No Case Under Section 138 of Negotiable Instruments Act Against Ex-Director if Cause of Action Arises After IBC Moratorium

Posted On - 2 April, 2025 • By - Suraj Jagtap

Key Highlights

  • The Supreme Court has ruled that proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) cannot continue against an ex-director if the cause of action for cheque dishonour arises after the declaration of a moratorium under the Insolvency and Bankruptcy Code, 2016 (IBC).
  • A bench comprising Justices Sudhanshu Dhulia and Ahsanuddin Amanullah held that once a moratorium is imposed, the powers of the board of directors are suspended, and the Insolvency Resolution Professional (IRP) assumes control of the corporate debtor’s management.
  • The judgment distinguishes Vishnoo Mittal v. M/S Shakti Trading Company[1] from the case of P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd. (2021), where the cause of action arose before the moratorium was imposed.
  • The Court clarified that under Section 138 of the NI Act, an offence is deemed to occur only when the amount remains unpaid for 15 days after the demand notice. Since the moratorium was imposed before this period expired, the proceedings against the appellant were quashed.

Implications

  • Enhanced Protection for Directors: The ruling strengthens protections for directors in insolvency proceedings, ensuring they are not held liable for company actions during the moratorium period.
  • Clarification of Liability Under NI Act: It reinforces that liability under Section 138 of the NI Act arises only if the cause of action occurs before the imposition of a moratorium.
  • IRP Assumes Responsibility: Once an IRP assumes control, directors no longer have decision-making authority over the company’s finances, absolving them from liability for cheque dishonour during the insolvency process.

Conclusion

This landmark judgment provides much-needed clarity on the interaction between the NI Act and IBC. By safeguarding directors from liability for actions beyond their control during insolvency, the Supreme Court has reinforced the legal framework protecting corporate directors and set a clear precedent for future cases.

[1]https://api.sci.gov.in/supremecourt/2022/2731/2731_2022_12_1501_60153_Judgement_17-Mar-2025.pdf