While tracing the legislative architecture of Section 96 of the IBC, which deals with ‘Interim-Moratorium’, the Bombay High Court has categorically held that the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 operates only qua the corporate debtor and cannot be invoked by directors or persons in-charge to stay criminal prosecutions launched against them under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881.
The Court also clarified that where a cheque is drawn by a company on its own account towards discharge of a corporate liability, the underlying debt is that of the company. The vicarious liability fastened on directors under Section 141 of the NI Act does not transform the corporate debt into the personal debt of the director, and therefore the expression “in respect of any debt” in Section 96 of the IBC does not get attracted.
A Single Judge Bench of Justice N. J. Jamadar turned to the bedrock principle that shareholders or directors of a company are not the owners of its property; the company has an independent juristic existence. When a corporate entity incurs a debt, the debt remains that of the corporate entity, and does not become the personal debt of its directors. Where a cheque is drawn by a company on its own account towards discharge of such debt, the debt or liability is primarily that of the company. Directors are prosecuted by invoking the deeming provisions of Section 141 of the NI Act, but this does not alter the character of the underlying debt.
The Court applied the binding precedent in P. Mohanraj vs M/s Shah Brothers Ispat Pvt Ltd [(2021) 6 SCC 258], where the three-Judge Bench had held that the moratorium provision contained in Section 14 of the IBC applies only to the corporate debtor, and that natural persons mentioned in Section 141 of the NI Act continue to be statutorily liable. The Court noted that Section 141 enables prosecution of persons in charge of the affairs of the company along with the company, and that the statutory liability against directors under Section 138 is personal and continues to bind natural persons, irrespective of any moratorium applicable to the corporate debtor.
Referring to a two-Judge Bench decision in Ajay Kumar Radheyshyam Goenka vs Tourism Finance Corporation of India Ltd. [(2023) 10 SCC 545], the Court observed that the scope and nature of proceedings under the IBC and the NI Act are quite different and do not intercede each other. The criminal liability and fines under Section 138 of the NI Act are built on the principle of not honouring a negotiable instrument, which affects trade. The extinguishment of debt consequent to the insolvency resolution process does not ipso facto result in extinguishment of criminal proceedings, and the termination of proceedings against the corporate entity does not result in automatic exoneration of the directors or responsible persons.
The Court noted that the Supreme Court in the case of Rakesh Bhanot Vs M/s Gurdas Agro Pvt Ltd [(2025) 6 SCC 781] had authoritatively held that the moratorium provisions under the IBC offer protection only to the corporate debtor, i.e., the company, and do not extend protection against personal guarantors by specific exclusion or to any individual who is prosecuted for committing a criminal act. The Supreme Court therein observed that the term “any legal action or proceedings” does not mean “every legal action or proceedings”, and that under sub-clauses 96(b)(i) and (ii), the term “legal action or proceedings” is followed by the qualifier “in respect of any debt”, meaning legal action or proceedings relating to recovery of debt. The purpose of the interim moratorium under Section 96 is not to stall proceedings unrelated to the recovery of debt, and the protection is not available against penal actions whose object is not to recover any debt.
In essence, the Court held that the debt in question is that of the corporate entity, and the factors constituting an offence under Section 138 relate to the failure of the corporate entity to pay the amount covered by the cheque drawn by it. The applicants were arraigned by invoking Section 141 of the NI Act. In such circumstances, the initiation of the insolvency resolution process, either under Part II or Part III of the IBC, does not preclude the continuation of the prosecution for an offence under Section 138 of the NI Act.
Briefly, a clutch of applications and petitions came up raising a common and commercially significant question: whether the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) operates to stall criminal prosecutions launched under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (“NI Act”) against directors and persons in-charge of a corporate debtor when such directors have themselves approached the NCLT under Section 94 or Section 95 of the IBC to initiate a personal insolvency resolution process. The lead matter involved Jagmohan Garg, a director and authorised signatory of M/s Mohan India Private Limited, which was a trading and clearing member of National Spot Exchange Limited (“NSEL”). NSEL is a spot exchange providing an electronic trading platform for commodity contracts on compulsory delivery basis.
The factual backdrop is rooted in a colossal settlement default. Mohan India and its sister concerns, Tavashi Enterprises Private Limited and Vrunda Commodity Private Limited, along with six others, had entered into a Settlement Agreement, pursuant to which a Settlement Award under Section 73 of the Arbitration and Conciliation Act, 1996 was passed on 30 October 2013. Under this Award, an amount of Rs. 771 crores became due and payable by Mohan India in thirteen instalments. After payment of the first instalment, the accused defaulted on the rest, leaving an outstanding sum of Rs. 124.50 crores as of 10 March 2014.
To discharge part of this liability, Mohan India issued a cheque for Rs. 30 crores drawn on Axis Bank Limited, New Delhi, payable on 28 February 2014, signed by the applicant-director and another director. Upon presentation, the cheque was returned unpaid with the remarks “funds insufficient” and “account freezed”. Despite service of a demand notice dated 10 March 2014, payment was not made within the stipulated period, prompting NSEL to lodge a complaint for an offence punishable under Section 138 read with Section 141 of the NI Act.
During the pendency of this complaint, the applicant-director filed an application under Section 94 of the IBC before the NCLT, Delhi, on 13 May 2024, seeking initiation of his personal Insolvency Resolution Process (“IRP”). He contended that once the IR Petition was admitted, the interim moratorium under Section 96 of the IBC came into effect, automatically staying the prosecution under Section 138 of the NI Act. He further pointed to the overriding effect of Section 238 of the IBC and to the fact that a financial creditor had already invoked his personal guarantee. The learned Magistrate rejected the application, holding that the cheque was drawn by the corporate entity to discharge its liability, and that the expression “debt” in Section 96 of the IBC does not cover the vicarious liability of the director under Section 141 of the NI Act. This led to the present challenge.
