Introduction:
The Supreme Court ruled that a cheque dishonour case under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) cannot continue against an ex-director of a company if the cause of action arose after a moratorium was imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Court emphasized that once a moratorium is declared, the management of the corporate debtor is taken over by the Insolvency Resolution Professional (IRP), and the ex-directors are no longer liable for financial transactions of the company.
Facts:
Vishnoo Mittal, the appellant, was a former director of a company undergoing insolvency proceedings. The company issued a cheque which was later dishonoured. A demand notice was sent to the company and its directors on August 6, 2018, after the moratorium under Section 14 of IBC was imposed on July 25, 2018. The cause of action under Section 138 NI Act arises 15 days after the demand notice, i.e., August 21, 2018, by which time the company was already under insolvency proceedings. The Punjab & Haryana High Court refused to quash the proceedings against Mittal, relying on P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258, stating that the moratorium applies only to the corporate debtor and not its directors. Mittal appealed before the Supreme Court, seeking quashing of the cheque dishonour case.
Issues:
- Whether a former director of a company can be held liable under Section 138 NI Act when the cause of action arose after an IBC moratorium was imposed?
- Whether the moratorium under Section 14 IBC protects ex-directors from proceedings under Section 138 NI Act?
- Whether the High Court was justified in refusing to quash the complaint under Section 482 CrPC?
Contentions of the Petitioner:
Once the moratorium was imposed, the board of directors was suspended, and all financial affairs were managed by the IRP. Hence, he had no control over company transactions, making him not liable under Section 138 NI Act. The cause of action under Section 138 NI Act arises only after the expiry of 15 days from the demand notice, which in this case was after the moratorium was imposed. Distinction from P. Mohan Raj's Case: Unlike in P. Mohan Raj, where the cheque dishonour occurred before the moratorium, in this case, the cause of action arose after the moratorium, relieving the director of liability. The High Court failed to exercise its powers under Section 482 CrPC to quash frivolous proceedings against him.
Contentions of the Respondent :
Section 138 NI Act imposes personal liability on directors involved in issuing dishonoured cheques, regardless of the moratorium under IBC. Relying on P. Mohan Raj, the respondent argued that IBC only bars proceedings against the company (corporate debtor) and not against its directors. The cheque was issued and dishonoured before the moratorium; thus, the appellant should still be held accountable.
Court’s Analysis:
1. Cause of Action Under Section 138 NI Act:
- Cheque dishonour alone does not constitute an offence; it arises only if payment is not made within 15 days from the demand notice.
- In this case, the demand notice was issued on August 6, 2018, and the cause of action arose on August 21, 2018, after the moratorium was imposed.
2. Effect of IBC Moratorium on Directors:
- Once a moratorium is imposed, the IRP takes over financial management, and directors lose control over payments.
- Since Mittal had no control over finances, he could not be held liable under Section 138 NI Act.
3. Distinguishing P. Mohan Raj’s Case
- In P. Mohan Raj, the cause of action arose before the moratorium, making directors liable.
- In the present case, the cause of action arose after the moratorium, relieving Mittal of liability.
- Thus, he could not be prosecuted under Section 138 NI Act.
4. Quashing Under Section 482 CrPC:
- The High Court erred in refusing to quash the proceedings.
- Since Mittal had no legal liability, continuing the case would be an abuse of process.
Conclusion:
The Supreme Court quashed the cheque dishonour case against Vishnoo Mittal. It ruled that when the cause of action for a Section 138 NI Act offence arises after an IBC moratorium is imposed, ex-directors cannot be held liable. The Court distinguished the present case from P. Mohan Raj and held that IBC provides protection to directors in such cases. It reiterated that courts must exercise their powers under Section 482 CrPC to prevent undue harassment. In Final Order Appeal allowed, proceedings quashed.
