Delhi HC: No Vicarious Liability under Section 138 NI Act for Dishonoured Cheques Following NCLT Moratorium - 2026-05-27

Corporate Shield: Delhi HC Rules Directors Immune to Section 138 Prosecution After NCLT Moratorium

In a significant ruling that provides clarity on the intersection of the Negotiable Instruments (NI) Act and the Insolvency and Bankruptcy Code (IBC), the Delhi High Court has held that directors of a company cannot be held vicariously liable for dishonoured cheques once the company has entered the insolvency resolution process and moratorium has been declared.

The decision by Hon'ble Ms. Justice Neena Bansal Krishna quashed three criminal complaints filed against the directors of M/s Sumeru Processors Pvt. Ltd., reinforcing the principle that statutory controls during insolvency preclude the legal "maintenance" of accounts required for a Section 138 prosecution.

The Backdrop: From Friendly Loans to Liquidation

The dispute arose from several "friendly loans" and rent agreements between the Complainants, Praveen and Jitender Choudhary, and M/s Sumeru Processors Pvt. Ltd. The business relationship, which began in 2010 and 2016, soured when the company failed to meet its financial obligations.

In September 2020, as the company faced severe distress, it issued several cheques to the complainants. However, all these cheques were returned by the bank with the remark: “ACCOUNT BLOCKED.” The complainants subsequently filed complaints under Section 138 of the NI Act, alleging that the directors were personally liable for the bouncing of these instruments.

Arguments: Control and Coercion

The petitioners (the directors) argued that by September 2020, they had no legal control over the company’s bank accounts. They pointed to the National Company Law Tribunal (NCLT) order dated April 15, 2019, which had admitted the company into the Corporate Insolvency Resolution Process (CIRP). Following this, an Interim Resolution Professional (IRP) and later a Liquidator were appointed, completely stripping the directors of their authority to manage the company.

Conversely, the respondents accused the directors of active fraud, alleging that they hid the insolvency status from the creditors and continued to issue cheques for personal gain. They argued that the directors remained criminally liable for the funds they had misappropriated.

Legal Analysis: The Mechanics of Moratorium

The High Court’s ruling hinges on the concept of "control." For a prosecution under Section 138 to succeed, the cheque must be drawn on an account "maintained by" the drawer. Justice Neena Bansal Krishna noted that once the NCLT imposes a moratorium under Section 14 of the IBC, management of the company is vested in the IRP/Liquidator.

Citing the Supreme Court judgment in P. Mohanraj & Ors. vs. Shah Brothers Ispat Pvt. Ltd. , the Court reasoned that while individuals may remain liable under Section 141 of the NI Act, this liability cannot be triggered by the dishonour of a cheque issued after the drawer has lost all authority over the account. The Court further clarified that a cheque returned with the remark “ACCOUNT BLOCKED” due to statutory intervention does not equate to “insufficiency of funds” as contemplated by the Act.

Key Observations

• On the nature of the account: "The expression 'account maintained by him' must necessarily include that the said account is not only alive and operative, but the account holder is capable of executing a command to govern the financial transactions."
• On the impact of NCLT proceedings: "The remark 'ACCOUNT BLOCKED' is a direct consequence of the moratorium and liquidation process and not attributable to the Petitioners."
• On the essential ingredients: "There was no 'valid issuance of cheque by the drawer', and no 'dishonour due to insufficiency of funds', as required under Section 138 NI Act."

The Verdict: Implications for Future Litigation

The High Court concluded that the summons issued by the trial court were legally unsustainable. By quashing the complaints, the Court has provided a vital shield for former directors, clarifying that once a company is formally under the control of an IRP or Liquidator, those directors lose the capacity to "maintain" the account, thereby insulating them from criminal prosecution for cheque dishonour occurring during that period.

This ruling underscores the imperative for creditors to engage timely with the insolvency process rather than resorting to parallel criminal litigation when a company is already under the oversight of a bankruptcy tribunal.