The Delhi High Court recently addressed a significant question regarding the interplay between the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Negotiable Instruments Act, 1881 (“NI Act”). In Ganesh Chandra Bamrana & Ors. v. Rukmani Gupta (CRL.M.C. 6170/2022), the Court reaffirmed that once a moratorium under Section 14 of the IBC is in place, proceedings under Section 138 of the NI Act cannot continue against individuals who ceased to be in control of the corporate debtor.

In this case, the petitioners sought quashing of the summoning order dated April 1, 2022, issued by the Metropolitan Magistrate, Rouse Avenue Court, Delhi, in a complaint under Section 138 of the NI Act. The complaint arose from dishonoured cheques issued in compliance with an order dated July 24, 2019, of the National Consumer Disputes Redressal Commission (“NCDRC”). While two cheques were honoured, the company entered Corporate Insolvency Resolution Process (“CIRP”) on October 31, 2019, imposing a moratorium under Section 14 of the IBC.

Subsequently, two cheques dated January 15, 2020, and March 15, 2020, amounting to Rs. 10 lakh each, were dishonoured for the reason “Drawer Signature to operate account not received”. The complainants filed a complaint under Section 138 of the NI Act, which resulted in the issuance of a summoning order.

The core issue before the High Court was whether individuals, including directors / authorized signatories, could be prosecuted under Section 138 of the NI Act after the commencement of CIRP and the imposition of moratorium under Section 14 IBC.

The Court reaffirmed that under Section 14 of the IBC, once CIRP is initiated, all proceedings against the corporate debtor are stayed. The Court observed that since cheques in question were presented for encashment post-moratorium, the petitioners could not be held liable under Section 138 of the NI Act. The Court noted that under Sections 17 and 18 of the IBC, once an Interim Resolution Professional (“IRP”) is appointed, the management of the corporate debtor vests in the IRP. Consequently, any transactions related to the corporate debtor's bank accounts would require approval from the IRP. The Court further relied on the judgment of a coordinate bench in Govind Prasad Todi & Anr. v. Govt. of NCT of Delhi (2023 SCC OnLine Del 3717), where it was held that upon admission of CIRP, proceedings under Section 138 of the NI Act against the corporate debtor must be stayed. The judgment had emphasized that the IRP becomes responsible for the company’s financial decisions and that any cheque dishonour occurring post-moratorium cannot be attributed to former directors or authorized signatories.

The High Court conclusively held that the petitioners could not be held liable for cheque dishonour since the cheques were presented post-moratorium when they no longer had control over the company’s bank accounts. Accordingly, the summoning order and all consequential proceedings were quashed.

This judgment reaffirms a crucial principle: once CIRP is initiated, liabilities related to cheque dishonour under Section 138 of the NI Act cannot be fastened upon individuals who have ceased to be responsible for the company’s affairs. The ruling acts as a significant safeguard for directors and officers of companies undergoing insolvency, ensuring that they are not held vicariously liable for acts beyond their control. As India’s insolvency jurisprudence continues to evolve, this judgment further solidifies the supremacy of IBC over other laws, reinforcing that economic legislation aimed at revival takes precedence over penal liabilities.

By - Vaibhav Mehra