The Bombay High Court held that no liability under the Negotiable Instruments Act can be imposed on former directors for dishonour of cheques that occurred during the moratorium and liquidation period under the Insolvency and Bankruptcy Code.
The Bombay High Court (Nagpur Bench), comprising Justice Urmila Joshi-Phalke, recently adjudicated multiple criminal applications and held that criminal liability under Sections 138 and 141 of the Negotiable Instruments Act, 1881, cannot be imposed on erstwhile directors of a corporate debtor for dishonoured cheques issued during the Corporate Insolvency Resolution Process (CIRP) or liquidation, where such directors no longer exercised control and all powers had vested in the Resolution Professional or Liquidator pursuant to a moratorium under Section 14 and liquidation under Section 33 of the Insolvency and Bankruptcy Code, 2016.
The Bombay High Court examined the maintainability of multiple criminal complaints filed under Sections 138 and 141 of the Negotiable Instruments Act, 1881, against former and suspended directors of Venus Rolling Mills Private Limited. The complaints pertained to dishonoured cheques allegedly issued in discharge of business liabilities towards the complainant company. The applicants sought quashing of the complaints, contending that they were not in control of the corporate debtor at the relevant time—some having resigned years earlier, and others having ceased to exercise any authority following the commencement of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016.
The Court noted that the National Company Law Tribunal (NCLT), Mumbai, had declared a moratorium under Section 14 of the IBC on 22 April 2019 and appointed a Resolution Professional, thereby suspending all powers of the company’s board of directors. Subsequently, on 9 June 2022, the NCLT passed an order under Section 33 of the IBC initiating the liquidation of the company and appointing the same professional as the liquidator, with all management powers henceforth vested in him. The dishonoured cheques in question were dated between 27 October 2022 and 2 November 2022—well after both the imposition of the moratorium and the commencement of liquidation.
The applicants submitted that the cheques were originally issued in 2018 as security and that the Resolution Professional had formally warned the complainant company in May 2019 not to deposit them. The Court accepted this factual matrix and held that by the time the cheques were presented, applicant Nos. 1 and 3 had ceased to have any legal authority to represent the company or to issue financial instruments on its behalf. The complainant, however, opposed the applications and relied on precedents, including P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, 2021 SC 03526, asserting that the moratorium applied only to the corporate debtor and not to the directors.
The Court distinguished the present case from P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, 2021 SC 03526, observing that the moratorium and liquidation had already been in effect prior to the issuance and dishonour of the cheques. Since the cause of action under Section 138 arises only after dishonour and failure to pay within 15 days of statutory notice, and since these events occurred during the moratorium and after liquidation had commenced, the offence under Section 138 was not made out against the applicants. It was further emphasised that only those individuals who were in charge of and responsible for the conduct of business at the relevant time could be made vicariously liable under Section 141 of the NIA, which was not the case here.
Accordingly, the Bombay High Court held that the applicants could not be held criminally liable for dishonour of cheques issued without their authority during a period when they had no control over the affairs of the corporate debtor. The Court quashed the summoning orders and set aside all pending criminal complaints against the applicants.