It is a well-recognized law that in cheque bounce cases, not only the company on whose behalf a cheque is issued but also the signatory of the cheque and other individuals engaged in the day to day affairs of the company are held liable in criminal complaint filed under Section 138 r/w 141 of the Negotiable and Instruments Act, 1881. Conjoint reading of the above section attributes vicarious liability to persons in charge of and responsible for the conduct of the company’s business at the time the offense was committed.

WHAT IS MORATORIUM PERIOD UNDER INSOLVENCY CODE?

If a Company/ individual undergoes Insolvency process, the Insolvency and Bankruptcy Code, 2016 vide its Section 14 and 96 imposes a moratorium period, which prohibits the initiation or continuation of legal proceedings against the corporate debtor or in respect of debt against the debtor during insolvency resolution process. As the recent trend emerged where people in order to delay the legal proceedings and to absolve themselves of their liabilities, initiated insolvency proceedings which necessitated the Court to examine and explain the scenarios where the said provision applies.

A crucial question that arises for Consideration is: Can natural persons associated with a company be held liable for a cheque bounce under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), even if a moratorium under the Insolvency and Bankruptcy Code, 2016 has been imposed?

LIABILITY OF NATURAL PERSONS

The Courts have consistently clarified this issue, emphasizing the liability of natural persons in cases u/s 138 of NI Act irrespective of the company’s financial status.

Natural persons, such as directors or authorized signatories, remain liable for offenses u/s 138 of the Negotiable Instruments Act even if the moratorium has been imposed. Courts have reiterated that the personal responsibility of individuals under Section 138 of NI Act arises independently of the company’s financial condition or legal proceedings under the IBC.

It is settled Law that where the signatory of the cheque is a director of the company, his/her liability stems from the act of signing the cheque on behalf of the company and the imposition of a moratorium under IBC does not negate this personal liability. Consequently, criminal proceedings under Section 138 of NI Act can continue against such individuals, ensuring accountability for fraudulent or negligent financial practices.

The Apex Court recently in its judgment dated 01.04.2025 titled as “RAKESH BHANOT Vs M/S GURDAS AGRO PVT LTD” adjudicated upon the issue as to whether the proceedings initiated against the appellants/ petitioners under Section 138 read with Section 141 of NI Act 1881 should be stayed in view of the interim moratorium under Section 96 IBC having come into effect by holding as follows:

“…The statutory liability against the directors under Section 138 of the N.I. Act, 1881, is personal and hence, continues to bind natural persons, irrespective of any moratorium applicable to the corporate debtor….” (Para 13)

“….. we are of the opinion that the object of moratorium or for that purpose, the provision enabling the debtor to approach the Tribunal under Section 94 is not to stall the criminal prosecution, but to only postpone any civil actions to recover any debt. The deterrent effect of Section 138 is critical to maintain the trust in the use of negotiable instruments like cheques in business dealings. Criminal liability for dishonoring cheques ensures that individuals who engage in commercial transactions are held accountable for their actions, however subject to satisfaction of other conditions in the N.I. Act, 1881. Therefore, allowing the respective appellants / petitioners to evade prosecution under Section 138 by invoking the moratorium would undermine the very purpose of the N.I. Act, 1881, which is to preserve the integrity and credibility of commercial transactions and the personal responsibility persists, regardless of the insolvency proceedings and its outcome.” (Para 17)

The Hon’ble Supreme Court of India in its judgment dated 15.03.2023 titled as “AJAY KUMAR RADHEYSHYAM GOENKA Vs TOURISM FINANCE CORPORATION OF INDIA LTD” addressed the issue concerning the continuation of criminal proceedings under Section 138 of the NI Act against company directors during corporate insolvency proceedings. The Apex Court dismissed the appeal filed by the appellant, thereby upholding the decisions of the lower courts that allowed the continuation of criminal proceedings under the NI Act against him, despite the ongoing insolvency proceedings of the company by holding that the initiation of insolvency proceedings under the IBC does not absolve directors or signatories of their personal criminal liability under Section 138 of the NI Act.

CONCLUSION

The imposition of a moratorium under Sections 14 or 96 of the IBC does not absolve natural persons, such as directors or signatories, from personal criminal liability for dishonoured cheques and the criminal prosecutions under Section 138 must continue against individuals, notwithstanding the initiation of insolvency proceedings.