Delhi High Court has addressed the interplay between the Insolvency and Bankruptcy Code, 2016 (IBC) and the Negotiable Instruments Act, 1881 (NIA). In Ganesh Chandra Bamrana & Ors v Rukmani Gupta, the court reaffirmed that once a moratorium under section 14 of the IBC is in place, proceedings for cheque bounce under section 138 of the NIA cannot continue against individuals who ceased to be in control of the corporate debtor.
In this case, the petitioners sought to quash a summoning order dated 1 April 2022, issued under section 138 of the NIA. The complaint arose from dishonoured cheques issued following an order dated 24 July 2019 by the National Consumer Disputes Redressal Commission. While two cheques were honoured, the company entered the corporate insolvency resolution process (CIRP), on 31 October 2019, imposing a moratorium under section 14 of the IBC.
Two cheques dated 15 January 2020, and 15 March 2020, amounting to INR1 million (USD11,478) each were dishonoured. The complainants filed a complaint under section 138 of the NIA, which resulted in the issuance of a summoning order.
Court quashes summoning order
The core issue was whether individuals, including directors or authorised signatories, could be prosecuted under the act after the commencement of a CIRP and the imposition of a moratorium.
The court reaffirmed that under section 14 of the IBC, once the process is initiated, all proceedings against the corporate debtor are stayed. Since the cheques in question were presented for encashment post-moratorium, the petitioners could not be held liable under the act.
The court noted that under sections 17 and 18 of the IBC, once an interim resolution professional (IRP) is appointed, the management of the corporate debtor vests in the IRP. Any transactions involving the corporate debtor’s bank accounts require IRP approval.
The court relied on the judgment in Govind Prasad Todi & Anr v Govt of NCT of Delhi (2023), where it was held that, upon CIRP admission, proceedings under the act against the corporate debtor must be stayed. The judgment emphasised that the interim resolution professional becomes responsible for financial decisions and that any cheque dishonour post-moratorium cannot be attributed to former directors or authorised signatories.
The court concluded that the petitioners could not be held liable for dishonoured cheques, as the cheques were presented post-moratorium, when they no longer controlled the company’s bank accounts. The summoning order and all related proceedings were quashed.
This judgment reaffirms that once the process is initiated, liabilities related to dishonoured cheques under the act cannot be attributed to individuals no longer responsible for the company’s affairs. It provides safeguard for directors and officers of companies undergoing insolvency, ensuring that they are not held vicariously liable beyond their control.
The ruling strengthens the IBC’s supremacy over other laws, reinforcing that economic legislation aimed at revival takes precedence over penal liabilities.
The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.
