A) ABSTRACT / HEADNOTE

The appeal challenges the High Court’s refusal to quash Section 138 proceedings instituted against a former director after an insolvency commencement date and the consequent moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). The appellant drew multiple cheques on behalf of the corporate debtor which were dishonoured before the insolvency commencement date (07.07.2018). The demand notice under Section 138, Negotiable Instruments Act, 1881 (NI Act) was, however, served on the appellant on 06.08.2018 after the moratorium declared on 25.07.2018 and after appointment of an Interim Resolution Professional (IRP) who assumed control under Section 17, IBC.

The High Court relied on P. Mohan Raj v. M/s Shah Brothers Ispat Pvt. Ltd. to hold that moratorium immunity applies only to the corporate debtor and not to natural persons who remain liable under Chapter XVII of NI Act. The Supreme Court distinguished P. Mohan Raj on its facts: there, cause of action under Section 138 arose before moratorium; here, the statutory cause of action (i.e., expiry of 15 days after demand) fell after imposition of moratorium and after the IRP had taken over management and bank operations.

The Court emphasized that dishonour alone does not complete the offence under Section 138 the cause of action crystallizes only after the obligatory notice and 15-day payment window lapse. Given Section 17 reposed management and banking control in the IRP and given that creditors were invited to file claims before the IRP, proceedings against the former director were quashed under the exercise of Section 482, CrPC.

Keywords: Section 138 NI Act; Section 14 IBC (moratorium); Section 17 IBC; Section 482 CrPC; cause of action; P. Mohan Raj; IRP; director liability.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The dispute arises at the intersection of insolvency relief and criminal liability under Section 138 of the NI Act. The appellant, a director of M/s Xalta Food and Beverages Pvt. Ltd. (the corporate debtor), had issued eleven cheques to the respondent in settlement of commercial liabilities; the cheques were dishonoured on 07.07.2018. A demand notice under Section 138 was served on the appellant on 06.08.2018. Crucially, insolvency proceedings had been initiated and an IRP appointed on 25.07.2018, and a moratorium under Section 14, IBC was in force from that date.

The High Court dismissed a Section 482 CrPC petition seeking quashing of criminal proceedings, relying on this Court’s earlier decision in P. Mohan Raj. That decision had held that moratorium protection under Section 14, IBC applies to the corporate debtor and does not bar criminal proceedings against natural persons under Chapter XVII NI Act. The appellant contended that the statutory cause of action under the proviso to Section 138 crystallised only after the demand notice and the lapse of the 15-day period, which fell during the moratorium period; further, by operation of Section 17, IBC, the IRP had assumed control of bank accounts and management, so the former director lacked capacity to effect payment.

The Supreme Court was thus called to decide whether the High Court rightly relied on P. Mohan Raj or whether the facts required a different outcome given timing of the notice and the IRP’s role. The Court held that the cause of action in this case arose after commencement of insolvency and found it distinguishable from P. Mohan Raj, warranting quashing of the criminal proceedings.

D) FACTS OF THE CASE

The appellant served as a director of M/s Xalta Food and Beverages Pvt. Ltd. under a commercial arrangement with the respondent M/s Shakti Trading Company acting as super stockist. In his capacity connected with the corporate debtor, the appellant issued eleven cheques aggregating approximately Rs. 11,17,326/-, which were dishonoured on 07.07.2018. Information of dishonour triggered the respondent’s statutory obligations, and a demand notice under Section 138 was issued; that notice reached the appellant on 06.08.2018.

Meanwhile, creditors initiated insolvency proceedings against the corporate debtor and on 25.07.2018 the National Company Law Tribunal recorded the insolvency commencement date, imposed moratorium under Section 14 and appointed an IRP. The IRP publicly invited claims and thereafter managed corporate accounts; by virtue of Section 17 the board’s powers were suspended and financial institutions were bound to follow the IRP’s instructions. Summons were issued to the appellant on 07.09.2018 in the Section 138 complaint; the appellant moved the High Court under Section 482 CrPC to quash the complaint on the ground that moratorium and Section 17 made compliance and repayment impossible.

