The Supreme Court held that when the cause of action for a cheque bounce under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) arises after a moratorium is imposed under the Insolvency and Bankruptcy Code, 2016 (IBC), then legal proceedings under Section 138 NI Act cannot continue against an ex-director of the company.
Background of the Case
The case arose from an appeal filed by Vishnoo Mittal, challenging an order of the Punjab & Haryana High Court. The High Court had refused to quash proceedings initiated under Section 138 NI Act against him. Mittal, an ex-director of M/s Xalta Food and Beverages Pvt. Ltd., contended that he could not be held liable as the cause of action arose after the IBC moratorium was imposed.
The Supreme Court noted that upon the declaration of a moratorium, the powers of the board of directors are suspended, and the management of the corporate debtor is transferred to the Insolvency Resolution Professional (IRP). This transition means that directors are no longer in control and cannot be held liable for any subsequent obligations.
"When the notice was issued to the appellant, he was no longer in charge of the corporate debtor as he had been suspended from his position as director upon the appointment of the IRP. Consequently, all financial decisions were under the IRP’s control," the Court observed.
The Court cited its earlier ruling in P. Mohan Raj vs. M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258, where it was held that the moratorium under Section 14 of the IBC applies to the corporate debtor but not to its directors. However, the Supreme Court distinguished the present case from P. Mohan Raj on the basis that, in this instance, the cause of action arose after the moratorium.
Read Also:- Supreme Court Rules Pension as Default Retiral Benefit for Rajendra Agricultural University Employees
The Supreme Court clarified that in P. Mohan Raj, the cheques were dishonored before the moratorium was imposed, meaning the director was still responsible. However, in the present case, the demand notice was issued after the moratorium, making the ex-director non-liable.
"The return of the cheques dishonored 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 stated.
Since the demand notice was issued after the moratorium was in place, the liability under Section 138 NI Act could not be fastened on the ex-director.
Case Title: Vishnoo Mittal vs. M/S Shakti Trading Company
Appearance:
- For Petitioner(s): Mr. Abhishek Anand, Ms. Mithu Jain, Mr. Karan Kohli, Mr. Krishna Sharma, Ms. Vanshika Dhoot (Advocates)
- For Respondent(s): Mr. A D S Jattana, Mr. Triloki Nath Razdan, Mr. Prashant Shukla, Mrs. Anushree Shukla (Advocates)
