The Delhi High Court has ruled that erstwhile directors of a corporate debtor cannot be held vicariously liable for an offence under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), if, prior to the expiry of the 15-day statutory notice period for payment, a CIRP has been initiated against the corporate debtor and an IRP has been appointed.
The Court clarified that the appointment of the IRP suspends the powers of the Board of Directors and vests control over the company’s affairs and bank accounts in the IRP, making it impossible for the directors to ensure the honouring of the dishonoured cheques. The High Court, therefore, quashed the summoning order, as well as all proceedings emanating therefrom in respect of the petitioners.
A Single Judge Bench of Justice Vikas Mahajan noted that the 15-day period for making payment, calculated from the earliest date of service expired on 07.08.2022. However, the CIRP had already commenced on 20.07.2022. Further, upon the appointment of the IRP on 20.07.2022, the powers of the company’s Board of Directors were suspended and vested in the IRP, as per Section 17 of the IBC.
The Bench, therefore, observed that during the 15-day notice period, the petitioners were not in charge of the company’s affairs and had no control over its bank accounts.
The Bench also found the issue to be “no more res integra” and placed significant reliance on the Apex Court’s decision in the case of Vishnoo Mittal v. Shakti Trading Company [(2025) 9 SCC 417], where under identical circumstances, it was held that a director who was suspended due to the appointment of an IRP did not have the capacity to fulfil the demand raised in the notice and could not be held liable under Section 138 of the NI Act.
Briefly, the company had availed a credit facility from the bank, against which it issued undated cheques. The cheques were presented and returned unpaid twice, with the remark “kindly contact drawer/drawee bank and present again”. Accordingly, the bank issued a demand notice under the NI Act on 14.07.2022, which was dispatched on 21.07.2022, and the petitioners (suspended directors of company) received this notice between 23.07.2022 and 26.07.2022.
Crucially, on 20.07.2022, the NCLT admitted a petition under Section 7 of the IBC against the company, and initiated the CIRP, leading to appointment of an Interim Resolution Professional (IRP), and a moratorium under Section 14 of the IBC came into effect. As payment was not made within the 15-day notice period, the bank filed the complaint under Section 138 of the NI Act.
Appearances:
Senior Advocate Madhav Khurana, along with Advocates Petrushka Das Gupta, Mridul Yadav, Raghav Mittal, Shaurya Singh, Tulika Bhatnagar, and Kashvi Bansal, for the Petitioner
Advocate Vaishnavi Viswanathan, for the Respondent
