IBC Moratorium Does Not Bar Section 138 NI Act Prosecution of Directors Even When Insolvency Predates Cheque Dishonour

Introduction

This commentary examines the oral judgment delivered by the Bombay High Court (Nagpur Bench) in Criminal Writ Petition No. 251 of 2025, titled Ortho Relief Hospital and Research Centre v. M/s. Anand Distilleries & Ors., decided on October 1, 2025 by M.M. Nerlikar, J. The ruling addresses a frequently litigated collision point in commercial criminal law: the interface between the Insolvency and Bankruptcy Code, 2016 (IBC), particularly the Section 14 moratorium and Section 32A immunity, and criminal prosecution for dishonour of cheques under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).

The petitioner, a proprietor running a hospital in Nagpur, extended a short-term loan of Rs. 15,00,000 in October 2015 to respondent company M/s. Anand Distilleries, represented by its directors (respondent nos. 2 and 3). A post-dated cheque issued on behalf of the company was dishonoured on December 14, 2018 for insufficiency of funds. Meanwhile, insolvency proceedings had been admitted by the NCLT on February 14, 2018 (imposing a moratorium), and a liquidation order was subsequently passed on February 8, 2019. The Magistrate (10th Jt. Civil Judge Senior Division & ACJM, Nagpur) discharged the directors under Section 245(2) CrPC on the strength of the IBC proceedings and deemed the complaint itself not maintainable against the company. This writ petition challenged those orders.

The core legal issue: whether prior initiation of corporate insolvency proceedings, and the Section 14 moratorium, frustrate or bar prosecution of directors under Section 138 of the NI Act—especially when the cause of action (dishonour and statutory notice) arises after the moratorium.

Summary of the Judgment

The High Court allowed the writ petition, quashed the discharge order, and restored the Section 138 complaint against the directors (accused nos. 2 and 3). The Court held:

Section 14 IBC moratorium applies only to the corporate debtor, not to natural persons covered by Section 141 of the NI Act.
Proceedings under Section 138 NI Act are penal, not recovery proceedings, and serve a distinct purpose (integrity of commercial instruments) from IBC’s insolvency resolution objectives.
Section 32A IBC insulates the “corporate debtor” from prosecution for “prior offences” upon satisfaction of statutory conditions, but it does not shield individuals such as directors or signatories.
It makes no difference whether IBC proceedings precede or post-date the Section 138 cause of action; natural persons’ liability under Section 138 is unaffected.

Relying on binding three-judge bench precedent—particularly P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021) and AJAY KUMAR RADHEYSHYAM GOENKA v. TOURISM FINANCE CORPORATION OF INDIA LTD. (2023)—and the Supreme Court’s recent articulation in Rakesh Bhanot v. Gurdas Agro Pvt. Ltd. (2025), the Court concluded that the trial court’s discharge premised on the IBC shield was a legal error. The request to stay the High Court’s order was rejected.

Factual Background and Procedural Posture

Loan: Rs. 15,00,000 advanced on 15.10.2015 carrying interest at 18% p.a. to respondent company through its directors. Security: a post-dated cheque drawn on Cosmos Bank, Amravati, signed by director as authorised signatory.
IBC timeline: CIRP admitted on 14.02.2018 (moratorium imposed); liquidation ordered on 08.02.2019. The petitioner lodged a claim with the IRP.
Cheque dishonour and complaint: Cheque dishonoured on 14.12.2018; statutory notice issued on 05.01.2019; complaint under Section 138 NI Act filed on 18.02.2019 (Criminal Complaint Case No. 7281/2019).
Trial court orders (31.01.2025): Allowed the accused directors’ application under Section 245(2) CrPC (Exh.39) and discharged them from Section 138 NI Act; held the complaint not maintainable against the company in view of the order at Exh.39 (Exh.1 order).
Writ petition: Challenge under Articles 226 and 227 of the Constitution seeking quashing of the discharge and restoration of Section 138 proceedings.

Issues for Determination

Whether prior initiation of proceedings under the IBC, and the moratorium under Section 14, frustrate or bar the petitioner’s Section 138 NI Act prosecution, particularly against the directors/natural persons?

Doctrinal Analysis

Precedents Cited and Their Influence

1) P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., [2021] 6 SCC 258 (Three-judge bench)

Held that Section 14 IBC moratorium bars initiation or continuation of Section 138/141 proceedings against the corporate debtor during CIRP.
Crucially, it clarified that proceedings may continue or be instituted against natural persons covered by Section 141 NI Act even during moratorium because the moratorium is confined to the corporate debtor.
Also reconciled the rule in Aneeta Hada that ordinarily the company must be arraigned with the persons in charge, carving an exception where a “legal impediment” (such as Section 14 moratorium) prevents prosecution against the company during that period, allowing actions against natural persons to proceed.