The High Court denied relief, applying P. Mohan Raj to permit continuation. The Supreme Court granted leave and, after distinguishing P. Mohan Raj on the timing of cause of action and the IRP’s takeover, allowed the appeal and quashed the criminal proceedings.

E) LEGAL ISSUES RAISED

i. Whether proceedings under Section 138, NI Act can be continued/initiated against a director once a moratorium under Section 14, IBC is in force where the statutory cause of action crystallises after the moratorium?

ii. Whether the mere dishonour of cheques before moratorium gives rise to completed offence under Section 138 or whether cause of action arises only after service of statutory demand notice and lapse of 15 days?

iii. Whether management takeover under Section 17, IBC (including control of bank accounts) negates the former director’s capacity to repay such that criminal proceedings become unsustainable?

iv. Whether P. Mohan Raj is applicable where the demand notice is served after the insolvency commencement date?

F) PETITIONER / APPELLANT’S ARGUMENTS

i. The appellant contended that although cheques were dishonoured before moratorium, the statutory cause of action under proviso (c) to Section 138 arises only after the demand notice and a 15-day window; the notice was issued on 06.08.2018 — after moratorium on 25.07.2018 — hence the cause of action fell during the moratorium.

ii. The appellant argued that Section 17 vested management and control of all corporate accounts with the IRP from 25.07.2018; therefore, the appellant lacked legal capacity or means to effect payment and could not be held criminally liable.

iii. It was submitted that P. Mohan Raj is factually distinguishable because there the demand and expiry preceded moratorium; here the demand-triggered 15-day period began after moratorium.

G) RESPONDENT’S ARGUMENTS

i. The respondent relied on P. Mohan Raj to assert that moratorium protection attaches only to the corporate debtor; natural persons (directors) remain liable under Chapter XVII and cannot hide behind corporate insolvency to avoid criminal proceedings.

ii. The respondent contended dishonour of cheques is a sufficient foundation and that statutory machinery contemplates prosecutorial action against responsible individuals notwithstanding corporate moratorium.

iii. It was argued that allowing quashing would frustrate creditors’ remedies and incentivize misuse of insolvency to escape criminal liability.

H) RELATED LEGAL PROVISIONS 

i. Section 138, Negotiable Instruments Act, 1881 — offence completes only after presentation, bank’s return, demand notice, and failure to pay within 15 days.

ii. Proviso (c) to Section 138 — cause of action arises post notice and 15-day non-payment.

iii. Section 14, IBC — moratorium prohibiting initiation/continuation of suits or proceedings against corporate debtor from insolvency commencement date.

iv. Section 17, IBC — management and board powers vest in IRP; financial institutions must act per IRP instructions.

v. Section 482, CrPC — supervisory power to quash criminal proceedings to prevent abuse/miscarriage of justice.

I) JUDGMENT

The Supreme Court allowed the appeal, set aside the High Court order and quashed the summoning order dated 07.09.2018 as well as the complaint pending as Case No.15580/2018. The Court’s reasoning proceeded in key steps.

First, it analysed the temporal element of cause of action under Section 138: mere dishonour is not the offence; the statutory offence is completed only after the payee serves the demand notice and the drawer fails to make payment within fifteen days. The Court relied on earlier exposition in Jugesh Sehgal v. Shamsher Singh Gogi for the ingredients of Section 138, stressing the cumulative nature of the elements. Thus the cause of action crystallised after 06.08.2018 plus 15 days, i.e., after the insolvency commencement date and during moratorium.

Second, the Court distinguished P. Mohan Raj: in that case the demand-notice/expiry predated moratorium and therefore liability of natural persons could be pursued despite moratorium applying to the corporate debtor. By contrast, in the present case the statutory event expiry of the 15-day window following demand occurred after moratorium; therefore, the case’s facts did not fall within P. Mohan Raj’s ratio. The Court emphasised that distinctions in the timing of the cause of action are decisive.

