Introduction:

In a landmark judgment, the Himachal Pradesh High Court upheld the personal liability of an individual under Section 138 of the Negotiable Instruments Act, even as insolvency proceedings were initiated under the Insolvency and Bankruptcy Code (IBC). The Court ruled that insolvency proceedings under the IBC do not absolve the personal liability of individuals who are signatories to dishonored cheques, reaffirming the applicability of criminal liability in cases involving cheque dishonor, even during insolvency proceedings.

This case involved Tushar Sharma (the accused), who along with his wife, Smt. Shaveta Sharma, had applied for a house loan of Rs. 2 crores from the State Bank of India (SBI) in 2015. After defaulting on the loan, a cheque for Rs. 5.90 lakh issued by the accused to settle part of the liability was dishonored due to insufficient funds in February 2019. SBI filed a complaint under Section 138 of the Negotiable Instruments Act (NI Act), triggering legal proceedings. Simultaneously, the accused sought protection under the IBC by filing for insolvency before the National Company Law Tribunal (NCLT), Chandigarh.

This case raises important questions regarding the interaction between insolvency proceedings under the IBC and the personal criminal liability associated with cheque dishonor under the NI Act.

Arguments of Both Parties:

Accused’s Arguments:

• Interim Moratorium under IBC:

The accused, through his counsel, argued that once an application for insolvency is filed under Section 94 of the IBC, an interim moratorium under Section 96 automatically comes into effect. This moratorium, as per the accused’s submission, prohibits any legal proceedings concerning a debt from continuing against the debtor until the insolvency application is admitted. The accused contended that this moratorium should also extend to criminal proceedings under Section 138 of the NI Act since the dishonored cheque related to an outstanding debt.

The accused further argued that the creditors, including the complainant bank, could not initiate or continue legal actions related to the debt during the pendency of the insolvency proceedings. According to the accused, this legal safeguard provided by the IBC was designed to protect insolvent individuals from multiple legal actions during the insolvency resolution process.

• Pending Insolvency Proceedings:

The accused also pointed out that insolvency proceedings were still ongoing before the NCLT, and the complainant bank had already initiated recovery actions as a secured creditor. He argued that allowing parallel proceedings under Section 138 of the NI Act would defeat the very purpose of the IBC, which is to provide an organized resolution process for individuals and companies facing financial distress. He thus sought to stay the proceedings under the NI Act until the completion of the insolvency process.

Complainant Bank’s Arguments:

• Nature of the Loan and Secured Property:

The complainant bank, SBI, countered by highlighting that the property mortgaged against the loan belonged to Smt. Shaveta Sharma, wife of the accused, and the bank had the first charge over it. They emphasized that the loan was secured by this mortgaged property, and no other creditor had any competing claim on it.

SBI argued that the cheque issued by the accused to repay part of the outstanding loan was dishonored due to insufficient funds, triggering their complaint under Section 138 of the NI Act. Since this case dealt with a dishonored cheque—a criminal offense under the NI Act—the bank asserted that the insolvency moratorium did not apply to such proceedings, as the NI Act deals with criminal liability rather than purely financial or civil debt recovery.

• Personal Liability of the Accused:

SBI further argued that the moratorium provisions under the IBC apply only to actions related to debt recovery from the corporate debtor and do not shield individuals from criminal prosecution under the NI Act. They contended that the accused, as the signatory of the dishonored cheque, bore personal criminal responsibility, which could not be nullified by initiating insolvency proceedings.

The bank relied on the fact that criminal liability for cheque dishonor under Section 138 of the NI Act is distinct from the debt recovery process and urged the court to allow the proceedings to continue to ensure accountability for the criminal act of cheque dishonor.

Court’s Analysis:

The Himachal Pradesh High Court, in its analysis, referred extensively to the recent rulings of the Supreme Court that clarify the interplay between the IBC and the NI Act.

• Supreme Court Precedents:

The Court relied on two landmark decisions: Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. (2023) and P. Mohanraj and Ors. v. Shah Brothers Ispat Pvt. Ltd. (2021), which dealt with the issue of whether criminal liability under the NI Act is suspended during insolvency proceedings. The Supreme Court in these cases held that while the IBC imposes a moratorium on proceedings against the corporate debtor, this moratorium does not absolve individuals, such as directors or signatories of cheques, from their personal criminal liability under Section 138 of the NI Act.

The Supreme Court made it clear that proceedings under the NI Act, aimed at penal action for dishonored cheques, do not fall within the scope of the insolvency moratorium since they deal with personal liability, not corporate debt restructuring. The Court observed that while the corporate entity may be protected under the IBC’s moratorium, individuals involved in the dishonor of cheques must continue to face prosecution.

In particular, the judgment in Ajay Kumar Radheyshyam Goenka was pivotal in this case. The Supreme Court had clarified that the resolution process under the IBC pertains only to the company or corporate debtor. However, the criminal liability of directors and signatories to dishonored cheques remains intact, even if the corporate entity undergoes insolvency.

• Nature of Criminal Liability under Section 138 NI Act:

The High Court further noted that Section 138 of the NI Act is designed to ensure that individuals who issue cheques maintain financial discipline. The offense is not simply a matter of debt recovery but an issue of maintaining trust in the commercial instruments of exchange. Therefore, the moratorium under the IBC, which focuses on civil debt recovery, cannot hinder criminal prosecution under the NI Act.

The Court pointed out that the complainant (SBI) approached the court for penal action against the accused for issuing a dishonored cheque, not for recovering the debt. The Court made a clear distinction between civil liability (which is subject to the IBC’s moratorium) and criminal liability (which continues irrespective of insolvency proceedings).

The Court noted that Section 96 of the IBC imposes a temporary moratorium only on the actions related to the insolvency resolution process, and this does not extend to criminal matters like cheque dishonor under Section 138. Since Section 138 proceedings are punitive and criminal in nature, they are outside the scope of the IBC’s debt resolution mechanisms.

Ruling and Conclusion:

Ultimately, the Himachal Pradesh High Court held that the accused could not escape criminal prosecution under Section 138 of the NI Act by citing the insolvency moratorium under the IBC. The Court ruled that the moratorium on debt recovery processes under the IBC does not preclude criminal prosecution for offenses related to dishonored cheques.

The High Court dismissed the accused’s petition, upholding the continuance of the criminal proceedings. It concluded that both the insolvency process under the IBC and the criminal proceedings under the NI Act could proceed simultaneously, as they addressed different aspects of the law—one focusing on debt resolution and the other on penalizing financial mismanagement.