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Introduction
When a company faces the grim reality of insolvency, entering the protective embrace of the CIRP1 under the IBC2, its financial obligations are temporarily suspended, and its corporate life is put on hold. But does this corporate catastrophe, a mechanism designed for financial restructuring and revival, simultaneously serve as a silent acquittal for the natural persons—the directors—who signed the cheques that ultimately bounced? Does the shield of the IBC moratorium, meant for the corporate entity, extend its formidable protection to individuals facing criminal charges for dishonour of cheques under Section 138 of the NI Act3? In a crucial ruling addressing this very nexus, the High Court of Bombay, Nagpur Bench, comprising Justice M.M. Nerlikar, delivered an unequivocal answer: the prior initiation of IBC proceedings, including subsequent liquidation, does not bar criminal prosecution of directors under Section 138 of the Negotiable Instruments Act.
This definitive pronouncement, emerging from the case of Ortho Relief Hospital and Research v. M/s. Anand Distilleries, through its Directors & Anr4., stemmed from a dispute where the petitioner’s complaint under Section 138 was dismissed by the trial court solely due to the respondent company having been admitted into CIRP and eventually liquidated. The petitioner had argued the distinct nature of the IBC and NI Act proceedings, emphasizing the penal character of the latter, while the respondent countered that the cause of action arose post-moratorium and was thus untenable, heavily relying on earlier rulings suggesting a bar to the NI Act proceedings post-CIRP initiation.
The High Court’s careful examination and subsequent ruling underscore a foundational principle: the moratorium under Section 14 of the IBC is strictly for the corporate debtor, and its legal effect cannot rescue natural persons liable under the NI Act’s penal provisions. By meticulously analysing Section 32A of the IBC and relying on clarifications from Supreme Court precedents, which confirm that Section 138 proceedings are not recovery proceedings and that natural persons cannot escape their personal liability, the Bench ensured the continued vigour of criminal law. This article will thoroughly explore the legal architecture supporting this consequential judgement, laying bare the rationale behind the Bench’s decision to uphold the continued personal accountability of directors despite the corporate entity’s fate.
The judicial scaffolding for the High Court’s decisive ruling rests firmly on the distinction between the protective ambit of the IBC and the punitive reach of the NI Act. The central question addressed by the bench was sharp and focused: “Whether prior initiation of proceedings under the IB Code would frustrate the claim of the petitioner under Section 138 of the NI Act?” The court answered this by drawing extensively from a series of authoritative Supreme Court judgments that have meticulously clarified the scope of the IBC’s moratorium and the nature of criminal liability under the NI Act.
Why is the timing of proceedings immaterial when penal liability is concerned? The court first turned to the landmark ruling in P.Mohanraj5, which established that the moratorium under Section 14 of the IBC applies exclusively to the corporate debtor, interdicting the initiation or continuation of Section 138/141 proceedings against the corporate entity itself. However, the ruling explicitly carved out the natural persons mentioned in Section 141 of the NI Act, confirming that they “continue to be statutorily liable under Chapter XVII of the Negotiable Instruments Act.” This judicial differentiation became the foundation: since the liability under Section 138 is essentially penal and personal, it remains insulated from the corporate shield. Reinforcing this point, the court noted that Section 14 is designed to shield the corporate debtor from “pecuniary attacks against it” to allow it “breathing space,” but compensation liability under Section 138 does not fall outside this statutory dragnet, a view that applies only to the corporate debtor.
Does the ultimate fate of the company—even its dissolution or approval of a resolution plan—extinguish the personal criminal liability of its directors? The Supreme Court’s pronouncement in Ajay Kumar Radheyshyam Goenka6 provides a clear negative. This case held in unequivocal terms that the criminal prosecution initiated against natural persons under Sections 138/141 of the NI Act would not stand terminated by the operation of the IBC, even if a resolution plan is approved or the company is dissolved. “What is dissolved is only the company, not the personal penal liability of the accused covered under Section 141 of the NI Act,” the court affirmed. Crucially, this ruling underscores a deeper legal reality: Section 138 proceedings are not about the “recovery of the legally enforceable debt,” but about taking penal action for an “offence already committed.” Therefore, the timing of the IBC proceeding relative to the NI Act complaint is rendered irrelevant, as the focus is shifted from debt recovery to penal accountability.
