In a significant ruling, the Himachal Pradesh High Court has clarified that personal liability under Section 138 of the Negotiable Instruments Act (NI Act) continues to apply even when insolvency proceedings are initiated under the Insolvency and Bankruptcy Code (IBC). Justice Sandeep Sharma delivered the judgment, decisively stating that insolvency proceedings do not absolve an individual from criminal prosecution under the NI Act for the dishonour of cheques, a common issue in commercial litigation.
The petitioner, Tushar Sharma, challenged the criminal proceedings initiated against him under Section 138 of the NI Act, arguing that the insolvency process initiated under the IBC placed a moratorium on such proceedings. The respondent in the case, State Bank of India (SBI), opposed this argument, asserting that the protections provided by the IBC were only for the corporate entity and did not shield individuals from criminal liability for dishonoured cheques.
Case Background
Tushar Sharma, the petitioner, was facing charges under Section 138 of the NI Act due to the dishonour of cheques he had issued. Simultaneously, insolvency proceedings under the IBC were initiated, and Sharma argued that, due to the IBC moratorium, the criminal proceedings under the NI Act should be stayed. The moratorium under Section 14 of the IBC prevents any suits or legal actions against the corporate debtor during insolvency proceedings. Sharma contended that this provision should extend to his personal liabilities, as the cheques were linked to the financial difficulties leading to insolvency.
Court’s Observations
The court addressed several pivotal questions during the hearing, including the applicability of the IBC’s moratorium provision to personal criminal liabilities. In delivering his judgment, Justice Sandeep Sharma made several critical observations regarding the interplay between insolvency laws and personal criminal liability under the NI Act.
1. Nature of Liability under Section 138: The court emphasized that liability under Section 138 of the NI Act is criminal in nature. The issuance of a cheque that is dishonoured constitutes an offence, and the NI Act is designed to ensure the integrity of financial instruments such as cheques. The court remarked:
“Section 138 of the Negotiable Instruments Act embodies a clear mechanism to ensure the reliability of cheques, which are integral to commercial transactions. The dishonour of such instruments cannot be treated lightly, and the resultant criminal liability is separate and distinct from the insolvency framework.”
2. Scope of the IBC Moratorium: Justice Sharma discussed the purpose of the moratorium under Section 14 of the IBC, which primarily focuses on preventing actions against the assets of the corporate debtor to facilitate insolvency resolution. He pointed out that the moratorium was designed to protect the interests of creditors during the restructuring process and does not extend to criminal liabilities arising from personal conduct. The court made it clear that:
“The moratorium under Section 14 of the IBC is specific to civil proceedings involving the assets of the corporate debtor. Criminal liability, particularly under Section 138 of the NI Act, which pertains to personal accountability for dishonoured cheques, remains unaffected by the initiation of insolvency proceedings.”
The court observed that allowing individuals to escape prosecution for issuing dishonoured cheques due to the corporate insolvency process would undermine the sanctity of financial dealings. Justice Sharma noted that the IBC’s protective framework for insolvency was never intended to offer a shield against criminal prosecution for personal misconduct, and the inclusion of such protection would frustrate the purpose of the NI Act.
3. Separation of Personal and Corporate Liabilities: Another important observation made by the court was the clear distinction between personal liability and corporate liability. Justice Sharma highlighted that while corporate debts and liabilities may be subject to restructuring under the IBC, personal criminal responsibility for offences such as dishonoured cheques cannot be diluted or removed merely by the initiation of insolvency proceedings. The court held:
“Personal liability for the issuance of dishonoured cheques under Section 138 of the NI Act remains intact, notwithstanding the commencement of corporate insolvency proceedings. The individual responsible for issuing the cheque cannot evade the consequences of criminal liability by invoking the IBC’s moratorium provisions.”
Court’s Decision
In its final decision, the Himachal Pradesh High Court rejected Tushar Sharma’s petition, affirming that criminal proceedings under Section 138 of the NI Act could not be stayed or dismissed simply because insolvency proceedings were pending under the IBC. Justice Sharma ruled that the personal nature of the liability under the NI Act made it distinct from corporate debt restructuring or resolution under the IBC.
The court emphasized that insolvency laws were designed to resolve corporate insolvency and could not be used as a defence mechanism for individuals seeking to evade personal criminal liability for offences related to dishonoured cheques. The ruling underscored that financial institutions, like the State Bank of India in this case, have the right to pursue criminal prosecution for dishonoured cheques, regardless of whether insolvency proceedings are underway.
In conclusion, Justice Sandeep Sharma dismissed the petition, reiterating the principle that personal criminal liability persists, and the protections offered by the IBC do not apply to criminal proceedings under the NI Act. He concluded:
“Insolvency proceedings under the IBC and criminal liability under Section 138 of the NI Act exist in separate domains. The legal protections granted to corporate debtors in insolvency cannot be used to obstruct or prevent the prosecution of criminal offences such as dishonoured cheques.”
Case Details
– Case Title: Tushar Sharma v. State Bank of India
– Bench: Justice Sandeep Sharma
– Counsel for Petitioner: Advocate Rajeev Bhardwaj
– Counsel for Respondent: Advocate Ajay Kumar
