The Supreme Court of India clarified that the offence under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), does not arise merely on dishonour of a cheque. Instead, the legal cause of action materializes only when the payment remains unpaid beyond 15 days after receiving the demand notice.
A bench comprising Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah pronounced this judgment in the case of Vishnoo Mittal vs M/s Shakti Trading Company, where the appellant sought to quash criminal proceedings under Section 138 of the NI Act.
Background of the Case
The appellant, Vishnoo Mittal, was the director of M/s Xalta Food and Beverages Pvt. Ltd., which had a business agreement with the respondent, M/s Shakti Trading Company. As part of this agreement, the appellant had issued eleven cheques totaling Rs. 11,17,326/-, which were dishonoured on 07.07.2018.
Following this, the respondent sent a legal notice on 06.08.2018, demanding payment as per the NI Act. However, by then, insolvency proceedings had been initiated against the corporate debtor on 25.07.2018, leading to the imposition of a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).
Despite the ongoing insolvency process, the respondent filed a complaint against the appellant under Section 138 of the NI Act in September 2018. The trial court issued summons, leading the appellant to seek relief from the Punjab and Haryana High Court, which dismissed the plea on 21.12.2021. Subsequently, the appellant approached the Supreme Court.
The Supreme Court carefully examined the provisions of Section 138 of the NI Act and the IBC. It made several critical observations:
1. Cheque Dishonour Alone Does Not Constitute an Offence
"The return of the cheques dishonoured simpliciter does not create an offence under section 138 NI Act. The cause of action arises only when the amount remains unpaid even after the expiry of fifteen days from the date of receipt of the demand notice."
The Court emphasized that Clause (c) of the proviso to Section 138 of the NI Act explicitly states that an offence arises only when payment is not made within 15 days after receiving the legal notice.
Read Also:- Supreme Court Clarifies Liability of Non-Executive Directors in Cheque Dishonour Cases
Reliance on Precedents
The Court referred to the precedent set in Jugesh Sehgal v. Shamsher Singh Gogi (2009) 14 SCC 683, which outlined the essential ingredients of an offence under Section 138 NI Act:
- A cheque must be drawn on an account maintained by the drawer.
- The cheque should be issued for discharging a legally enforceable debt.
- It must be presented within its validity period (or within six months).
- The cheque must be dishonoured due to insufficient funds or exceeding arrangement limits.
- A legal notice demanding payment must be served within 30 days of dishonour.
- The drawer must fail to pay within 15 days of receiving the notice.
Since the demand notice in this case was issued on 06.08.2018, the statutory 15-day period ended on 21.08.2018—a date falling after the moratorium imposed on 25.07.2018. Thus, the Court noted that the cause of action never arose before the moratorium came into effect.
IBC Moratorium and Its Impact on Section 138 NI Act Proceedings
The appellant contended that once insolvency proceedings commenced, all legal proceedings against the corporate debtor were automatically stayed under Section 14 of the IBC. The Supreme Court analyzed the scope of the moratorium and its implications:
“On the insolvency commencement date, a moratorium prohibits proceedings against the corporate debtor, including execution of judgments, decrees, and recovery actions.”
This meant that once the management of the corporate debtor was handed over to the Interim Resolution Professional (IRP) on 25.07.2018, the appellant no longer had control over the company’s finances or cheque payments.
The Court further pointed out that in P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258, it was held that a moratorium under Section 14 of IBC applies only to the corporate debtor, not to individual directors. However, the facts of Vishnoo Mittal’s case were distinguishable because the cause of action itself arose after the moratorium was imposed, making prosecution under Section 138 of the NI Act legally unsustainable.
The Supreme Court ruled in favor of the appellant and quashed the proceedings under Section 138 of the NI Act, setting aside the High Court's order.
“The appellant did not have the capacity to fulfill the demand raised by the respondent after 25.07.2018, as the IRP had taken over the company’s management and all financial transactions were under his control.”
Thus, the Supreme Court held that the High Court should have exercised its power under Section 482 of the CrPC to quash the case, considering that the cause of action arose after insolvency proceedings had already commenced.
Key Takeaways
- Dishonour of a cheque alone does not constitute an offence under Section 138 NI Act.
- Cause of action arises only after failure to pay within 15 days of receiving a demand notice.
- IBC moratorium under Section 14 prohibits proceedings against corporate debtors but not against individual directors.
- If the cause of action under Section 138 NI Act arises after the moratorium, the case becomes legally unsustainable.
- Supreme Court quashed the cheque dishonour case against Vishnoo Mittal due to the insolvency moratorium.
Case Title: VISHNOO MITTAL VERSUS M/S SHAKTI TRADING COMPANY
