Cheque Bounce Proceedings Under Section 138 of the Negotiable Instruments Act, 1881 When the Accused Is Undergoing Corporate Insolvency Resolution Process

The question of whether proceedings under Sections 138 and 141 of the Negotiable Instruments Act, 1881 (NI Act) are covered by the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) has been addressed by the Hon’ble Supreme Court in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258 and, more recently, in Vishnoo Mittal v. M/s Shakti Trading Company (Special Leave to Appeal (Crl.) No. 1104/2022).

Supreme Court's Ruling in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd.

In P. Mohanraj, the Supreme Court held that the scope of Section 14 of the IBC is broad enough to cover proceedings under Sections 138 and 141 of the NI Act. Consequently, once the Corporate Insolvency Resolution Process (CIRP) is initiated, and a moratorium is imposed, any pending or new proceedings under the NI Act against the corporate debtor must be stayed. However, the Court clarified that the moratorium applies only to the corporate debtor and does not extend to natural persons who are in charge of the company, as per Sections 141(1) and 141(2) of the NI Act.

The case involved cheques that were dishonored on 03.03.2017 and 28.04.2017, with demand notices issued on 31.03.2017 and 05.05.2017. A moratorium was subsequently imposed on 06.06.2017—after the lapse of 15 days from the demand notices. Since the cause of action under Section 138 of the NI Act arose before the moratorium was imposed, the Court ruled that while proceedings against the corporate debtor were barred, those against the responsible natural persons could continue.

Supreme Court's Ruling in Vishnoo Mittal v. M/s Shakti Trading Company

The case of Vishnoo Mittal involved a different scenario—where the 15-day period following the demand notice expired after the moratorium had already been imposed under Section 14 of the IBC.

Here, insolvency proceedings were initiated against the corporate debtor on 25.07.2018, and a moratorium was imposed on the same date. The demand notice under Section 138 of the NI Act was issued on 06.08.2018—after the moratorium had taken effect. Since the cause of action under Section 138 arises only after 15 days from the demand notice, in this case, it arose on 21.08.2018—when the moratorium was already in place.

Furthermore, under Section 17 of the IBC, once an Interim Resolution Professional (IRP) is appointed, the powers of the board of directors, including financial management, are suspended. Since the accused was no longer in control of the company at the time the demand notice was issued, compliance with the notice or payment of the cheque amount was not possible. The complainant had already filed a claim with the IRP, reinforcing that the issue should be resolved within the IBC framework rather than through criminal proceedings under the NI Act.

Accordingly, the Supreme Court quashed the proceedings initiated under Section 138 of the NI Act.

Conclusion

The Supreme Court’s rulings in P. Mohanraj and Vishnoo Mittal have clarified the interplay between Section 14 of the IBC and proceedings under the NI Act. While cheque bounce proceedings against the corporate debtor are barred during the moratorium, those against natural persons can continue if the cause of action arose before the moratorium. However, if the cause of action itself arises after the imposition of the moratorium, such proceedings cannot be sustained. These rulings reinforce the principle that insolvency resolution should take precedence over parallel criminal proceedings in matters concerning financial liabilities.