IBC proceedings no bar to cheque bounce prosecution against directors under Section 138 NI Act: Bombay HC

The Bombay High Court recently ruled that insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) do not shield company directors from prosecution for dishonoured cheques under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) [Ortho Relief Hospital and Research Centre Vs Anand Distilleries]..The Court stressed that while a corporate debtor may be protected during insolvency, the liability of its directors and signatories is personal and continues despite liquidation.Justice MM Nerlikar of the Nagpur Bench delivered the judgment on October 1.“The Directors of the Company remain liable under Section 138 of the NI Act, even if Company’s debt is resolved under the IB Code,” the Court said.The protection under Section 32A of the IBC extends only to the corporate debtor and not to its officer, the judge added.The observations were made while holding that the trial court had committed “gross error” in discharging the directors of Anand Distilleries.The case arose from a loan transaction between Ortho Relief Hospital and Research Centre at Nagpur and M/s Anand Distilleries. In October 2015, the distillery, through its directors Abhaykumar and Anandkumar Bhambore, obtained a short-term loan of ₹15 lakh from the petitioner hospital. Towards security, a post-dated cheque was issued, signed by one of the directors as authorised signatory of the company.The petitioner claimed that interest at 18% per annum was paid for some time, but by January 2018 payments stopped. In February 2018, insolvency proceedings were initiated against Anand Distilleries by Punjab National Bank before the National Company Law Tribunal (NCLT) and an Interim Resolution Professional was appointed.Despite the moratorium, the directors assured the petitioner that the company’s operations would resume and advised him to present the cheque. When presented in December 2018, the cheque was dishonoured with the remark “insufficient funds.” A statutory demand notice was issued in January 2019 and when no payment was made, a complaint was lodged in February 2019 under Section 138 NI Act along with charges under Sections 406 and 420 of the Indian Penal Code.In January 2025, the 10th Joint Civil Judge, Senior Division and Additional Chief Judicial Magistrate at Nagpur discharged the directors on the ground that the complaint was not maintainable because of the ongoing IBC proceedings. This order was challenged before the High Court..Justice Nerlikar made it clear that cheque dishonour proceedings are criminal in nature and cannot be equated with debt recovery under the IBC. “The proceedings under Section 138 of the NI Act are not recovery proceedings. They are penal in nature, aimed at maintaining the integrity of commercial transactions,” the Court held..Referring to Supreme Court rulings in P Mohanraj v. Shah Brothers Ispat Pvt Ltd, Ajay Goenka v. TFCI, Narinder Garg v. Kotak Mahindra Bank and Rakesh Bhanot v. Gurdas Agro Pvt Ltd, the High Court reiterated that while Section 14 of the IBC imposes a moratorium on proceedings against the corporate debtor, it does not bar prosecution of individuals responsible for the company’s conduct..The judgment also clarified that once the cause of action under Section 138 arises through dishonour of a cheque and failure to comply with a statutory notice, directors cannot avoid criminal liability by citing subsequent liquidation of the company. .Hence, the Court allowed the petition filed by Ortho Relief Hospital, quashed the discharge orders of the trial court and restored the complaint for prosecution. “The Court below has lost sight of the fact that the Supreme Court has already settled this issue … and therefore committed a gross error in discharging the accused,” Justice Nerlikar concluded. .The petitioner was represented by advocate SS Dewani.The respondents were represented by advocate SD Khati.[Read Judgment]