Bombay High Court Revives Section 138 Case Against Distillery Directors Despite Earlier IBC Proceedings

In a sharply reasoned ruling that clarifies the boundaries between insolvency relief and criminal accountability, the Nagpur Bench of the Bombay High Court has held that the mere fact that insolvency proceedings under the Insolvency and Bankruptcy Code began before a cheque-dishonour complaint was filed does not protect company directors from prosecution under Section 138 of the Negotiable Instruments Act.

Justice M.M. Nerlikar allowed the writ petition filed by Ortho Relief Hospital and Research Centre and restored the criminal complaint against the directors of M/s. Anand Distilleries, setting aside the trial court’s order discharging them.

A Short-Term Loan Turns into a Long Legal Battle

The dispute traces back to October 2015 when the hospital extended a short-term loan of ₹15 lakh to the distillery company. The directors, in their capacity as authorised signatories, issued a post-dated cheque as security. Interest payments stopped after January 2018. When the cheque was presented in December 2018 it was returned for “insufficient funds”. A legal notice followed and a complaint under Section 138 NI Act was instituted in February 2019.

By then, however, Punjab National Bank had already initiated insolvency proceedings against the company. The NCLT had passed an admission order in February 2018 and imposed a moratorium; liquidation was ordered in February 2019. Relying on these developments, the directors successfully moved the magistrate for discharge, arguing that the prior IBC proceedings rendered the NI Act complaint non-maintainable.

Directors Argue Timeline Shields Them; Hospital Insists Personal Liability Survives

Before the High Court, the distillery directors contended that because the cause of action for the Section 138 complaint arose entirely after the moratorium had been imposed, the statutory bar under Section 14 of the IBC applied. They placed heavy reliance on the Supreme Court’s 2025 decision in Vishnoo Mittal v. Shakti Trading Company , asserting that once IBC proceedings pre-date the dishonour, prosecution of natural persons is also barred.

The hospital countered that Section 138 proceedings are penal in nature and operate in a completely different sphere from debt-resolution mechanisms. It argued that the Supreme Court’s larger-bench pronouncements in P. Mohanraj , Ajay Kumar Goenka and Rakesh Bhanot had already settled that moratorium protects only the corporate debtor; the personal penal liability of signatories and directors continues unaffected.

Court Holds Nature of Proceedings, Not Chronology, Is Decisive

Justice Nerlikar examined the sequence of dates but ultimately concluded that chronology is not the decisive factor. The Court observed that the statutory scheme of the IBC itself, particularly the second proviso to Section 32A, expressly preserves the prosecution of persons who were in charge of or responsible for the affairs of the corporate debtor.

Quoting extensively from the three-judge Bench decisions, the Court reiterated that once the offence under Section 138 stands committed, the subsequent approval of a resolution plan or even liquidation cannot extinguish the criminal liability of the individuals who signed the cheque.

Key Observations

> “It makes no difference whether the proceedings are initiated prior to initiation of IB Code proceeding or thereafter. The Supreme Court has in unequivocal terms held that natural persons cannot escape from their personal liability under Section 138 of the NI Act.”

> “The scope and nature of the proceedings under these two Acts is quite different and would not intercede each other.”

> “Section 138 of the NI Act proceedings are penal in nature, aimed at maintaining the integrity of commercial transactions and not just compensating.”

The Court also noted that the Punjab and Haryana High Court had taken an identical view in Rakesh Juneja v. Maruti Suzuki India Ltd. after considering the very same Vishnoo Mittal judgment.

Decision Restores Complaint; Directors’ Fresh Attempt for Stay Rejected

Allowing the writ petition, the High Court quashed both the discharge order and the consequential order closing the complaint against the company. The matter now stands remitted to the trial court for fresh consideration on merits.

The directors’ oral prayer for stay of the judgment was rejected, signalling that the High Court expects the criminal proceedings to move forward without further delay.

The ruling provides welcome clarity for complainants who have already filed claims in insolvency proceedings: they need not abandon parallel criminal remedies against the individuals responsible for issuing worthless cheques.