Can Section 138 NI Act proceedings be quashed against former director of company, suspended from his position on appointment of IRP? SC answers

Supreme Court: In a criminal appeal against Punjab and Haryana High Court’s decision, whereby the accused person’s application under Section 482 of Code of Criminal Procedure, 1973 (‘CrPC’) for quashing of proceedings initiated under Section 138 of Negotiable Instruments Act, 1881 (‘NI Act’) was dismissed, the Division Bench of Sudhanshu Dhulia* and Ahsanuddin Amanullah, JJ. allowed the appeal and set aside the impugned decision opining that the High Court erred in denying the relief to the accused- former director of the corporate debtor by placing reliance upon P. Mohan Raj v. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258. The Court explained that cause of action under Section 138 of the NI Act arose after the commencement of the insolvency process.

The Bench also quashed the summoning order and proceedings against the accused.

Background

The accused was the director of the corporate debtor company. There was a contract between the corporate debtor and the respondent- Shakti Trading Company where the respondent was to function as a super stockist of the corporate debtor. As director of the corporate debtor, the accused had drawn eleven cheques in favour of the respondent of varying amounts, the total amount being Rs.11,17,326/- (approximately). A legal notice under Section 138 of the NI Act was issued to the accused by the respondent for dishonour of cheques. Meanwhile, insolvency proceedings against the corporate debtor, of which the accused was the director, commenced and a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) was imposed. The interim resolution professional (‘IRP’) was appointed regarding the corporate debtor.

In the proceedings under Section 138 of the NI Act, the accused was summoned. The accused challenged the said summoning order and sought quashing of the proceedings in view of the moratorium issued under Section 14 of the IBC. Vide the impugned order, the High Court dismissed the accused’s petition and declined to quash the complaint against him.

Analysis and Decision

The Court noted that the High Court while dismissing the accused’s plea, relied upon P. Mohan Raj (supra) where it was held that the immunity granted by the moratorium order issued under Section 14 of the IBC can only be obtained by a corporate debtor and not by a natural person such as the present accused, who was the Director of the corporate debtor.

The Court opined that the High Court erred in relying upon P. Mohan Raj (supra) since the facts of that case were completely different from the present. The Court explained that in P. Mohan Raj the cause of action under Section 138 of the NI Act arose before the imposition of the moratorium and on these facts, the 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.

The Court stated that-

“The return of the cheques dishonoured simpliciter does not create an offence under Section 138 of the NI Act.”

Further, the Court added that clause (c) of the proviso to Section 138 of the NI Act clarifies that cause of action arises only when demand notice is served and payment is not made pursuant to such demand notice within the stipulated fifteen-day period. Placing reliance upon Jugesh Sehgal v. Shamsher Singh Gogi, (2009) 14 SCC 683, the Court reiterated that 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.

In the matter at hand, the Court noted that on 25-07-2018, the moratorium was imposed and management of the corporate debtor was taken over by the interim resolution professional as per Section 17 of the IBC. Perusing Section 17 of the IBC, the Court said that the accused did not have the capacity to fulfil the demand raised by the respondent by way of the notice issued under clause (c) of the proviso to Section 138 NI Act. When the notice was issued to the accused, he was not in charge of the corporate debtor as he was suspended from his position as the director of the corporate debtor as soon as IRP was appointed. Therefore, the powers vested with the board of directors were to be exercised by the IRP in accordance with the provisions of IBC. All the bank accounts of the corporate debtor were operating under the instructions of the IRP; hence, the accused could not repay the amount in light of Section 17 of the IBC. Additionally, the Court noted that after the imposition of the moratorium, the IRP had made a public announcement inviting the claims from the creditors of the corporate debtor and the respondent had filed a claim with the IRP.

Buy Code of Criminal Procedure, 1973  HERE