Summary
Cheques drawn by the appellant as director of a company were dishonoured on 7 July 2018; a moratorium under Section 14 IBC was declared and an interim resolution professional appointed on 25 July 2018; the demand notice under Section 138 NI Act was issued on 6 August 2018 and a complaint followed. The High Court refused to quash the complaint, relying on P. Mohan Raj. The Supreme Court quashed it: the cause of action under Section 138 arises only on non-payment within fifteen days of the notice, which here fell after the moratorium, by when the director's powers stood suspended under Section 17 IBC and he had no capacity to pay; P. Mohan Raj, where the cause of action predated the moratorium, was distinguishable.
Issues
- Whether proceedings under Section 138 of the Negotiable Instruments Act, 1881 against the director of a corporate debtor can continue where the cause of action for the offence arose after the moratorium under Section 14 IBC and the appointment of the interim resolution professional.
- Whether the decision in P. Mohan Raj v. Shah Brothers Ispat Pvt. Ltd., holding that the moratorium protects only the corporate debtor and not natural persons under Section 141, governs such a case.
- Whether the High Court ought to have quashed the complaint in exercise of its power under Section 482 CrPC.
Provisions considered
- Section 138 and clause (c) of its proviso, Negotiable Instruments Act, 1881The return of a cheque unpaid does not by itself create the offence; the ingredients are cumulative and clause (c) of the proviso makes it clear that the cause of action arises only when the drawer fails to pay within fifteen days of receipt of the demand notice. On the facts the cause of action arose on 21 August 2018, after the moratorium of 25 July 2018. (¶¶ 7, 9)
- Section 14, Insolvency and Bankruptcy Code, 2016The moratorium declared on 25 July 2018 was relied on by the appellant. The Court noted that P. Mohan Raj had held that Section 14 bars or stays proceedings only against the corporate debtor and not natural persons, but on facts where the cause of action under Section 138 arose before the moratorium; the present case, where the cause of action arose after commencement of insolvency, was held to be different. (¶¶ 6, 7, 8)
- Section 17, Insolvency and Bankruptcy Code, 2016From the appointment of the interim resolution professional the management of the corporate debtor vests in the IRP, the powers of the board of directors stand suspended, and the banks act on the IRP's instructions. The appellant was therefore not in charge of the company when the demand notice was issued and could not have paid the cheque amounts from the company's accounts. (¶¶ 10, 11)
- Section 482, Code of Criminal Procedure, 1973Given the distinguishing facts, the High Court ought to have exercised its inherent power to quash the summoning order and the complaint against the appellant. (¶¶ 12, 13)
Held
- Dishonour of a cheque simpliciter does not constitute an offence under Section 138 NI Act. The cause of action arises only when the amount remains unpaid after expiry of fifteen days from receipt of the demand notice, as clause (c) of the proviso makes clear and as the cumulative ingredients explained in Jugesh Sehgal v. Shamsher Singh Gogi require. (¶ 9)
- The High Court erred in relying on P. Mohan Raj. In that case the demand notices preceded the moratorium, so the cause of action under Section 138 arose before the moratorium and the Court held that proceedings could continue against the natural persons in Section 141. Here the cheques were dishonoured before, but the notice was issued and the fifteen-day period expired after, the moratorium and the appointment of the IRP; the cause of action arose after commencement of the insolvency process. (¶¶ 7, 8)
- Once the IRP was appointed under Section 17 IBC, the appellant stood suspended as director, the board's powers were exercisable by the IRP and the company's bank accounts operated on the IRP's instructions; the appellant therefore had no capacity to meet the demand under the Section 138 notice. The respondent had, moreover, lodged a claim with the IRP after the public announcement. (¶¶ 10, 11)
- In these distinguishing circumstances the High Court ought to have quashed the case against the appellant under Section 482 CrPC. (¶ 12)
Result
Appeal allowed. The High Court's order dated 21 December 2021 set aside; the summoning order dated 7 September 2018 and Complaint Case No. 15580/2018 pending before the Chief Judicial Magistrate, Chandigarh quashed. Pending applications disposed of.