2) AJAY KUMAR RADHEYSHYAM GOENKA v. TOURISM FINANCE CORPORATION OF INDIA LTD., [2023] 10 SCC 545 (Three-judge bench)

Reaffirmed the penal nature of Section 138 proceedings; the offence completes when payment is not made within 15 days of statutory notice.
Even if the company is dissolved or a resolution plan is approved, directors/signatories cannot escape personal penal liability arising under Section 138 read with Section 141 NI Act.
Clarified that Section 32A IBC does not absolve individuals; it is focused on insulating the corporate debtor post-approval subject to conditions.

3) Rakesh Bhanot v. Gurdas Agro Pvt. Ltd., (2025) 6 SCC 781

Addressed personal guarantors and clarified that the IBC’s interim moratorium (Section 96) and post-admission moratorium (Section 101) do not shield individuals from personal criminal liability under Section 138 NI Act.
Reiterated that NI Act prosecutions are distinct and aimed at preserving the sanctity of commercial instruments, and directors remain personally answerable.

4) Narinder Garg v. Kotak Mahindra Bank Ltd., (2022) 19 SCC 623

Clarified that moratorium under Section 14 IBC does not prevent proceedings against promoters for enforcing settlements, reaffirming that the moratorium is confined to the corporate debtor.

5) Shashankbhai Jayantibhai Shah v. HDFC Bank Ltd., CrA No. 5606/2024 (decided 23.04.2025)

Relied upon by the petitioner for the proposition that Section 138 proceedings retain their penal character and are not subsumed by insolvency processes.

6) Vishnoo Mittal v. M/s. Shakti Trading Company, 2025 SCC OnLine SC 558

Relied upon by the respondents to argue that when the cause of action under Section 138 arises after the moratorium, initiation/continuation may be barred. The High Court treated this as distinguishable and, importantly, subordinate to the binding three-judge bench rulings in Mohanraj and Ajay Goenka.

7) Rakesh Juneja v. M/s. Maruti Suzuki India Ltd., 2025 NCPHHC 101360 (Punjab & Haryana High Court)

Persuasive authority taking the same view as in the present judgment: three-judge bench rulings govern; Section 138 prosecutions against natural persons are unaffected by moratorium.

Legal Reasoning Adopted by the Court

The High Court distilled the following principles from the Supreme Court’s three-judge bench jurisprudence:

Section 138 NI Act proceedings are penal, not recovery mechanisms; they vindicate the credibility of negotiable instruments.
The Section 14 IBC moratorium bars actions “against the corporate debtor”; it does not extend to natural persons liable under Section 141 NI Act.
Section 32A IBC protects the corporate debtor (post plan approval/change of management) from prosecution for prior offences; it does not immunize directors, officers in default, or signatories.
Chronology does not control: whether IBC proceedings commence before or after cheque dishonour is immaterial to the personal penal liability of natural persons under Section 138 NI Act.
NI Act and IBC operate in different spheres and do not conflict. The NI Act’s penal objective does not intrude upon IBC’s collective resolution framework.
During the moratorium, the company may be temporarily non-prosecutable due to legal impediment (per Mohanraj), but proceedings can continue against persons in charge; after moratorium ends, actions against the company may also proceed (subject to Section 32A conditions).

On this footing, the trial court’s resort to Section 245(2) CrPC to summarily discharge the directors because of the IBC process was incorrect. The discharge order was therefore quashed.

Treatment of Vishnoo Mittal

The respondents pressed Vishnoo Mittal (2025 SCC OnLine SC 558) to contend that if the cause of action arises after the moratorium, natural persons cannot be prosecuted under Section 138. The High Court:

Noted the position apparently emerging from Vishnoo Mittal, but
Emphasised that the governing law is laid down by the three-judge bench decisions in Mohanraj and Ajay Goenka, which bind High Courts and make clear that the moratorium is confined to the corporate debtor and does not shield natural persons from Section 138 NI Act liability.

The Court also cited a consistent High Court view (P&H High Court in Rakesh Juneja) that reading Vishnoo Mittal to bar prosecution of directors contradicts binding three-judge bench authority.

Why Section 32A IBC Did Not Help the Directors

The Court reproduced Section 32A and highlighted:

It extinguishes the corporate debtor’s liability for prior offences upon plan approval with a qualifying change in management/control.
But the second proviso preserves the prosecution of natural persons who were in charge or responsible for the conduct of the corporate debtor and were involved in the commission of the offence.

