A) ABSTRACT / HEADNOTE

Vishnoo Mittal v. M/s Shakti Trading Company, [2025] 4 S.C.R. 41 : 2025 INSC 346, examines whether proceedings under Section 138 of the Negotiable Instruments Act, 1881 can be quashed against a natural person (a former director) where an insolvency moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 was in force when the statutory demand notice was served.

The appellant, a director of M/s Xalta Food and Beverages Pvt. Ltd., drew cheques which were dishonoured on 07.07.2018. The demand notice was served on 06.08.2018, after the insolvency commencement date (25.07.2018) and the appointment of the Interim Resolution Professional (IRP). The High Court relied on P. Mohan Raj v. M/s Shah Brothers Ispat Pvt. Ltd. to reject quashal, treating the moratorium’s immunity as unavailable to natural persons.

The Supreme Court distinguished P. Mohan Raj on its facts because in that case the cause of action under Section 138 had arisen before the moratorium. Relying on the statutory structure of Section 138 (specifically proviso clause (c) and the management vesting provisions in Section 17 IBC, the Court held that a cause of action only accrues after the 15-day period post demand notice and that where that accrual happens during a moratorium and the director lacks capacity to make payment (management and bank accounts controlled by IRP), proceedings should be quashed. The summons and complaint were therefore quashed.

Keywords: Section 138 NI Act; Sections 14 & 17 IBC; moratorium; quashing under Section 482 CrPC; demand notice; cause of action; director; interim resolution professional.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The dispute arises at the intersection of insolvency protection afforded to a corporate debtor and criminal liability of persons under Chapter XVII of the Negotiable Instruments Act. Eleven cheques drawn by the appellant as director were dishonoured on 07.07.2018. The complainant served a statutory notice under Section 138 on 06.08.2018.

Separately, insolvency proceedings commenced on 25.07.2018 with the appointment of an IRP and an operative moratorium under Section 14 IBC. The High Court, invoking P. Mohan Raj, held that moratorium protection applies only to the corporate debtor and not to natural persons, thereby refusing quashal of the criminal complaint. The Supreme Court was called upon to decide whether the High Court’s reliance on P.

Mohan Raj was tenable given that, in the present case, the statutory cause of action under Section 138 (i.e., expiry of the 15-day cure period post demand notice) occurred after the moratorium date. The analysis necessarily required construing the temporal trigger for cause of action under Section 138 and reconciling it with the effect of Sections 14 and 17 of the IBC which transfer management and control (including bankers’ instructions) to the IRP.

The Court examined statutory text and precedent, emphasising that the mere dishonour of cheques is not a complete offence until statutory notice and the 15-day window elapse. It then tested whether a director could realistically satisfy the demand during a moratorium when management powers and bank accounts are under the IRP’s control.

D) FACTS OF THE CASE

The appellant was a director of M/s Xalta Food and Beverages Pvt. Ltd. A commercial relationship with the respondent, M/s Shakti Trading Company, led the appellant to draw eleven cheques totalling approximately ₹11,17,326/-. Those cheques were dishonoured on 07.07.2018. The respondent received information of dishonour and served a written demand notice under Section 138 NI Act on the appellant on 06.08.2018.

Crucially, insolvency proceedings against the corporate debtor had been initiated on 25.07.2018, when a moratorium under Section 14 IBC was declared and an IRP appointed. On appointment, Section 17 IBC suspended the board’s powers and vested management and control in the IRP; banks were mandated to act on IRP’s instructions. A summons was issued to the appellant on 07.09.2018 in the criminal complaint based on the Section 138 notice.

The appellant sought quashal under Section 482 CrPC, arguing that because the demand notice was served after the moratorium, the cause of action (which crystallises only after the 15-day cure period) arose during moratorium and therefore the criminal proceedings could not be permitted to continue. The High Court denied relief, relying on P. Mohan Raj, treating moratorium immunity as limited to the corporate debtor and not extending to natural persons such as directors. The appellant appealed to the Supreme Court.

E) LEGAL ISSUES RAISED

i. Whether a cause of action under Section 138 NI Act arises only after the service of demand notice and expiry of the 15-day cure period and thus may post-date the insolvency moratorium.
ii. Whether a moratorium under Section 14 IBC bars initiation or continuation of Section 138 proceedings against a natural person when the statutory cause of action accrues during the moratorium.
iii. Whether P. Mohan Raj governs the present facts or is distinguishable where the demand notice and expiry of cure period fall after the insolvency commencement date.
iv. Whether practical inability to make payment because management and bank accounts are under the IRP’s control (per Section 17 IBC) precludes criminal prosecution of the director.

F) PETITIONER / APPELLANT’S ARGUMENTS

The counsels for Petitioner / Appellant submitted that the cause of action under Section 138 accrues only after the statutory demand notice is served and the drawer fails to pay within 15 days; therefore the offence, in law, arose after 06.08.2018 and post-dates the insolvency commencement date of 25.07.2018.

The appellant further argued that once the IRP assumed control under Section 17 IBC, the director lacked authority to operate accounts or make payment; consequently, permitting criminal proceedings would defeat the moratorium’s protective purpose and penalise a person who had been divested of powers. Reliance was placed on the statutory language of Section 138 (proviso clause (c) and the management-vesting scheme in Section 17 to urge quashal under Section 482 CrPC.

G) RESPONDENT’S ARGUMENTS

The counsels for Respondent submitted that P. Mohan Raj establishes that moratorium immunity applies only to the corporate debtor and does not protect natural persons such as directors; therefore proceedings under Section 138 could continue. It was contended that the dishonour of cheque predates the moratorium, and liability of directors under Chapter XVII is personal and independently enforceable; accordingly the temporal sequence should not defeat prosecution where the underlying act (issue of cheque) occurred earlier.

