The Supreme Court has ruled that cheque dishonour proceedings under Section 138 of the Negotiable Instruments Act, 1881, cannot be pursued against a former company director if the cause of action arose after a moratorium was imposed under the Insolvency & Bankruptcy Code, 2016 (IBC).
The Court emphasized that once a moratorium is in place, the powers of the board of directors are suspended, and the management is transferred to the Insolvency Resolution Professional (IRP). Consequently, a director cannot be held responsible for company obligations they had no authority to address.
“When the notice was issued, the appellant was no longer in charge of the company, having been suspended as soon as the IRP was appointed. With the corporate debtor’s bank accounts under IRP control, the appellant was in no position to settle the amount,” the Court stated.
The case stemmed from a Punjab & Haryana High Court ruling that refused to dismiss proceedings against the appellant, relying on a prior Supreme Court judgment in P. Mohan Raj vs. M/S Shah Brothers Ispat Pvt. Ltd. The High Court had ruled that the IBC moratorium protected only the corporate debtor, not its directors.
However, the Supreme Court drew a clear distinction between the two cases. In P. Mohan Raj, the cheque bounce issue arose before the moratorium took effect, making the director liable. In the present case, the cause of action—triggered when the demand notice was issued—occurred after the moratorium was declared, rendering the appellant free from liability.
The Court clarified that a cheque bounce itself does not constitute an offence under Section 138; legal action begins only if payment remains outstanding 15 days after the demand notice is served. In this case, the cheque was dishonoured before the moratorium, but the demand notice was sent afterward, meaning the offence materialized post-moratorium.
With this reasoning, the Supreme Court overturned the High Court’s decision and dismissed the cheque dishonour case against the former director, affirming that insolvency proceedings shield individuals from liabilities arising after the company enters resolution.