2025 (5) TMI 1001 - SC - Indian Laws

Dishonour of a cheque - liquidation of the company as well as lack of financial resources - moratorium imposed under the Insolvency and Bankruptcy Code (IBC) protects an individual director or personal guarantor from criminal prosecution - HELD THAT - Having perused the decision in Rakesh Bhanot 2025 (4) TMI 775 - SUPREME COURT we share the view expressed therein. There is thus no reason to hold that because the company has been liquidated the appellant has no liability. Incidentally the appellant was convicted even before the process under the Insolvency and Bankruptcy Code was initiated. Further his position is that of a personal guarantor for the loan advanced to the company. Also NCLAT expressly permitted proceedings under Section 138 of the N.I. Act to continue. Hence it is not open to the appellant to claim protection by urging that proceedings under Section 138 of the N.I. Act cannot be carried forward against him. Thus we find no merit in any of the appeals. However as a last opportunity we grant the appellant some more time to put in 25% of the cheque amount before the High Court. Let such amount be deposited in the Registry within a period of eight weeks from date. Till that time the appellant s liberty shall not be curtailed. In the event payment within the aforesaid time is not made law shall take its own course meaning thereby that the appellant shall expose himself to be taken into custody. Should the deposit be made the revisional application shall be heard on its own merits and decided in accordance with law. If any amount out of 25% of the cheque amount has already been paid and sufficient proof is produced before the High Court to this effect the same may be considered upon granting reasonable opportunity to the complainant and the liquidator to offer their versions. Subject to the aforesaid terms the appeals stand dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the moratorium imposed under the Insolvency and Bankruptcy Code (IBC) protects an individual director or personal guarantor from criminal prosecution under Section 138 of the Negotiable Instruments Act, 1881 (N.I. Act) for dishonour of a cheque issued in personal capacity.

- Whether the liquidation of the company relieves the appellant, a director and personal guarantor, from the liability arising under Section 138 of the N.I. Act.

- Whether the appellant was obliged to comply with the High Court's condition to deposit 25% of the cheque amount pending hearing of the revisional application, and consequences of non-compliance.

- Whether the continuation of criminal proceedings under Section 138 of the N.I. Act is permissible despite the moratorium under the IBC.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Impact of IBC Moratorium on Criminal Proceedings under Section 138 of the N.I. Act

Relevant Legal Framework and Precedents: The Insolvency and Bankruptcy Code, 2016, particularly Sections 94, 95, 96, 97 to 119, 100, and 101, provides for moratoriums during insolvency proceedings to protect debtors from legal actions related to debt recovery. Section 96 imposes an interim moratorium on legal proceedings concerning debts. However, the moratorium is not intended to shield individuals from personal criminal liabilities. The Supreme Court decision in Rakesh Bhanot v. Gurdas Agro (P) Ltd. (2025) elucidates that the moratorium under IBC applies only to legal proceedings related to debt recovery and does not extend to penal actions such as prosecution under Section 138 of the N.I. Act.

Court's Interpretation and Reasoning: The Court emphasized that the moratorium under Section 96 IBC is designed to protect corporate debtors from creditor actions related to debt recovery, but it does not cover criminal proceedings. The Court noted that the term "legal action or proceedings" in Section 96 must be read in conjunction with "in respect of any debt," implying that only debt recovery actions are stayed. Penal proceedings under Section 138, which aim to uphold commercial integrity and impose personal liability, are distinct and continue unaffected.

Key Evidence and Findings: The appellant was a director and personal guarantor who issued the cheque personally. The dishonour of the cheque triggered prosecution under Section 138. The moratorium was imposed after the appellant's conviction and did not prevent continuation of criminal proceedings. The NCLAT had expressly permitted Section 138 proceedings to continue despite the moratorium.

Application of Law to Facts: Since the appellant's liability under Section 138 is personal and separate from the corporate insolvency process, the moratorium under IBC does not bar criminal prosecution. The Court upheld that the moratorium does not protect the appellant from prosecution for dishonour of cheque issued in personal capacity.

Treatment of Competing Arguments: The appellant contended that the moratorium should protect him from prosecution due to the company's liquidation and his financial incapacity. The Court rejected this, relying on the statutory distinction between corporate insolvency and personal criminal liability, and the precedent in Rakesh Bhanot.

Conclusion: The moratorium under the IBC does not protect the appellant from criminal liability under Section 138 of the N.I. Act.

Issue 2: Effect of Company Liquidation on Liability of Director/Personal Guarantor under Section 138 N.I. Act

Relevant Legal Framework and Precedents: Section 141 of the N.I. Act provides for prosecution of persons in charge of the company's affairs, including directors. The liquidation of the company under the IBC does not extinguish personal criminal liability of directors or guarantors for offences committed in their individual capacity.

Court's Interpretation and Reasoning: The Court held that liquidation of the company does not absolve the appellant of his personal liability under Section 138. The appellant's conviction preceded the insolvency proceedings, and his role as personal guarantor further establishes personal accountability. The NCLAT's order permitting continuation of Section 138 proceedings reinforces this position.

