Bombay HC Rules Personal Insolvency Cannot Halt Cheque Bounce Cases Against Directors
The Bombay High Court has ruled that company directors cannot use personal insolvency proceedings to halt criminal trials over dishonoured cheques issued by their companies, holding that their liability under the Negotiable Instruments Act is separate from the corporate entity's debt.
Justice NJ Jamadar delivered the ruling while rejecting petitions filed by several directors seeking stays on cheque-bounce complaints filed by the National Spot Exchange Limited (NSEL). The cases involved multiple companies, including Mohan India Private Limited, Lotus Refineries, Metkore Alloys, and White Water Foods, over unpaid dues running into hundreds of crores.
The directors contended that they had initiated personal insolvency resolution proceedings under the Insolvency and Bankruptcy Code (IBC). They argued that an interim moratorium under Section 96 of the IBC should protect them from criminal prosecution since the cheques were issued toward discharging company debts.
NSEL opposed the petitions, arguing that the underlying financial liabilities belonged to the respective companies rather than the directors individually. It stated that directors were being prosecuted as natural persons under Section 141 of the Negotiable Instruments Act due to their roles and responsibilities in managing company affairs.
In a 64-page judgment, Justice Jamadar agreed with NSEL, stating that the debt in question is that of the corporate entity. The court held that the liability of directors under the Negotiable Instruments Act remains personal and can continue even when a moratorium applies.
In one instance examined by the court, NSEL filed a complaint against Mohan India Private Limited and its directors, including Jagmohan Garg. Mohan India was required to pay Rs 771 crore in 13 instalments under a Settlement Award. Following a default, the company issued a Rs 30 crore cheque, which was returned unpaid with remarks stating "funds insufficient" and "account freezed." Garg subsequently moved the National Company Law Tribunal in Delhi under Section 94 of the IBC, seeking a stay on the complaint.
The High Court observed that while an interim moratorium under Section 96 of the IBC might apply to the recovery of compensation ordered against an individual director, it does not halt the criminal trial itself. Noting that several of the cheque-bounce cases had been pending for over 10 years, the court permitted trial courts to proceed with witness examination and final arguments.
