Section 138 proceedings can continue even if Bankruptcy Code was initiated earlier
Bombay High Court Upholds Continuation of Section 138 NI Act Proceedings Despite Prior Insolvency Proceedings. Directors' Personal Liability Under Negotiable Instruments Act Continues Post-Insolvency Proceedings; Court Quashes Magistrate’s Order of Discharge
Nagpur, October 1, 2025 - In a significant judgment, the Nagpur Bench of the Bombay High Court, presided by Justice M.M. Nerlikar, ruled that proceedings under Section 138 of the Negotiable Instruments Act, 1881, can continue against individual directors of a company despite prior initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016. This decision overturns the order of the 10th Joint Civil Judge, Senior Division, and Additional Chief Judicial Magistrate, Nagpur, which had previously discharged the directors from the offence under Section 138, citing insolvency proceedings as a bar.
The case arose from a criminal writ petition filed by Ortho Relief Hospital and Research Centre against M/s. Anand Distilleries and its directors after a cheque issued for repayment of a Rs. 15 lakh loan dishonored due to insufficient funds. The petitioner contended that insolvency proceedings under the IB Code did not bar prosecution under Section 138 of the NI Act, which is penal in nature and distinct from recovery proceedings.
The core issue revolved around whether insolvency proceedings, initiated before the cheque dishonor, could frustrate the petitioner’s claim under Section 138 of the NI Act. The High Court, relying on precedents set by the Supreme Court in cases such as P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. and Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited, clarified that the moratorium provision under Section 14 of the IB Code applies only to the corporate debtor, not the directors, who remain personally liable under Section 138.
The judgment emphasized that the purpose of Section 138 proceedings is to uphold the integrity of commercial transactions, which is distinct from insolvency resolutions aimed at corporate rehabilitation. It further highlighted that Section 32A of the IB Code, while providing protection to the corporate debtor, does not absolve individuals involved in the company’s conduct from penal liability.
Justice Nerlikar underscored that the proceedings under Section 138 are not recovery actions but are penal, targeting the personal liability of natural persons involved. The judgment sets a precedent for similar cases where insolvency proceedings and cheque dishonor issues intersect, reinforcing the principle that directors cannot evade personal liability by virtue of company insolvency.
The High Court’s decision reinstates the charges against the directors, ensuring that the penal consequences of cheque dishonor remain enforceable despite corporate insolvency proceedings. This ruling is expected to have significant implications for corporate law practice, particularly in maintaining accountability in financial transactions.
The Court rejected the respondents’ plea for a stay on the judgment, affirming the immediate continuation of proceedings against the directors for the dishonored cheque.
Bottom Line:
Section 138 of the Negotiable Instruments Act, 1881 proceedings can continue against natural persons like Directors, even if insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 were initiated earlier, as the liability under Section 138 is penal and personal in nature.
Statutory provision(s): Section 138 of the Negotiable Instruments Act, 1881, Section 141 of the Negotiable Instruments Act, 1881, Section 14 of the Insolvency and Bankruptcy Code, 2016, Section 32A of the Insolvency and Bankruptcy Code, 2016, Section 245(2) of the Criminal Procedure Code, 1973