Key Evidence and Findings: The appellant's personal issuance of the cheque and his status as director and guarantor were undisputed. The company's liquidation was subsequent to the conviction, and no statutory provision or precedent supports immunity from prosecution due to liquidation.

Application of Law to Facts: The appellant's personal liability is independent of the company's financial status or liquidation. Criminal prosecution under Section 138 is distinct from corporate insolvency and continues unaffected.

Treatment of Competing Arguments: The appellant argued that liquidation and lack of financial resources should relieve him from liability. The Court rejected this, emphasizing the personal nature of the offence and the legislative intent to hold individuals accountable.

Conclusion: Liquidation of the company does not relieve the appellant of personal criminal liability under Section 138 of the N.I. Act.

Issue 3: Obligation to Deposit 25% of Cheque Amount as Condition for Suspension of Sentence and Consequences of Non-Compliance

Relevant Legal Framework and Precedents: The High Court, exercising revisional jurisdiction, directed suspension of sentence on condition that the appellant deposit 25% of the cheque amount. Such conditional suspension is a recognized judicial practice to balance liberty and ensuring compliance with financial obligations arising from dishonoured cheques.

Court's Interpretation and Reasoning: The Court upheld the High Court's condition as lawful and binding. The appellant's failure to comply with the deposit condition justified cancellation of bail and recall of the suspension order. The Court emphasized that non-compliance with judicial conditions cannot be condoned.

Key Evidence and Findings: The appellant did not deposit any amount within the stipulated three months. The complainant filed an application for cancellation of bail on this ground, which was allowed by the High Court. The appellant's contention that he was not required to deposit was overruled.

Application of Law to Facts: The Court found no merit in the appellant's claim of exemption from the deposit condition. The judicial order was clear and binding, and failure to comply warranted revocation of bail and continuation of criminal proceedings.

Treatment of Competing Arguments: The appellant's financial incapacity was noted but not accepted as a ground to avoid compliance. The Court granted a final opportunity to deposit the amount, balancing fairness and judicial discipline.

Conclusion: The appellant was obliged to deposit 25% of the cheque amount as condition for suspension of sentence, and failure to do so justified recall of the suspension and continuation of prosecution.

Issue 4: Continuation of Section 138 Proceedings Despite Moratorium and Liquidation

Relevant Legal Framework and Precedents: The NCLAT's order explicitly permitted continuation of Section 138 proceedings despite the moratorium under the IBC. The Supreme Court's ruling in Rakesh Bhanot confirms that criminal proceedings under Section 138 are not stayed by insolvency moratoriums.

Court's Interpretation and Reasoning: The Court concurred with NCLAT's view and the Supreme Court precedent, holding that the moratorium does not bar continuation of criminal proceedings under Section 138. The legislative intent is to ensure accountability for cheque dishonour irrespective of insolvency proceedings.

Key Evidence and Findings: The appellant's conviction predated insolvency proceedings. The NCLAT's order and statutory interpretation confirm the permissibility of continuing prosecution.

Application of Law to Facts: The Court found no legal impediment to continuation of Section 138 proceedings against the appellant despite liquidation and moratorium.

Treatment of Competing Arguments: The appellant's reliance on insolvency proceedings to claim immunity was rejected.

Conclusion: Section 138 proceedings may continue notwithstanding the moratorium and liquidation of the company.

3. SIGNIFICANT HOLDINGS

"The interim moratorium under Section 96 and the moratorium under Section 101 IBC are designed to offer a breathing space to the corporate debtor, allowing them to reorganize their financial affairs without the immediate threat of creditor actions. However, this moratorium is not intended to shield individuals from personal criminal liabilities arising from their actions outside the scope of corporate debt restructuring."

"The statutory liability against the directors under Section 138 of the N.I. Act, 1881, is personal and hence, continues to bind natural persons, irrespective of any moratorium applicable to the corporate debtor."

"The acceptance of the resolution plan under Section 31 IBC or its implementation thereof will have no effect on the prosecution under Section 138 of the N.I. Act, 1881."

"The cause of action for prosecution under Section 138 of NI Act commences on the dishonour of the cheque and the failure to pay the amount unpaid because of dishonour, within 15 days from the date of receipt of notice demanding payment."

"The moratorium under the IBC does not protect the appellant from criminal liability under Section 138 of the N.I. Act."

"Liquidation of the company does not relieve the appellant of personal criminal liability under Section 138 of the N.I. Act."

"The appellant was obliged to deposit 25% of the cheque amount as condition for suspension of sentence, and failure to do so justified recall of the suspension and continuation of prosecution."

"Section 138 proceedings may continue notwithstanding the moratorium and liquidation of the company."

The Court finally granted the appellant a last opportunity to deposit 25% of the cheque amount within eight weeks, during which his liberty would not be curtailed. Failure to comply would expose him to custody, but upon deposit, the revisional application would be heard on merits.