Mere Return of Dishonoured Cheques Not an Offence Under Section 138 NI Act: SC

The Supreme Court has said that the return of the cheques dishonoured simpliciter does not create an offence under Section 138 NI Act and Clause (c) of the proviso makes it clear that cause of action arises only when demand notice is served and payment is not made within the stipulated 15-day period.

A bench of Justices Sudhanshu Dhulia and Ahsanuddin Amanullah also pointed out that a director of the company, which has gone under the insolvency and faced the moratorium, would not be able to make repayment after the interim resolution professional has been appointed.

Appellant, Vishnoo Mittal challenged the order of December 21, 2021, of the Single Judge of the Punjab and Haryana High Court by which his petition under Section 482 of the Criminal Procedure Code, seeking quashing of proceedings initiated under Section 138 of the Negotiable Instruments Act was dismissed.

The appellant, being the director of M/s Xalta Food and Beverages Private Limited, a corporate debtor, issued multiple cheques to respondent M/s Shakti Trading Company to the sum of approximately Rs 11,17,326. The cheques were dishonoured on July 7, 2018.

In September 2018, a complaint was filed before the appropriate court by the respondent against the appellant for offences under Section 138 of the NI Act. Meanwhile, on July 25, 2018, insolvency proceedings against the corporate debtor, of which the appellant was the director, commenced and a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 was imposed. On the same day i.e. July 25, 2018, the interim resolution professional was appointed to the corporate debtor.

The appellant submitted that since the moratorium order was imposed on July 25, 2018, and was in operation, therefore, the proceedings under Section 138 of the NI Act could not have been initiated against him.

Although the cheques were drawn and dishonoured prior to the date i.e., July 25, 2018, however, the notice under Section 138 of the NI Act was given on August 06, 2018, i.e., post July 25, 2018. Hence, the cause of action for the offence under Section 138 of the NI Act would commence after a period of 15 days calculated from August 06, 2018 and it would be August 21, 2018, but by this time moratorium had already been imposed on July 25, 2018, his counsel said.

The high court, while dismissing the appellant’s petition, relied upon the judgment of the top court in P Mohan Raj Vs M/S Shah Brothers Ispat Pvt Ltd (2021) where it was held that the immunity granted by the moratorium order issued under Section 14 of the IBC could only be obtained by a corporate debtor and not by a natural person such as the present appellant, who was the director of the corporate debtor.

"However, in our opinion, 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 bench said.

In that case, the cause of action under Section 138 NI Act arose before the imposition of the moratorium and on these facts, the apex court had held that Section 14 of IBC bars or stays proceedings only against the corporate debtor and proceedings can be continued or initiated against the natural persons, the bench said.

"The case at hand is totally different from P Mohan Raj as the cause of action in the present case arose after the commencement of the insolvency process," the bench noted.

The court also pointed out the return of the cheques dishonoured simpliciter does not create an offence under section 138 NI Act.

Clause (c) of the proviso to Section 138 of the NI Act makes it clear that cause of action arises only when demand notice is served and payment is not made pursuant to such demand notice within the stipulated 15-day period, the bench added.

Citing Jugesh Sehgal Vs Shamsher Singh Gogi (2009), the bench said, the cause of action arises only when the amount remains unpaid even after the expiry of 15 days from the date of receipt of the demand notice.

Court also noted that in the present case, on July 25, 2018, the moratorium was imposed and management of the corporate debtor was taken over by the interim resolution professional as per Section 17 of the IBC.

"The bare reading of the provision showed 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 court noted.

When the notice was issued to the appellant, he was not in charge of the corporate debtor as he was suspended from his position as the director of the corporate debtor as soon as IRP was appointed on July 25, 2018. Therefore, the powers vested with the board of directors were to be exercised by the IRP in accordance with the provisions of IBC. All the bank accounts of the corporate debtor were operating under the instructions of the IRP, hence, it was not possible for the appellant to repay the amount in light of Section 17 of the IBC, the bench said.

Additionally, the court noted, after imposition of the moratorium, the IRP had made a public announcement inviting the claims from the creditors of the corporate debtor, and the respondent had filed a claim with the IRP.

The bench thus held, "We are of the considered view that the High Court ought to have quashed the case against the appellant by exercising its power under Section 482 of the CrPC".

The court accordingly set aside the high court's order and quashed the summoning order issued on September 7, 2018 and the complaint case pending before the Chief Judicial Magistrate Court, Chandigarh.

Case Title: Vishnoo Mittal Vs Shakti Trading Company