Third, the Court interpreted Section 17, IBC functionally: once the IRP is appointed, management and control including bank accounts vest in the IRP and the board’s powers are suspended. Financial institutions must act on the IRP’s instructions. The Court observed that when the statutory demand was served, the appellant lacked operational control and capacity to make payments, because all corporate banking operations were under the IRP. This practical inability to pay undercut the rationale for criminal prosecution of the individual in the moratorium period.

Fourth, balancing insolvency purpose and creditor remedies, the Court held that the moratorium’s protective object to centralise resolution and prevent piecemeal actions would be undermined if post-moratorium Section 138 prosecutions were routinely permitted where the cause of action crystallises during moratorium while IRP controls assets. The remedy for the creditor was to file claims with the IRP, which the respondent had done. On this basis the Court exercised Section 482, CrPC to quash criminal proceedings to prevent misuse and injustice.

a. RATIO DECIDENDI

The decisive legal proposition is that the offence under Section 138 NI Act is completed only upon the service of the demand notice and the drawer’s failure to pay within 15 days therefore the temporal point at which the cause of action arises is the end of that 15-day period. If that moment falls during an insolvency moratorium and management/control of corporate accounts has vested in an IRP under Section 17, the moratorium’s protective and centralising purpose precludes initiating or continuing Section 138 proceedings against the former director; consequently, where those facts obtain the court may quash proceedings under Section 482 CrPC.

b. OBITER DICTA

The Court observed obiter that P. Mohan Raj remains good law for the factual matrix where the demand-notice/expiry had already occurred prior to moratorium; in such cases natural persons can be pursued. The Court also noted the practical obligation of creditors to present claims to the IRP post-moratorium. These comments frame but do not expand P. Mohan Raj’s ratio beyond its facts.

c. GUIDELINES

i. Courts should identify the precise date on which the cause of action under Section 138 crystallises (i.e., date of expiry of 15-day payment period post-demand) before deciding interaction with IBC moratorium.

ii. Where the 15-day expiry falls after insolvency commencement and the IRP controls accounts per Section 17, courts should assess whether the accused had capacity to make payment; absence of capacity militates against criminal prosecution.

iii. Creditors must file claims with the IRP; the availability of this statutory insolvency remedy is a factor against allowing parallel criminal proceedings that would undermine the moratorium.

iv. P. Mohan Raj is applicable only where the entire cause of action (including expiry after demand) occurred before moratorium; otherwise it is distinguishable.

J) CONCLUSION & COMMENTS

This decision draws a careful temporal line between pre-moratorium completed causes of action (where criminal liability of natural persons may proceed) and causes of action that crystallise only after the moratorium and IRP takeover (where the object and mechanics of the IBC justify quashing criminal proceedings). The Court preserves P. Mohan Raj for its factual compass while protecting the insolvency process from fragmentation by post-moratorium criminal actions that the director could not effectively remedy given Section 17 constraints. Practitioners should therefore scrutinise dates of dishonour, service of demand notices, and the insolvency commencement date before proceeding with or defending Section 138 prosecutions involving corporate officers. The judgment reinforces the primacy of insolvency’s centralised claims machinery when the statutory cause of action intersects the moratorium window.

K) REFERENCES

Important Cases Referred

1. Vishnoo Mittal v. M/s Shakti Trading Company, Criminal Appeal No. 1287 of 2025 (Supreme Court, 17 Mar. 2025).

2. P. Mohan Raj v. M/s Shah Brothers Ispat Pvt. Ltd., (2021) 6 S.C.C. 258; [2021] 14 S.C.R. 204.

3. Jugesh Sehgal v. Shamsher Singh Gogi, (2009) 14 S.C.C. 683 ; [2009] 10 S.C.R. 857.

Important Statutes Referred

1. Negotiable Instruments Act, 1881 (especially s.138 and proviso).

2. Insolvency and Bankruptcy Code, 2016 (especially ss.14 & 17).

3. Code of Criminal Procedure, 1973 (s.482).