Findings of Court:
The appeals lack merit; however, the Court allows time for deposit of 25% before the High Court.
Issues: Whether personal liability arises despite corporate liquidation and applicability of moratoriums to personal actions.
Ratio Decidendi: The personal liability under Section 138 persists regardless of insolvency proceedings. Payments or claims during such proceedings do not obstruct prosecutorial actions for cheque dishonor.
Result: Appeals dismissed.
(B) Insolvency Proceedings - The legislative intent of the IBC allows individual actions for dishonored cheques outside corporate moratorium protection, emphasizing personal accountability. (Paras 16, 17)
Facts of the case:
The appellant, convicted under Section 138, appealed against the affirmation of his conviction amidst the company's liquidation. The High Court directed the deposit of 25% of the cheque amount pending appeal.
Findings of Court:
The appeals lack merit; however, the Court allows time for deposit of 25% before the High Court.
Issues: Whether personal liability arises despite corporate liquidation and applicability of moratoriums to personal actions.
Ratio Decidendi: The personal liability under Section 138 persists regardless of insolvency proceedings. Payments or claims during such proceedings do not obstruct prosecutorial actions for cheque dishonor.
Result: Appeals dismissed.
Legal Category Hierarchy
- crime and sentencing
- practice and procedure
- commercial law
Table of Contents
2. Whether company liquidation and insolvency moratorium preclude personal liability of directors under Section 138, Negotiable Instruments Act, and justify waiver of deposit for sentence suspension. (Para 11 , 14 )
3. Moratorium under Insolvency and Bankruptcy Code protects against debt recovery but does not shield individuals from personal criminal liability for cheque dishonour under Negotiable Instruments Act. (Para 16 , 17 , 18 , 19 )
4. Statutory liability of directors under Section 138, Negotiable Instruments Act is personal and continues regardless of corporate insolvency moratorium or liquidation of the corporate debtor. (Para 16 , 18 )
5. Appeals dismissed; however, appellant granted final eight-week extension to deposit twenty-five percent of the cheque amount to maintain liberty and proceed with revisional application. (Para 20 , 21 , 22 , 23 )
6. Does the moratorium under the Insolvency and Bankruptcy Code (IBC) stay criminal proceedings under Section 138 of the Negotiable Instruments Act?
No. The moratorium under Sections 96 and 101 of the IBC is designed to protect debtors from legal actions concerning debt recovery. It does not extend to penal actions or personal criminal liabilities arising from the dishonour of cheques. (Para 16 )
7. Does the liquidation of a company absolve its directors from criminal liability under Section 138 of the Negotiable Instruments Act?
No. Liability under Section 138 of the Negotiable Instruments Act is personal to the directors in charge of the company's affairs. The extinguishment of corporate debt through liquidation or a resolution plan does not absolve directors of this personal criminal liability. (Para 16 , 18 )
8. Can a director claim protection from Section 138 proceedings if they are a personal guarantor for the company's loan?
No. The court held that the status of a personal guarantor and the subsequent liquidation of the company do not preclude the continuation of criminal proceedings under Section 138 of the Negotiable Instruments Act. (Para 18 , 19 )
ORDER :
1. The appellant was convicted by the Additional Chief Metropolitan Magistrate, NIA Court No.30, Ahmedabad[Magistrate], vide judgment and order dated 03rd April, 2017, in a case registered under the provisions of Section 138 of the Negotiable Instruments Act, 1881[N.I. Act], for dishonour of a cheque. He was sentenced to undergo imprisonment for two years and to pay Rs.2,50,00,000/- (Rupees two crore fifty lakh) as compensation.
2. An appeal was carried from the said judgment and order by the appellant before the Sessions Court at Ahmedabad[sessions court].
3. During the pendency of the appeal, a petition came to be admitted by the National Company Law Tribunal, Ahmedabad against a company. The appellant happens to be one of the Directors of the company.
4. By an order dated 19th March, 2018, the National Company Law Tribunal[NCLT] passed an order for liquidation of the company.
5. Even in the wake of such development, the sessions court confirmed the order of the Magistrate convicting the appellant and dismissed the appeal on 26th July, 2018.
6. While things stood thus, by an order dated 31st July, 2018, the National Company Law Appellate Tribunal[NCLAT] while considering Company Appeal[Company Appeal (AT) (Insolvency) No.306 of 2018], which was carried from the order of the NCLT dated 19th March, 2018, permitted proceedings under Section 138 of the N.I. Act to continue despite the period of moratorium.
7. Within a week from date of such order, the appellant questioned the appellate judgment and order of the sessions court affirming the conviction and sentence recorded by the Magistrate in a revisional application[Criminal Revision Application No.955/2018] before the High Court of Judicature at Gujarat at Ahmedabad.
8. By an order dated 13th August, 2018, a learned single judge of the High Court directed suspension of sentence pending hearing of the revisional application on condition that the appellant deposits 25% of the amount of the dishonoured cheque without fail within a period of three months from date. Conditions regarding release of the appellant on bail bond were also imposed.
9. This order dated 13th August, 2018 is the subject matter of challenge, by special leave, in Criminal Appeal No.5606/2024.
10. The appellant failed to deposit 25% of the cheque amount as directed by the order dated 13th August, 2018. This triggered an application[Criminal Misc. Application No.1 of 2019 in CRA No.955/ 2018] from the side of the complainant seeking cancellation of bail. It was alleged therein that despite expiry of the time limit fixed by the earlier order dated 13th August, 2018, the appellant had not deposited any sum.
11. Learned counsel representing the appellant before the High Court urged that he was not required to make payment of any sum in terms of the earlier direction.
12. The learned judge disagreed and overruled such contention. The application filed by the complainant was allowed by an order dated 25th September, 2019 and the order dated 13th August, 2018, passed on the revisional application, was recalled. The trial court was left free to proceed in accordance with law.
13. In Criminal Appeal No.5607 of 2024, the order dated 25th September, 2019 is under challenge by special leave.
14. We have heard learned counsel appearing for the appellant who submits that in view of liquidation of the company as well as lack of financial resources of the appellant, he is not in a position to make payment of 25% of the cheque amount. She urges that in the event the court does not come to the appellant's rescue, he would be remediless in the sense that the revisional application would not be heard.
15. Learned counsel appearing for the complainant and the official liquidator have been heard.
16. Reliance has been placed by them on the decision of this Court in Rakesh Bhanot vs. Gurdas Agro (P) Ltd., 2025 SCC Online SC 728 and in particular paragraphs 12 and 13 thereof :
12. The legislative intent behind the Insolvency and Bankruptc
