Supreme Court Quashes Section 138 NI Act Proceedings Initiated Against Director Post Imposition of IBC Moratorium

The Hon’ble Supreme Court (Supreme Court), in its ruling in Vishnoo Mittal v. Shakti Trading Company, addressed the interplay between the Insolvency and Bankruptcy Code, 2016 (IBC) and Section 138 of the Negotiable Instruments Act, 1881 (NI Act), delivering a significant ruling on directors’ liability during insolvency proceedings.

The case arose from a dispute between Shakti Trading Company, a super stockist for Xalta Food and Beverages, and Vishnoo Mittal, its former director. Mittal issued eleven cheques totaling INR11,17,326, dishonored on July 7, 2018. Shakti issued a demand notice on August 6, 2018, followed by a Section 138 complaint under NI Act in September 2018. Meanwhile, on July 25, 2018, the Ld. NCLT imposed a moratorium under Section 14 of the IBC on Xalta, appointing an IRP and suspending the directors’ powers. Mittal sought to quash the proceedings in the Punjab and Haryana High Court under Section 482 CrPC, arguing the moratorium’s protection, but his plea was dismissed on December 21, 2021, based on the earlier Supreme Court ruling in P. Mohan Raj v. Shah Brothers Ispat Pvt. Ltd., which limited moratorium protection to the corporate debtor.

On appeal, the Supreme Court held as follows:

1. The cause of action under Section 138 of the NI Act arises only after the 15-day notice period post-demand notice, not at cheque dishonour. In this case, it would be on August 21, 2018, post-moratorium.

 

2. During the moratorium, the IRP controlled Xalta’s affairs under Section 17 of the IBC, rendering Mittal powerless to settle the debt.

 

3. Initiating Section 138 proceedings against Mittal, whose authority was suspended, violated the IBC’s framework, which aims to shield insolvency processes from parallel actions.

 

Consequently, the Court quashed the High Court’s order, the summoning order of September 7, 2018, and the complaint before the Chandigarh Chief Judicial Magistrate.

This ruling clarifies that former directors cannot be prosecuted under Section 138 of the NI Act for causes of action arising after imposition of an IBC moratorium, when their control is relinquished to the IRP. It reinforces the IBC’s precedence in harmonizing insolvency proceedings with other legal frameworks, offering relief to individuals unfairly targeted amid corporate distress.