H) RELATED LEGAL PROVISIONS 

i. Section 14, Insolvency and Bankruptcy Code, 2016 — Moratorium prohibiting institution or continuation of suits or proceedings against corporate debtor.
ii. Section 17, IBC 2016 – Management vests in IRP; board’s powers suspended; banks to act on IRP instructions.
iii. Section 138, Negotiable Instruments Act, 1881 — Dishonour of cheque; proviso (c) requires failure to pay within 15 days of demand notice.
iv. Section 482, CrPC 1973 – Inherent powers to quash proceedings to prevent abuse of process and secure ends of justice.

I) JUDGEMENT

The Supreme Court allowed the appeal and set aside the High Court order. The Court ruled that the High Court’s reliance on P. Mohan Raj was erroneous because the factual matrix in that precedent was different: in P. Mohan Raj demand notices and expiry of the 15-day cure period had occurred before the moratorium, whereas in the present matter the demand notice was served on 06.08.2018 and the cause of action under Section 138 would arise only after the 15-day period expired thus post-dating the moratorium imposed on 25.07.2018.

The Court emphasised the statutory construction of Section 138 that the offence is consummated only when all ingredients are satisfied, notably when the drawer fails to pay within 15 days of notice. Relying on Jugesh Sehgal v. Shamsher Singh Gogi for the constituents of Section 138, the Court concluded the complainant’s cause of action crystallised after the insolvency commencement date.

The Court further observed that Section 17 IBC vests management and operational control including bank account instructions in the IRP and suspends board powers; hence the appellant lacked the legal capacity to meet the demand. Given that the respondent had filed a claim before the IRP, and the IRP had invited claims publicly, the appropriate remedy for the creditor lay in the insolvency process rather than criminal prosecution.

In these circumstances, continuing criminal proceedings would be inconsistent with the moratorium’s object and would penalise a person who had been divested of power to satisfy the demand. The Court accordingly quashed the summoning order and complaint.

a. RATIO DECIDENDI

The decisive legal proposition is that the cause of action for an offence under Section 138 NI Act arises only upon satisfaction of all statutory ingredients in particular after service of the demand notice and the drawer’s failure to make payment within 15 days.

Where that accrual occurs after the insolvency commencement date and during an operative moratorium under Section 14 IBC, and where Section 17 IBC has vested managerial and banking control in the IRP thereby rendering the director incapable of discharging the debt, criminal proceedings against the director ought to be quashed. P. Mohan Raj is distinguishable where the accrual preceded the moratorium.

b. OBITER DICTA 

The Court observed that mere dishonour of cheques “simpliciter” does not by itself create the offence; the statutory demand and the 15-day lapse are essential. The Court reiterated that moratorium is aimed at preserving the corporate debtor as a going concern and that creditors must primarily pursue remedies through the insolvency resolution process where claims may be filed with the IRP. The judgment suggests judicial sensitivity to the practical effects of Section 17 on a director’s ability to comply with extraneous obligations.

c. GUIDELINES

i. When assessing quashal applications under Section 482 CrPC in cases intersecting with insolvency, courts must first identify the precise date when the cause of action under Section 138 crystallised (post-demand and expiry of 15 days).
ii. If the cause of action accrues during an operative moratorium, the court should examine whether the accused had the legal and practical capacity to discharge the debt given the IRP’s control under Section 17 IBC.
iii. Creditors whose cause of action falls within the moratorium period should be directed to lodge claims with the IRP and pursue remedies within the insolvency framework rather than by criminal prosecution.
iv. Precedents like P. Mohan Raj must be applied factually; immunity under moratorium cannot be applied or denied without careful fact-sensitive analysis of temporal sequences.
v. Courts must avoid mechanical application of precedents and ensure that the protective purpose of the moratorium is not undermined by permitting prosecutions where the accused lacked capacity to pay.

J) CONCLUSION & COMMENTS

The decision carefully reconciles two legislative regimes: the penal remedial scheme of Section 138 NI Act and the corporate-restructuring regime under the IBC. The Court’s approach is textually anchored in Section 138 proviso clauses and pragmatic in recognising the displacement of corporate control by an IRP under Section 17.

Distinguishing P. Mohan Raj on temporal facts safeguards the moratorium’s remedial object while preserving liability where the statutory offence had already crystallised prior to insolvency. The judgment underscores the primacy of statutory ingredients in criminal offences and the necessity to situate prosecutions within the larger policy of collective creditor remedies under insolvency law.

Practically, the ruling protects individuals from criminal exposure where they are divested of power by insolvency statutes and directs creditors to insolvency fora. This fosters coherence between criminal law and insolvency policy, while reminding courts to apply precedent through a careful factual lens.

K) REFERENCES

a. Important Cases Referred
i. Vishnoo Mittal v. M/s Shakti Trading Company, [2025] 4 S.C.R. 41 : 2025 INSC 346.
ii. P. Mohan Raj v. M/s Shah Brothers Ispat Pvt. Ltd., [2021] 14 SCR 204 : (2021) 6 SCC 258.
iii. Jugesh Sehgal v. Shamsher Singh Gogi, (2009) 14 SCC 683 : 10 SCR 857.

b. Important Statutes Referred
i. Negotiable Instruments Act, 1881 (Sections 138, proviso (c)).
ii. Insolvency and Bankruptcy Code, 2016 (Sections 14, 17).
iii. Code of Criminal Procedure, 1973 (Section 482).