IBC and Section 138 NI Act: Cheque Dishonour in Insolvency

Cheque dishonour complaints under section 138 of the Negotiable Instruments Act are among the most common recovery tools in India. When the drawer company enters insolvency, three questions arise: does the moratorium stop the complaint against the company, are its directors still liable, and what happens after a resolution plan is approved or the company is dissolved? The Supreme Court has answered these in three decisions that every exam aspirant should know. This note explains them together.

1. Nature of Section 138 Proceedings

• Offence. Under section 138, the drawer of a cheque dishonoured for insufficiency of funds commits an offence if it fails to pay within 15 days of receiving a demand notice; the cause of action arises only on that failure.
• Company and officers. Under section 141, where the drawer is a company, every person in charge of and responsible for its business at the time of the offence is also deemed guilty, unless he proves lack of knowledge or due diligence.
• Quasi-criminal. Although tried in criminal courts, the proceedings are largely compensatory, with the aim of securing payment, which is why the Supreme Court treated them as falling within the moratorium.

2. During the Moratorium: P. Mohanraj, 2021

• Question. Whether the moratorium under section 14(1)(a), which prohibits the institution or continuation of suits or proceedings against the corporate debtor, covers section 138 complaints.
• Holding. The Supreme Court held that section 138 proceedings are a civil sanction in criminal garb and are proceedings against the corporate debtor within section 14(1)(a), so they cannot be instituted or continued against the company during the moratorium.
• Directors. The moratorium protects only the corporate debtor, so proceedings against its directors and other persons under sections 138 and 141 may continue.
• Overruled. The Court overruled High Court decisions that had held criminal proceedings outside the moratorium altogether.

Figure 1: Liability of the company and its directors at each stage

3. After Resolution or Dissolution: Ajay Kumar Goenka, 2023

• Facts. A director argued that because the company's resolution plan had been approved and the debt dealt with in it, the cheque case against him should end.
• Holding. On 15 March 2023, a bench of Kaul, Oka and Pardiwala JJ held that a director cannot escape liability under sections 138 and 141 because the company has been resolved under the Code or dissolved.
• Section 32A. The extinguishment of the corporate debtor's liability for past offences under section 32A does not extend to its officers, whose liability is expressly preserved by the second proviso to section 32A(1) (Topic 46)

4. Cause of Action after the IRP Takes Over: Vishnoo Mittal, 2025

• Facts. Cheques issued by a director of the corporate debtor were dishonoured, but the demand notice and the expiry of the 15-day period came after the insolvency process had begun and an interim resolution professional had taken control.
• Holding. In March 2025, a bench of Dhulia and Amanullah JJ quashed the summons against the director, holding that once the IRP was appointed, the board's powers were suspended under section 17 and the director had no control over the company's bank accounts, so he could not have made payment within the notice period.
• Distinguishing Mohanraj. P. Mohanraj concerns proceedings where the offence was complete before the moratorium; where the cause of action arises after the director has lost control, the director cannot be made liable.

Figure 2: The three leading decisions

5. Other Points of Interface

Figure 3: Further features of the interface

• Evidence of debt and default. A dishonoured cheque is strong evidence of a debt and default and may support a section 9 application by an operational creditor, though the corporate debtor may still raise a pre-existing dispute (Topic 13)
• Claims. The payee must file its claim in the CIRP; if the claim is not provided for in an approved plan, it is extinguished under Ghanashyam Mishra (2021), though the directors' criminal liability continues.
• Personal guarantors. A cheque given by a personal guarantor is a matter for the guarantor's own process; the moratorium under section 101 bars legal action in respect of debts after admission, and since 2026 no interim moratorium is available to guarantors (Topic 68)

6. Frequently Asked Questions

Can a section 138 complaint against a company continue after its CIRP begins?

Not against the company. P. Mohanraj (2021) held that the moratorium under section 14(1)(a) bars such proceedings against the corporate debtor. The complaint may continue against its directors and signatories.

If the company's resolution plan is approved, does the managing director's cheque case end?

No. Ajay Kumar Goenka (2023) held that the director remains liable, since section 32A extinguishes only the corporate debtor's liability.

A cheque bounces before the CIRP, but the demand notice period expires after the IRP takes over. Is the director liable?

Following Vishnoo Mittal (2025), the director is not liable where the cause of action, which arises only on non-payment within the notice period, accrued after the IRP took control and the director could not make payment.

Can a dishonoured cheque be the basis of a section 9 application?

It can be strong evidence of an operational debt and default, but the application will fail if the corporate debtor shows a genuine dispute that existed before the demand notice.

7. Related Topics

• Topic 22: Moratorium under Section 14. Scope of the moratorium.
• Topic 46: Section 32A. Immunity for the corporate debtor.
• Topic 52: Personal Liability of Directors and Promoters. Wider liability.