No offence U/s 138 NI Act on dishonour of cheque alone-Offence kicks in on default of payment within 15 days of demand notice
Kiran Raj
The Supreme Court of India has set aside the criminal proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881, against a former director of a company undergoing insolvency resolution. The Division Bench of Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah quashed the criminal complaint and summoning order issued by the Chief Judicial Magistrate, Chandigarh, against the appellant, who had sought relief under Section 482 of the Code of Criminal Procedure, 1973.
The Court held that the initiation of the complaint under Section 138 of the NI Act was untenable in view of the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), and the legal incapacity of the appellant to fulfill the demand raised through the statutory notice. The Court declared that “the appellant did not have the capacity to fulfil the demand raised by the respondent by way of the notice issued under clause (c) of the proviso to Section 138 NI Act.”
The apex court further held that “the High Court ought to have quashed the case against the appellant by exercising its power under Section 482 of the CrPC.” In its final direction, the Court set aside the order passed by the Punjab and Haryana High Court and quashed the pending criminal complaint against the appellant.
The Supreme Court, having found the case distinguishable from the precedent cited by the High Court, recorded its view that the moratorium under the IBC and appointment of an interim resolution professional had divested the appellant of the power to discharge corporate debts.
The appellant, who was serving as the director of M/s Xalta Food and Beverages Private Limited, had drawn eleven cheques in favour of M/s Shakti Trading Company as part of a business relationship where the respondent company functioned as a super stockist. The cheques, amounting to approximately ₹11,17,326, were dishonoured on 07.07.2018. The respondent thereafter issued a legal notice under Section 138 of the NI Act on 06.08.2018, followed by the filing of a criminal complaint in September 2018.
Before these developments, on 25.07.2018, insolvency proceedings were initiated against the corporate debtor under the IBC, resulting in a moratorium order and the appointment of an interim resolution professional (IRP). The appellant was suspended from his position as director, and the management of the corporate debtor was transferred to the IRP under Section 17 of the IBC.
Subsequently, on 07.09.2018, the Chief Judicial Magistrate, Chandigarh, issued summons to the appellant in the complaint filed by the respondent under Section 138 of the NI Act. The appellant approached the Punjab and Haryana High Court under Section 482 of the CrPC, seeking quashing of the complaint in light of the moratorium. However, the High Court dismissed the petition on 21.12.2021, referring to the Supreme Court’s earlier decision in P. Mohan Raj v. M/s Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258.
The appellant argued before the Supreme Court that the cause of action under Section 138 arose only after the issuance of the legal notice on 06.08.2018, which occurred after the imposition of the moratorium on 25.07.2018. The counsel submitted that Clause (c) of the proviso to Section 138 of the NI Act makes it clear that the offence is deemed to occur only if the drawer fails to pay within fifteen days of receiving the demand notice. In this case, by the time the demand notice was issued, the appellant had been suspended from management, and the IRP had assumed control of the corporate debtor’s assets and bank accounts.
The respondent contested the submissions of the appellant and relied on the precedent in P. Mohan Raj to argue that the moratorium applied only to the corporate debtor and not to natural persons such as directors.
The Supreme Court examined the statutory framework under Section 14 and Section 17 of the IBC, alongside the provisions of Section 138 of the NI Act. The Bench recorded that “the bare reading of the above provision shows that the appellant did not have the capacity to fulfil the demand raised by the respondent by way of the notice issued under clause (c) of the proviso to Section 138 NI Act.” It further observed that “the powers vested with the board of directors were to be exercised by the IRP in accordance with the provisions of IBC.”
In its examination, the Court distinguished the facts of the present case from those in P. Mohan Raj. The judgment recorded that “in that case, the cause of action under Section 138 NI Act arose before the imposition of the moratorium” whereas, in the instant matter, “the cause of action in the present case arose after the commencement of the insolvency process.”
The Court referred to its earlier judgment in Jugesh Sehgal v. Shamsher Singh Gogi (2009) 14 SCC 683 and stated that “cause of action arises only when the amount remains unpaid even after the expiry of fifteen days from the date of receipt of the demand notice.” The Court found that by the time the demand notice was issued, the appellant no longer controlled the corporate debtor’s assets due to the moratorium and the IRP's appointment.
The Court also recorded that the IRP had issued a public announcement calling for claims from creditors, and the respondent had filed a claim in accordance with the insolvency process.
On these facts, the Court found that the continuation of criminal proceedings against the appellant was unwarranted and observed that “the High Court erred in relying on P. Mohan Raj since the facts of that case were completely different and the present case is thus distinguishable from it.”
The Supreme Court allowed the appeal and recorded, “we allow this appeal by setting aside the impugned order dated 21.12.2021 and quash the summoning order dated 07.09.2018.” The Court further directed, “we hereby quash the complaint case no.15580/2018, pending before the Chief Judicial Magistrate Court, Chandigarh, filed by the respondent against the appellant.” The Court also disposed of all pending applications.
Case Title: Vishnoo Mittal v. M/s Shakti Trading Company
Neutral Citation: 2025 INSC 346
Case Number: Special Leave Petition (Crl) No. 1104 of 2022
Bench: Justice Sudhanshu Dhulia, Justice Ahsanuddin Amanullah
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