Introduction
The Hon'ble Supreme Court, in a recent decision dated 17.03.2025, ruled in favor of Vishnoo Mittal (Appellant), overturning the decision of the Single Judge of Punjab and Haryana High Court, wherein the Single Judge had dismissed the Appellant's petition to quash proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). This ruling of the Hon'ble Supreme Court underscores the protective shield offered by the Insolvency and Bankruptcy Code, 2016 (I&B Code) to Corporate Debtors and their ex- directors, providing much-needed clarity on the interplay between the I&B Code and the NI Act, when the proceedings under the NI Act has been undertaken after admission of Corporate Insolvency Resolution Process (CIRP) and moratorium is in effect.
Background
Vishnoo Mittal, the ex-director of M/s Xalta Food and Beverages Private Limited (Corporate Debtor/CD), found himself in a legal quagmire when eleven cheques (to the tune of Rs. 11,17,326 approx.) issued to M/s Shakti Trading Company (Respondent) were dishonored on 07.07.2018. This led to a demand notice under Section 138 of the NI Act issued by Respondent on 06.08.2018 and a subsequent complaint in September 2018 before the appropriate Court by the Respondent against the Petitioner under Section 138 of NI Act. The Court, by order dated 07.09.2018, issued summons to the Appellant in relation to proceedings initiated by the respondent under Section 138 of the NI Act and the Court passed the summoning order. Aggrieved by this, the Appellant approached the Hon'ble Punjab and Haryana High Court under Section 482 of the Criminal Procedure Code (CrPC), challenging the summoning order and praying to quash the Section 138 NI Act proceedings, citing the applicability of the moratorium under Section 14 of the I&B Code w.r.t. CD. However, by the order dated 21.12.2021 (Impugned Order), the Hon'ble Punjab and Haryana High Court dismissed the Appellant's petition, refusing to quash the complaint against him. Aggrieved by the Impugned Order, the Appellant had approached the Hon'ble Supreme Court for setting aside of the Impugned Order of the Hon'ble Punjab and Haryana High Court and quashing of summoning order dated 07.09.2018 passed by appropriate Court.
It is important to mention here that before the demand notice dated 06.08.2018 was issued by the Respondent under Section 138 of NI Act, where an opportunity is given to the CD & its officers to honor the obligation within fifteen (15) days of receipt of the notice, the insolvency proceedings against Corporate Debtor commenced on 25.07.2018, triggering a moratorium under Section 14 of the I&B Code upon the Corporate Debtor. After the moratorium was imposed, the Interim Resolution Professional (IRP) issued a public notice inviting claims from creditors, and the Respondent filed their claim with the IRP. This moratorium became the crux of the legal battle that ensued.
Deciphering of the Hon'ble Supreme Court Judgement and Key Take aways
1. The Protective Scope of the IBC Moratorium
The Hon'ble Supreme Court emphasized that the moratorium under Section 14 of the I&B Code is a robust shield that prohibits the initiation or continuation of legal proceedings against the Corporate Debtor. This includes proceedings under Section 138 of the NI Act, if the cause of action arises after the insolvency process has begun or halt of such proceedings w.r.t. the Corporate Debtor which have been initiated prior to CIRP. The Court's interpretation ensures that the Corporate Debtor is insulated from legal actions that could disrupt the insolvency resolution process.
2. Distinguishing from the P. Mohan Raj Case
In a critical analysis, the Hon'ble Supreme Court distinguished this case from the precedent set in P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258. In P. Mohan Raj, the cause of action under Section 138 of the NI Act arose before the imposition of the moratorium. However, in Vishnoo Mittal's case, the cause of action arose after the moratorium was in place, making the two scenarios fundamentally different. This distinction was pivotal in the Court's decision to quash the proceedings against the Petitioner. The Hon'ble Supreme Court noted:
"In P. Mohan Raj, certain cheques drawn by the appellants therein were dishonoured on 03.03.2017 and 28.04.2017. Thereafter, demand notices dated 31.03.2017 and 05.05.2017 were issued by the complainant. The moratorium was imposed on 06.06.2017, which is clearly after the lapse of 15 days from the date of demand notices. In other words, in that case, the cause of action under section 138 NI Act arose before the imposition of the moratorium and on these facts, this Court had held that section 14 of IBC bars or stays proceedings only against the Corporate Debtor and proceedings can be continued or initiated against the natural persons."
