Bombay High Court: The present writ petition was filed challenging the common orders (‘impugned orders’) of the 10th Joint Civil Judge, Senior Division and the Additional Chief Judicial Magistrate, Nagpur (‘Trial Court’), dated 31-01-2025. By the first order, the Court discharged the original accused of the offence under Section 138 of the Negotiable Instruments Act, 1881 (‘NI Act’), and by the second order the Court had held that, in view of that discharge, the complaint was not maintainable against the remaining accused persons. A Single Judge Bench of M.M. Nerlikar, J., while observing that the Courts below had passed the orders in ignorance of the Supreme Court’s decision that natural persons could not escape their liability under the NI Act because of ongoing insolvency proceedings, quashed and set aside the impugned orders.
Background:
The petitioner, the proprietor of Ortho Relief Hospital and Research Centre, lent Rs 15 lakh to Respondent 1, a liquor-distilling company (‘Company’), operating through Respondents 2 and 3 (collectively ‘Directors’), in October 2015, secured by a post‑dated cheque for Rs 15 lakh signed by Respondent 2. The respondents agreed to pay 18% per annum interest, which was paid until January 2018, after which payments and responses to reminders ceased.
The petitioner learned in February 2018 that insolvency proceedings were initiated against the Company, and the National Company Law Tribunal (‘NCLT’) had admitted the insolvency petition and appointed an Interim Resolution Professional (‘IRP’). He submitted his claim to the IRP but received no communication. The petitioner then tried persuading the Directors to repay the loan, who assured him that the insolvency proceedings would not be successful, and the Company would soon resume normal operations. They asked him to present the cheque for encashment. However, the petitioner received a message regarding dishonor of the cheque with memo remarking ‘insufficient funds’. Accordingly, a legal notice was issued to the respondents, and thereafter, a complaint under Section 138 of the NI Act, along with Sections 406 and 420 of the Penal Code, 1860 (‘IPC’) was filed.
The NCLT discharged the respondents under Section 138 of the NI Act, and that order was the subject matter in this petition. The petitioner’s counsel argued that insolvency proceedings under the Insolvency and Bankruptcy Code 2016 (‘IBC’) were distinct from penal proceedings under the NI Act, and the approval of a resolution plan under Section 131(1) IBC, did not absolve the respondents from the penal action under Section 138 of the NI Act.
It was further submitted that the liability of Respondent 2 was in his personal capacity and since the liquidation order was passed, the moratorium period came to an end, and therefore, there was no impediment in recovering the amount. However, he also submitted that a company being a separate legal entity, could be prosecuted independently under the NI Act. He contended that the Courts below ought not to have closed the proceedings when the IBC proceeding provided for limited protection at the most. He further argued that the Directors could not escape from their liability by claiming that the transaction was undertaken in the name of the Company as they were natural persons and were liable for prosecution.
The respondents’ counsel argued that IBC proceedings began before the NI Act proceedings. A moratorium was imposed on 14-02-2018; the cheque was issued on 12-12-2018 and it was dishonoured on 14-12-2018. The legal notice was received on 17-01-2019 and the cheque bounce complaint was filed on 18-02-2019; and the order of liquidation was passed on 08-02-2019. He relied on Sections 14 and 32-A IBC and argued that the proceedings once the moratorium was declared, were barred. He also pointed out that the petitioner had lodged a claim with the IRP and now it was within its domain to pass an appropriate order, making the proceedings under Section 138 untenable. The Directors sought the dismissal of the complaint filed against them and their discharge under Section 245(2) of the Criminal Procedure Code, 1973 (‘CrPC’).
Issue:
Whether prior initiation of proceeding under the IBC would frustrate the petitioner’s claim under Section 138 of the NI Act?
Analysis and Decision:
The Court referred to P. Mohanraj v. Shah Bros. Ispat (P) Ltd., (2021) 6 SCC 258, where it was observed that “the corporate debtor would be covered by the moratorium provision contained in Section 14 IBC, by which initiation or continuation of Section 138/141 proceedings against the corporate debtor during the corporate insolvency resolution process were interdicted. But the moratorium provision contained in Section 14 IBC would apply only to the corporate debtor, and the natural persons mentioned in Section 141 would continue to be statutorily liable under Chapter XVII of the NI Act.”.
The Court also referred to Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corpn. of India Ltd., (2023) 10 SCC 545, where it was held that “by operation of the provisions of the IBC, the criminal prosecution initiated against the natural persons under Sections 138/141 of the NI Act read with Section 200 CrPC would not stand terminated. Where the proceedings under Section 138 of the NI Act had already commenced and during the pendency, the company got dissolved, the signatories or directors could not escape from their penal liability under the NI Act by citing its dissolution. What was dissolved was only the company and not the personal penal liability of the accused covered under Section 141 of the NI Act”.
The Court relied on Rakesh Bhanot v. Gurdas Agro (P) Ltd., (2025) 6 SCC 781, where the Supreme Court distinguished between the insolvency proceedings and the proceedings under Section 138 of the NI Act and held that “the respective petitioners, having filed insolvency applications as personal guarantors under Section 94 IBC, could not extend this protection to avoid prosecution under Section 138 of the NI Act”.
The Court noted that it was not disputed that the IBC proceedings were initiated much prior to the initiation of proceedings under Section 138 of the NI Act and agreed with the submission of the petitioner’s counsel that if this was to be permitted then Section 32-A IBC would be held redundant and the protection granted under that Section would be of no use. The Court clarified that Section 32-A IBC barred prosecution in respect of corporate debtors for offences committed prior to the commencement of the proceedings under the IBC. However, an exception was carved out in the second proviso, which spoke about persons against whom the prosecution would continue and therefore, the prosecution against natural persons could be carried on.
The Court opined that the Supreme Court in cases of P. Mohanraj (supra), Ajay Kumar (supra) and Rakesh Bhanot (supra), had held that the moratorium provision in Section 14 IBC would apply only to the corporate debtor, and the natural person mentioned in Section 141 of the NI Act would continue to be statutorily liable under Chapter XVII.
The Court observed that it made no difference whether the NI Act proceedings were initiated prior to initiation of IBC proceeding or thereafter, as it is a settled principle that natural persons cannot escape from their personal liability under Section 138 of the NI Act. The Court further held that Section 138 proceedings in relation to the signatories who were liable or covered by the two provisos to Section 32-A(1) IBC, would continue in accordance with law.
The Court opined that the Courts below lost sight of the fact that the Supreme Court had already settled the issue, and had therefore, committed a gross error by discharging the Directors for the offence under Section 138 of the NI Act. Consequently, the Court, while allowing the present writ petition, quashed and set aside the impugned orders.
[Ortho Relief Hospital and Research Centre v. Anand Distilleries, Criminal Writ Petition No. 251 of 2025, decided on 01-10-2025]
Advocates who appeared in this case:
For the Petitioner: S.S. Dewani, Advocate.
For the Respondents: S.D. Khati, Advocate.
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