IBC Moratorium Won't Extinguish Directors' Criminal Liability For Cheque Bounce: Punjab & Haryana HC

The Punjab and Haryana High Court on 20 July held that the moratorium under the Insolvency and Bankruptcy Code, 2016 (IBC) cannot extinguish a director's criminal liability for dishonour of cheques issued before commencement of insolvency proceedings against the company.

Justice Manisha Batra dismissed a petition filed by Ajay Gupta seeking quashing of proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) for cheque dishonour, holding that subsequent insolvency and liquidation proceedings of the company cannot shield directors from criminal prosecution for offences already committed. She observed,

“…the proceedings under Section 138 of the N.I. Act are predominantly criminal in nature and the moratorium provisions under Part III of the IBC do not operate to stall or terminate the criminal prosecution. The object of the moratorium is merely to postpone civil debt enforcement and not to shield an accused from criminal accountability arising out of dishonour of cheques.”

The complaint was filed by Can Bank Factors Ltd. in September 2015 against Supreme Tex Mart Ltd. and its directors, alleging dishonour of cheques issued towards repayment of factoring credit facilities worth Rs. 5 crore. The cheques issued in June 2015 were dishonoured in August 2015 with the remark “Exceeds Arrangement”. After the statutory demand notice failed to secure payment, proceedings under Section 138 of the NI Act were initiated.

The Judicial Magistrate, Ludhiana, subsequently summoned the petitioners to face trial. In September 2017, the National Company Law Tribunal (NCLT), Chandigarh, admitted a petition under Section 7 of the IBC (which allows financial creditors to initiate insolvency proceedings), declared a moratorium under Section 14 and appointed an Interim Resolution Professional. The company was later ordered into liquidation in August 2018.

The petitioners argued that after commencement of the Corporate Insolvency Resolution Process (CIRP) and liquidation proceedings, they ceased to have control over the company and could not be prosecuted for the alleged offence. They contended that continuation of proceedings under the NI Act amounted to parallel recovery proceedings contrary to Section 238 of the IBC, which gives the Code overriding effect over inconsistent laws. They further argued that continuation of insolvency proceedings and criminal prosecution arising from the same transaction could result in conflicting outcomes and cause prejudice to the petitioners.

The respondents opposed the plea, submitting that the offence under Section 138 of the NI Act was completed in 2015, before the NCLT admitted insolvency proceedings in 2017. They argued that the IBC proceedings could not erase criminal liability that had already arisen. They also contended that the moratorium under Section 14 of the IBC applies only to the corporate debtor and does not protect directors or cheque signatories from prosecution. They submitted that directors continue to remain liable under Section 141 of the NI Act for offences committed when they were responsible for the company's affairs.

Justice Batra noted that the offence under Section 138 of the NI Act was completed when the cheques were dishonoured and payment was not made despite receipt of the statutory notice in 2015. The Court held that subsequent insolvency proceedings could not wipe out the liability that had already crystallised.

She relied on the Supreme Court's decisions in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. and Ajay Kumar Goenka v. Tourism Finance Corporation of India Ltd., which clarified that the moratorium under Section 14 of the IBC protects only the corporate debtor and does not extend to directors or natural persons liable under Section 141 of the NI Act. She observed:

“The subsequent divesting of managerial powers by operation of the provisions of the IBC cannot erase the criminal liability which had already crystallized on the date of commission of the offence”

The Bench also held that proceedings under Section 138 of the NI Act are criminal proceedings and are distinct from civil recovery proceedings covered by the IBC. It found no ground to interfere with the complaint or summoning order.

Accordingly, the High Court dismissed the petition.

For Petitioners: Advocate Sandeep Wadhawan For P1 & Advocate Nimanyu Gautam for P2

For Respondents: Advocate Ajay Gupta