Orissa High Court Upholds Continuation of Criminal Proceedings Under Section 138 N.I. Act Despite Corporate Insolvency
Court Affirms Penal Liability of Directors and Signatories Unaffected by Company's Insolvency Resolution
In a significant judgment, the Orissa High Court has ruled that criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881, will continue against the directors and signatories of a company, even if the company is undergoing a corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016. The judgment, delivered by Justice Chittaranjan Dash on October 13, 2025, underscores that such proceedings are penal in nature and distinct from civil recovery actions.
The case, titled Syed Najam Ahmed v. State of Odisha, involved a petition by Syed Najam Ahmed, Managing Director of Zenith Mining Private Ltd., seeking discharge from prosecution under Section 138 of the N.I. Act. The petitioner argued that the company's insolvency proceedings, initiated by an order from the National Company Law Tribunal (NCLT), should halt the criminal case. However, the court rejected this plea, emphasizing the penal nature of Section 138 proceedings, which cannot be stalled due to corporate insolvency.
The court cited the Supreme Court's judgments in Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Ltd. and P. Mohanraj v. Shah Brothers Ispat Private Limited, which clarified that Section 138 proceedings are criminal and not civil in character, thereby not affected by a company's insolvency status. Justice Dash reiterated that the directors and signatories cannot evade penal liability, even if the company is dissolved under a resolution plan, as the personal liability persists.
This judgment reinforces the legal principle that the dissolution of a company does not absolve its directors or signatories from criminal liability under the N.I. Act. The ruling is expected to have significant implications for similar cases where companies attempt to use insolvency proceedings as a shield against criminal prosecution for cheque dishonor.
Bottom Line:
Proceedings under Section 138 of the Negotiable Instruments Act, 1881 are criminal in nature and cannot be stalled due to corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.
Statutory provision(s): Negotiable Instruments Act, 1881, Section 138; Insolvency and Bankruptcy Code, 2016, Section 32A
Syed Najam Ahmed v. State of Odisha, (Orissa) : Law Finder Doc Id # 2794763
