The Supreme Court quashed a summoning order issued against a former Director of a company after noting that the cause of action under section 138 of the NI Act arose after the commencement of the insolvency process and the Director was suspended from his position as soon as the interim resolution professional was appointed.

The Appellant approached the Apex Court challenging the order of the Single Judge of the Punjab and Haryana High Court by which the appellant’s petition under section 482 of Criminal Procedure Code, 1973 (CrPC), seeking quashing of proceedings initiated under Section 138 of Negotiable Instruments Act, 1881 (NI Act) against the appellant, had been dismissed.

Referring to the judgment in P. Mohan Raj v. 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 can only be obtained by a Corporate Debtor and not by a natural person, the Division Bench comprising Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah 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.”

Advocate Abhishek Anand represented the Appellant while AOR Triloki Nath Razdan represented the Respondent.

Factual Background

The appellant was the director of M/s Xalta Food and Beverages Private Limited (corporate debtor). There was a contract between the corporate debtor and the Respondent M/s Shakti Trading Company where the respondent was to function as a super stockist of the corporate debtor. As a consequence of the business relationship between the two companies, the appellant, in his capacity as director of the corporate debtor, had drawn eleven cheques in favour of the respondent of varying amounts totalling to over Rs 11 lakh. These cheques were dishonoured. A legal notice was issued under Section 138 to the appellant by the respondent as the cheque amounts were not furnished to the respondent by the bank. Consequently, in September 2018, a complaint was filed before the appropriate Court by the respondent against the appellant for offences under Section 138.

Meanwhile, 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 (IBC) was imposed. The Court issued a summons to the appellant under section 138. Aggrieved, the appellant approached the High Court seeking the quashing of the Section 138 NI Act case against him in view of the moratorium issued under Section 14 of the IBC. By the impugned order, the High Court dismissed the appellant’s petition. Aggrieved thereby, the appellant approached the Apex Court.

Reasoning

The Bench explained that the return of the cheques dishonoured simpliciter does not create an offence under Section 138 NI Act and as per Clause (c) of the proviso to Section 138 of NI Act, the cause of action arises only when the demand notice is served and payment is not made under such demand notice within the stipulated fifteen-day period. “In other words, the cause of action arises only when the amount remains unpaid even after the expiry of fifteen days from the date of receipt of the demand notice”, it added.

The Bench found that 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. Therefore, the powers vested with the board of directors were to be exercised by the IRP by the provisions of IBC. All the bank accounts of the corporate debtor were operating under the instructions of the IRP, hence, the appellant couldn't repay the amount in light of section 17 of the IBC.

It was also noticed that the the IRP had made a public announcement inviting the claims from the creditors of the Corporate Debtor and the respondent filed a claim with the IRP. “...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”, it said.

Thus, allowing the appeal, the Bench set aside the impugned order and quashed the summoning order. “Further, we hereby quash the complaint case no.15580/2018, pending before the Chief Judicial Magistrate Court, Chandigarh, filed by the respondent against the appellant”, the Bench further ordered.

Cause Title: Vishnoo Mittal v. M/s Shakti Trading Company (Neutral Citation: 2025 INSC 346)

Appearance:

Appellant: Advocates Abhishek Anand, Karan Kohli, Krishna Sharma, AOR Mithu Jain

Respondent: AOR Triloki Nath Razdan

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Supreme CourtJustice Sudhanshu DhuliaJustice Ahsanuddin Amaah

Tulip Kanth

Assistant Editor

Tulip Kanth is an Assistant Editor at Verdictum having over 5 years of experience in the field of legal journalism and editing. She extensively covers judgments of the Supreme Court, High Courts as well as Tribunals. She has previously worked with a legal publishing website where she oversaw the work of other editors and has also created updates on notifications of different Government Ministries. She holds an English Honours Degree from SGTB Khalsa College, Delhi University and has completed her LLB course with specialisation in Corporate Law from Amity University.