In a significant ruling, the Supreme Court of India has quashed criminal proceedings against Vishnoo Mittal, a director of M/s Xalta Food and Beverages Private Limited, holding that the cause of action under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) arises only after the expiry of 15 days from the date of the demand notice, not at the time of cheque dishonour. The court emphasized that in this case, the moratorium under the Insolvency and Bankruptcy Code, 2016 (IBC) was already in effect before the cause of action materialized, rendering the criminal complaint unsustainable.
Background of the Case
The case arose from a business transaction between M/s Xalta Food and Beverages Private Limited (corporate debtor), where Vishnoo Mittal was a director, and M/s Shakti Trading Company, which acted as a super stockist for the company. In the course of their dealings, Mittal issued eleven cheques amounting to ₹11,17,326, which were dishonoured on July 7, 2018. Following this, Shakti Trading Company issued a legal notice under Section 138 of the NI Act on August 6, 2018, and later filed a complaint in September 2018 when no payment was made.
Meanwhile, on July 25, 2018, insolvency proceedings were initiated against Xalta Food and Beverages, and the National Company Law Tribunal (NCLT) imposed a moratorium under Section 14 of the IBC, preventing legal actions against the corporate debtor. Despite this, criminal proceedings under Section 138 of the NI Act continued against Vishnoo Mittal, prompting him to challenge the complaint before the Punjab and Haryana High Court under Section 482 of the Code of Criminal Procedure (CrPC), seeking quashing of the case.
However, the High Court, in its judgment dated December 21, 2021, dismissed the petition, relying on the Supreme Court’s ruling in P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258, which held that a moratorium under IBC applies only to the corporate debtor, not to its directors or officers. Aggrieved by this decision, Mittal approached the Supreme Court.
Key Legal Issues Before the Supreme Court
- Whether the moratorium under Section 14 of the IBC protects the director of a corporate debtor from prosecution under Section 138 of the NI Act?
- When does the cause of action arise under Section 138 – at the time of cheque dishonour or after the expiry of 15 days from the demand notice?
- Whether the High Court was justified in relying on P. Mohan Raj to refuse quashing of the case against the director?
Supreme Court’s Observations and Ruling
The Supreme Court bench comprising Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah overruled the High Court’s decision and quashed the criminal proceedings against Vishnoo Mittal. The Court emphasized the following key points:
1. Cause of Action Under Section 138 Arises After 15 Days of Unpaid Demand Notice
The Court clarified that mere dishonour of a cheque does not immediately give rise to an offence under Section 138 of the NI Act. Instead, the offence is complete only when the drawer fails to make the payment within 15 days after receiving the demand notice. Quoting Jugesh Sehgal v. Shamsher Singh Gogi (2009) 14 SCC 683, the Court reiterated:
“The return of the cheque dishonoured simpliciter does not create an offence. The cause of action arises only when demand notice is served and payment is not made within the stipulated 15-day period.”
Applying this to the case, the Court observed that:
- The cheques were dishonoured on July 7, 2018.
- The demand notice was issued on August 6, 2018.
- The cause of action would have arisen on August 21, 2018, after 15 days of non-payment.
- However, by this time, the moratorium under IBC had already been imposed on July 25, 2018, which meant that the financial affairs of the corporate debtor were under the control of the Interim Resolution Professional (IRP).
Thus, the Court held that since the corporate debtor was already under a moratorium before the cause of action arose, the complaint against the appellant should have been quashed.
2. High Court Wrongly Applied P. Mohan Raj
The Supreme Court also clarified that the High Court wrongly relied on P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd., as the facts of that case were materially different.
- In P. Mohan Raj, the demand notice and cause of action under Section 138 arose before the moratorium was imposed.
- In the present case, the cause of action arose after the moratorium had already been imposed.
- The Court noted:
“The High Court erred in applying P. Mohan Raj mechanically without considering the factual distinction. Here, the moratorium was already in effect before the demand notice period ended, making the criminal proceedings unsustainable.”
3. Once a Moratorium is Imposed, the Director Loses Control Over Corporate Debtor’s Affairs
The Court also noted that once an IRP is appointed under Section 17 of IBC, the powers of the corporate debtor’s directors are suspended. Therefore, even if Vishnoo Mittal wanted to make the cheque payment, he had no authority over the company’s bank accounts to do so.
“When the notice was issued, the appellant was not in control of the corporate debtor, and all financial decisions were under the IRP. The non-payment of the cheque amount cannot be attributed to him.”
Final Judgment
Accordingly, the Supreme Court:
- Quashed the complaint (Case No. 15580/2018) filed against Vishnoo Mittal before the Chief Judicial Magistrate, Chandigarh.
- Set aside the Punjab & Haryana High Court’s order dated December 21, 2021.
- Held that the moratorium under Section 14 IBC protected the corporate debtor and precluded prosecution under Section 138 NI Act in this case.
