The Punjab & Haryana High Court (Chandigarh Bench) has held that where the offence under Section 138 of the Negotiable Instruments Act had already been completed before commencement of insolvency proceedings under the IBC, the later initiation of CIRP, declaration of moratorium under Section 14, or even liquidation of the company does not extinguish or bar criminal prosecution against the directors or persons in charge under Sections 138 and 141 of the NI Act. The moratorium protects the corporate debtor in respect of insolvency proceedings, but it does not grant immunity to natural persons from criminal liability already incurred on account of cheque dishonour.
A Single Judge Bench of Justice Manisha Batra rejected the core submission of the petitioners that the later insolvency proceedings had rendered the complaint under Section 138 not maintainable. The Court noted that the cheques were issued and dishonoured in June 2015, the statutory notice had been served, and the complaint was filed on Sep 29, 2015. Therefore, the offence under Section 138 had already stood completed much before the corporate insolvency resolution process was initiated on Sep 29, 2017. In the Court’s view, once the criminal liability had crystallised, the subsequent commencement of insolvency proceedings could not erase or obliterate it.
Referring to the law laid down by the Supreme Court in P. Mohanraj v. Shah Brothers Ispat Pvt Ltd. [(2021) 6 SCC 258] and Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Ltd. [(2023) 10 SCC 545], the Court reiterated the settled legal position that the moratorium under Section 14 of the IBC operates in favour of the corporate debtor, but the criminal liability of natural persons under Sections 138 and 141 of the NI Act continues unaffected. The Court specifically held that directors or persons in charge do not get absolved merely because insolvency resolution or liquidation proceedings have begun against the company.
On the argument that the petitioners had ceased to control the affairs of the company after appointment of the Interim Resolution Professional and later the Liquidator, the Court found no merit. It clarified that liability under Section 141 of the NI Act has to be examined with reference to the status of the accused when the offence was committed, namely when the cheques were issued and dishonoured. The later suspension or cessation of managerial powers by operation of the IBC does not wipe out criminal liability that had already attached at the time of the offence.
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The High Court also rejected the argument that allowing the cheque dishonour prosecution to continue alongside IBC proceedings would amount to impermissible parallel proceedings. The Court observed that proceedings under Section 138 of the NI Act are predominantly criminal in nature, whereas the moratorium under the IBC is aimed at postponing civil debt enforcement. According to the Court, the moratorium is not meant to shield accused persons from criminal accountability arising from dishonour of cheques.
The Court further held that the petitioners were seeking quashing solely on the basis of subsequent insolvency proceedings, which was not legally sustainable. Questions such as whether the petitioners were actually in charge of and responsible for the conduct of the company’s business at the relevant time, and whether all ingredients of Sections 138 and 141 of the NI Act are made out, are matters for the trial Court to decide on evidence. At the quashing stage, the High Court found no illegality or perversity in either the complaint or the summoning order.
Briefly, the respondent, Can Bank Factors Limited, filed a complaint under Section 138 of the Negotiable Instruments Act, 1881 against M/s Supreme Tex Mart Limited and the present petitioners, alleging that the company had availed a factoring credit facility of Rs. 5 crores and defaulted in repayment. According to the complaint, the company issued multiple cheques in June 2015 towards discharge of its outstanding liability, but all of them were dishonoured on presentation with the remark “Exceeds Arrangement”. After a statutory demand notice was issued and payment was still not made within the prescribed period, the complaint was instituted on Sep 29, 2015, and the petitioners were later summoned by the Magistrate on 31.05.2016 to face trial under Section 138 of the NI Act.
The petitioners therefore sought quashing of the complaint, the summoning order, and all consequential proceedings. Their main case was that insolvency proceedings had subsequently been initiated against the company under the Insolvency and Bankruptcy Code, 2016. They pointed out that the NCLT had admitted a Section 7 petition on Sep 29, 2017, imposed a moratorium under Section 14 of the IBC, appointed an Interim Resolution Professional, and later ordered liquidation on Aug 08, 2018. According to the petitioners, once the insolvency process and later liquidation had commenced, and the powers of the board had ceased, continuation of the cheque dishonour complaint against them became legally impermissible.
The respondent opposed the petition by arguing that the criminal liability had already arisen in 2015 itself when the cheques were dishonoured and the statutory notice period expired without payment. It contended that the insolvency proceedings started much later in 2017, and therefore the subsequent moratorium or liquidation could not wipe out an offence already complete under Section 138 of the NI Act. The respondent further argued that the moratorium under Section 14 of the IBC protects the corporate debtor and does not bar criminal proceedings against directors or persons in charge of the company at the relevant time.