3. Ingredients of an offense under Section 138 of the NI Act
The Hon'ble Apex Court reiterated the essential ingredients required to constitute an offense under Section 138 of the NI Act, as outlined in Jugesh Sehgal v. Shamsher Singh Gogi (2009) 14 SCC 683. To constitute an offense under Section 138 of the NI Act, the following conditions must be met:
- Drawing of the Cheque
A person must have drawn a cheque on an account maintained by him in a bank for the payment of a certain amount of money to another person from out of that account. - Purpose of the Cheque
The cheque should have been issued for the discharge, in whole or in part, of any debt or other liability. - Presentation of the Cheque
The cheque must be presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. - Dishonor of the Cheque
The cheque is returned by the bank unpaid, either because the amount of money standing to the credit of the account is insufficient to honor the cheque or it exceeds the amount arranged to be paid from that account by an agreement made with the bank. - Demand Notice
The payee or the holder in due course of the cheque makes a demand for the payment of the said amount of money by giving a notice in writing to the drawer of the cheque within thirty days of the receipt of information from the bank regarding the return of the cheque as unpaid. - Failure to Make Payment
The drawer of such cheque fails to make the payment of the said amount of money to the payee or the holder in due course of the cheque within fifteen days of the receipt of the said notice.
It is only when all the aforementioned ingredients are satisfied that the person who had drawn the cheque can be deemed to have committed an offense under Section 138 of the NI Act. The Hon'ble Supreme Court in Jugesh Sehgal v. Shamsher Singh Gogi explained that these ingredients are cumulative, meaning that each one must be fulfilled for the offense to be constituted. The cause of action arises only when the drawer fails to make the payment within fifteen days of receiving the demand notice. This nuanced understanding of the law played a crucial role in the Hon'ble Supreme Court's decision.
4. Impact of Management by Interim Resolution Professional (IRP)
The Court noted that once the IRP is appointed, the management of the Corporate Debtor's affairs vests in the IRP, and the powers of the board of directors are suspended. This means that Appellant, as the suspended director, did not have the capacity to fulfill the demand raised by the Respondent. The Hon'ble Apex Court's interpretation of Section 17 of the I&B Code highlighted the practical implications of the moratorium on the Corporate Debtor's management. That is in the present case in hand, CIRP proceedings started on 25.07.2018, so do the moratorium and suspension of board of directors of the Corporate Debtor. The NI proceedings including issuing of Demand Notice was done after such date, which means the Appellant had no power to deal with the demand notice as he was already suspended from the board of directors and CD could not repay due to the moratorium in place.
5. Quashing of Proceedings
Given the moratorium and the fact that the cause of action arose post-moratorium, the Hon'ble Supreme Court quashed the proceedings under Section 138 of the NI Act against Vishnoo Mittal. The Court exercised its power under Section 482 of the Criminal Procedure Code (CrPC) to quash the complaint and the summoning order, providing significant relief to the Petitioner.
Conclusion
In conclusion, the Hon'ble Supreme Court's judgment in the Vishnoo Mittal vs. Shakti Trading Company addresses the individual role of the suspended board of directors, which is key to understanding the legal implications in situations, where the Corporate Debtor has undergone the insolvency resolution process, and a moratorium is in effect. In the present case at hand, Mr. Vishnoo Mittal, the ex-director of the Corporate Debtor, was rendered powerless due to his suspension upon the appointment of the Interim Resolution Professional (IRP) during the CIRP. This suspension, coupled with the moratorium under Section 14 of the I&B Code, effectively precluded him from taking any action regarding the dishonored cheques or the demand notice issued under Section 138 of the NI Act. Even though the individual may have been directly involved prior to the insolvency proceedings, once the moratorium and the suspension of the board were in place, he lost all authority to act on behalf of the Corporate Debtor. The Hon'ble Supreme Court, recognizing this, highlighted the legal and practical impossibility of holding a suspended director liable for actions that fall outside of their control during the moratorium, thereby quashing the proceedings. This ruling reinforces the concept that the individual actions of a director are not actionable once they are suspended, and any such claims must be directed at the corporate entity under the protection of the I&B Code.
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