The Bombay High Court restored the proceedings under Section 138 of the Negotiable Instruments Act, 1881, holding that the directors being natural person are to be distinguished from the company being an artificial person, and therefore, they cannot escape their liability merely because insolvency proceedings were initiated earlier against the company. Accordingly, the Court quashed the order of discharge passed by the Trial court.
The Court reiterated that Directors or Signatories remain personally liable under Section 138 of the NI Act and even if the company’s debt is resolved or liquidation was completed, the personal penal liability continues to remain. Reference was made to the decisions in the case of Rakesh Bhanot vs Gurdas Agro Private Limited [(2025) 6 SCC 781], P. Mohanraj and others vs Shah Brothers Ispat Pvt Ltd. [(2021) 6 SCC 258], and Ajay Kumar Radheyshyam Goenka vs Tourism Finance Corporation of India Ltd. [(2023) 10 SCC 545].
A Single Judge Bench of Justice M.M. Nerlikar explained that the NI Act proceedings are penal, not recovery proceedings, whereas, Section 138 aims to uphold the integrity of commercial transactions, and not to recover debt. The IBC and NI Act operate in different spheres, wherein the IBC provides financial resolution for companies, and the NI Act imposes penal liability for cheque dishonour.
The Bench also observed that the moratorium under Section 14 of the IBC applies only to the corporate debtor, not to natural persons, i.e., the directors, and Section 32A of the IBC protects only the corporate debtor (post-resolution), not the directors responsible for conduct of the company.
The Single Judge went on to explain that IBC bars prosecution in respect of corporate debtor for offences committed prior to commencement of the insolvency proceedings. However, an exception has been carved out, so far as the second proviso to Section 32A of the IBC is concerned, which speaks about persons against whom the prosecution would continue and therefore, the prosecution against natural persons can be continued.
Essentially, the Bench pointed out that Section 138 proceedings are not meant for recovery of money; directors and signatories of a company remain personally liable even if the company’s debt is resolved under the IBC; approval of a resolution plan does not extinguish or discharge their criminal liability; and such proceedings aim to preserve the integrity of commercial transactions rather than merely compensate the complainant.
Moreover, the Bench clarified that while Section 32A of the IBC provides protection to the corporate debtor, it does not extend that protection to individuals who were in charge of or responsible for the conduct of the company’s business. Also, moratorium under Section 14 IBC does not cover criminal proceedings under the NI Act.
Briefly, the petitioner, through its proprietor Dr. Hargun J. Sangtani, advanced a short-term loan of ₹15 lacs to the respondent company through its directors in October 2015, which was secured by issuance of a post-dated cheque of ₹15 lacs drawn on Cosmos Bank, signed by Respondent No. 2 as the authorized signatory. Interest was paid periodically until January 2018, after which payments stopped.
In February 2018, the petitioner learned that insolvency proceedings were initiated against the respondent company by Punjab National Bank and a moratorium was imposed. Thereafter, the cheque was presented and dishonoured for “insufficient funds”, leading to issuance of a legal notice and filing of a complaint under Section 138 NI Act. When the matter went in trial, the Court discharged the Respondents under Section 245(2) of CrPC, holding that due to the insolvency moratorium, the NI Act complaint was not maintainable.
Cases Relied On:
Rakesh Bhanot vs Gurdas Agro Private Limited – (2025) 6 SCC 781
Mohanraj and others vs Shah Brothers Ispat Pvt Ltd. – [2021] 6 SCC 258
Ajay Kumar Radheyshyam Goenka vs Tourism Finance Corporation of India Ltd. – [2023] 10 SCC 545
Rakesh Juneja v. Maruti Suzuki India Ltd. – 2025 NCPHHC 101360
Appearances:
Advocate S.S. Dewani, for the Petitioner
Advocate S.D. Khati, for the Respondents