The court further bolstered its rationale by examining the import of Section 32A of the IBC. While the respondent had attempted to argue that prior initiation of IBC proceedings would render this provision redundant if prosecution were allowed, the High Court’s analysis revealed a key statutory exception. Section 32A(1) certainly dictates that the liability of a corporate debtor for prior offences shall cease upon the approval of a resolution plan that results in a change of management. But does this protection extend to the individuals involved in the offence? The second proviso to Section 32A(1) explicitly carves out and preserves the liability of “every person who was… an officer who is in default… or was in any manner in charge of, or responsible to the corporate debtor for the conduct of its business,” confirming that such natural persons “shall continue to be liable to be prosecuted and punished.” The legislative intent is crystal clear: Section 32A protects the corporate debtor, but not the individuals responsible for its conduct. This was further solidified by reference to the subsequent RakeshBhanot ruling, which distinguished between insolvency proceedings and Section 138 proceedings, holding that individuals cannot use the insolvency protection (even as personal guarantors) to “avoid prosecution under Section 138 of the N.I. Act.” The statutory liability under the NI Act is personal and thus continues to bind natural persons, irrespective of any moratorium.
Finally, while the bench acknowledged the earlier ruling in Visnhoo Mittal7 that had suggested a bar on prosecution if the cause of action arose after the moratorium, it correctly concluded that the subsequent, larger-bench decisions in ∗P.Mohanraj, ∗AjayKumar, and ∗RakeshBhanot had settled the issue. By holding that the moratorium applies only to the corporate debtor and that the fundamental nature of a Section 138 complaint is penal, aimed at maintaining the integrity of commercial transactions, the High Court affirmed the ultimate principle: natural persons cannot escape their personal liability under Section 138 of the NI Act. This judicial trajectory ensures that the noble objective of corporate revival under the IBC is not subverted into a shield for criminal misconduct by directors.
Conclusion
The ruling by the High Court of Bombay, Nagpur Bench, in Ortho Relief Hospital and Research is far more than a technical adjudication; it is a profound affirmation of the fundamental principle that corporate distress cannot serve as a blanket immunity against personal criminal misconduct. By leveraging the settled law from the Supreme Court—particularly the ∗P.Mohanraj, ∗AjayKumar, and ∗RakeshBhanot series—the court successfully disentangled the statutory purpose of the IBC from the punitive essence of the NI Act. The distinction that Section 14’s moratorium is for the corporate debtor, and Section 138’s liability rests with the culpable natural person, forms the bedrock of this judgment. It firmly closes the loophole where directors might have sought to use the commencement of insolvency proceedings as a de facto discharge from their personal criminal accountability, thereby upholding the integrity and deterrent effect of the NI Act within commercial transactions.
In terms of future implications, this judgment provides essential clarity and stability for creditors and the commercial ecosystem at large. It ensures that the statutory remedy available to creditors under the NI Act against those in charge of the company’s affairs remains intact, regardless of the stage or outcome of the IBC proceedings. However, this clarity might give rise to new questions. For instance, while the criminal liability is preserved, how will the quantum of compensation, often a component of sentencing under Section 138, be reconciled if the underlying debt is significantly reduced or extinguished by an approved Resolution Plan under the IBC? Furthermore, as the interplay between Section 32A’s second proviso and personal liability is repeatedly tested, will subsequent legislative or judicial interventions be required to precisely define the scope of ‘persons in charge’ under Section 141 of the NI Act when a new management team takes over post-resolution?
Ultimately, the decision reinforces a crucial message: the law views a director’s decision to issue a cheque without sufficient funds as a distinct personal transgression, separate from the company’s financial failure. This separation ensures that the mechanism for corporate rescue does not inadvertently foster moral hazard among management. The judgment stands as a powerful judicial statement that penal responsibility under Section 138 is not merely a mechanism for debt recovery; it is a tool for maintaining commercial trust, and its operation cannot be truncated by the restructuring process of the corporate debtor. This pronouncement secures the path for criminal prosecutions against errant directors, solidifying the penal recourse for commercial counterparties and strengthening the overall legal framework governing debtor-creditor relationships in India.
Citations
Expositor(s): Adv. Anuja Pandit
