Date of Order: May 5, 2025
Introduction
The present order addresses the intricate legal question regarding the effect of Section 96 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) on ongoing proceedings under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”), particularly when insolvency proceedings are initiated against an individual director or personal guarantor.
The Court critically examines whether the interim moratorium under Section 96 IBC mandates a stay of criminal proceedings against the Director(s) under Section 138 NI Act, especially in light of divergent judicial interpretations and the evolving jurisprudence on the interplay between insolvency law and penal provisions for dishonored cheques.
The Court placed significant reliance on the Hon’ble Supreme Court’s latest decision / Judgement passed in the matter titled as “Rakesh Bhanot Vs M/s Gurdas Agro Pvt. Ltd Cri. Appeal No. 1607 of 2025” wherein the Apex Court clearly mentioned that in all the cases pertaining to section 138 of N.I Act, no protection shall be granted under section 96 IBC.
Moreover, the Hon’ble Supreme Court while tagging Sandeep Gupta v. Shri Ram Steel Traders (2023) with Rakesh Bhanot case (supra) clarified that the protection of Section 96 IBC does not extend to directors or signatories of a company who are arrayed as accused in their representative capacity under Section 141 NI Act.
The Court reasoned that to maintain the sanctity and trust in use of the negotiable instruments like cheques in business dealings it is vital that no mortarium under section 96 shall be granted against the directors of the company. Thus, the interim moratorium would not stay criminal proceedings under Section 138 NI Act against the Directors / personal guarantors.
In view of this, the Ld. Court passed a conclusive order in the favor of the Complainant Bank and dismissed the application filed by the opposite party u/s 96 IBC. This order thus encapsulates the ongoing legal debate on the scope of the interim moratorium under the IBC vis-à-vis criminal proceedings for cheque dishonor against the Director, highlighting the need for judicial clarity to ensure consistency in the application of insolvency and penal laws.
Background of the Case
The complainant bank is a financial institution established under the Banking Companies (Acquisition of Transfer of Undertakings) Act, 1971 which sanctioned a Letter of Credit (LC) of Rs. 3 crores (“said sum”) on the request of accused company (Accused No. 1), its Managing Director (Accused No. 2), and its Whole Time Director (Accused No. 3).
The Accused to secure the LC issued a postdated cheque of the same amount and committed to pay back the sum of Rs. 3 crores by July 10, 2013. It is pertinent to mention that the accused did not pay back the said sum and when the security cheque was presented with the bank, then the same also got dishonored on July 29, 2013, despite numerous reminders.
The accused did not comply with the legal demand notice and the complainant was constrained to initiate section 138 read with section 141 NI Act proceedings against the Accused.
Issues raised by the Court
- Whether Section 96 is applicable to stay the proceedings implying criminal liability under Section 138 of the Negotiable Instruments Act?
Legal Provisions
- Section 138 of the Negotiable Instruments Act, 1881: criminalizes the dishonor of cheques for insufficiency of funds
- Section 96 of the Insolvency and Bankruptcy Code, 2016: provides for an “interim moratorium” upon the filing of an application for insolvency resolution against an individual or a partnership firm
Analysis Of the Case
The present order addresses the application filed by the accused seeking a stay of proceedings under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”), on the ground of an interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The application was premised on the initiation of insolvency proceedings under Sections 94(1) and 95 of the IBC.
The Ld. Court while dismissing the said application observed that the Hon’ble Supreme Court in Rakesh Bhanot v. M/s Gurdas Agro Pvt. Ltd. (supra), did not grant a stay on the ongoing criminal proceedings against the Directors.
Conclusion
This order upholds the integrity of the Negotiable Instruments as it disallows the accused to take shelter under section 96 IBC. The Ld. Court while relying on the landmark judgement passed by the Hon’ble Supreme Court clears the fact that IBC’s moratorium provisions are intended only to shield the accused from civil recovery actions during insolvency, and not from the personal culpability that has been casted upon the Directors / signatory of Dishonoured cheque.
The Ld. Court also stressed that allowing the moratorium to stall such prosecutions would undermine the deterrent effect of Section 138 and erode trust in the use of cheques in commercial transactions. The Court further reasoned that insolvency proceedings cannot be used as a shield for the crimes done by the Directors in their personal capacity.
The Ld. Court’s order also endorses that the legislative intent of Section 96 does not extend to the criminal liability of the directors as imposed as per section 138 of NI Act.