Thus, even assuming Section 32A conditions are met, directors remain personally liable to face criminal prosecution under Section 138. The petitioner’s continued pursuit of a criminal complaint is, therefore, not barred.

Impact and Implications

Directors and authorised signatories cannot rely on the IBC moratorium or even a later resolution/liquidation event to seek discharge from Section 138 NI Act prosecutions. The chronology—whether insolvency predates the cheque dishonour—is not determinative.
Complainants need not suspend penal remedies merely because CIRP or liquidation has commenced; they can proceed against natural persons. During moratorium, prosecution of the company may be held in abeyance due to a legal impediment (per Mohanraj), but this does not affect the case against the individuals.
Trial courts in Maharashtra should not use Section 245(2) CrPC to discharge directors solely on the ground of ongoing IBC proceedings against the corporate debtor. The present ruling provides clear guidance against such discharge orders.
Post-resolution or liquidation, Section 32A may shield the corporate debtor from prosecution for prior offences (subject to the statutory conditions), but it does not extinguish the penal liability of those “in charge of and responsible to” the company for the conduct of its business.
The decision fortifies the integrity of the cheque system by ensuring penal consequences remain for natural persons irrespective of a parallel insolvency process.

Complex Concepts Simplified

Section 138 NI Act: Criminalises dishonour of cheques for insufficiency of funds. The offence crystallises when the drawer fails to pay within 15 days of receiving the statutory demand notice.
Section 141 NI Act: Extends liability to persons in charge of and responsible to the company for the conduct of its business, in addition to the company itself.
Section 14 IBC (Moratorium): Upon admission of CIRP, a moratorium restrains actions or proceedings “against the corporate debtor.” It does not extend to natural persons/directors.
Section 31 IBC: Approval of resolution plan by the NCLT. Note: The judgment’s reference to “Section 131[1]” appears to be a typographical error for Section 31(1).
Section 32A IBC: Provides immunity to the corporate debtor for prior offences post-approval of a plan with qualifying change of control; preserves prosecution of individuals involved in the offence.
Section 245(2) CrPC: Enables a Magistrate to discharge the accused at any previous stage of the case if the charge is groundless. It is not a vehicle for terminating prosecutions on broad policy grounds contrary to binding precedent.
Aneeta Hada principle: Generally, the company must be arraigned with its officers in a Section 141 prosecution. Mohanraj carves an exception during moratorium—a legal impediment justifies continuation against natural persons even if proceedings against the company cannot continue at that time.

Key Extracts Emphasised by the High Court

The Court enumerated seven salient features distilled from Supreme Court jurisprudence:

Section 138 proceedings are not recovery proceedings.
Directors remain liable under Section 138 even if the company’s debt is resolved under IBC.
Approval of a resolution plan does not automatically extinguish directors’ criminal liability under Section 138.
Section 138 is penal and preserves commercial integrity, not merely compensatory.
Approval under Section 31 IBC does not discharge signatories/directors from Section 138 liability.
Section 32A protects the corporate debtor, not the individuals responsible for its conduct.
IBC and NI Act serve different purposes and do not conflict.

Critical Appraisal

The judgment is faithful to binding Supreme Court authority and provides necessary clarity amid inconsistent trial-level orders post-IBC. Its most notable contribution is the express holding that chronology is immaterial: even if CIRP predates dishonour and the cause of action, directors cannot seek discharge from Section 138 prosecution as a matter of law. This squarely addresses a common defense based on timing and aligns magistrate-level practice with the three-judge bench architecture of Mohanraj and Ajay Goenka.

The Court’s cautious engagement with Vishnoo Mittal is pragmatic: to the extent that a reading of that decision would widen the moratorium to shield natural persons when the cause of action arises after the moratorium, it would conflict with binding three-judge bench precedent. The High Court correctly preferred the latter and also drew support from a contemporary High Court judgment (Rakesh Juneja).

Finally, the refusal to stay the order underscores the Court’s confidence in its doctrinal footing and its desire to prevent further delay in criminal prosecutions that safeguard the credibility of negotiable instruments.

Conclusion

Ortho Relief Hospital and Research Centre v. M/s. Anand Distilleries reaffirms and sharpens a key doctrinal boundary: the IBC moratorium under Section 14 protects only the corporate debtor. It neither converts Section 138 NI Act prosecutions into recovery actions nor extinguishes or suspends personal penal liability of directors and signatories under Section 141, regardless of whether insolvency commenced before cheque dishonour. Section 32A’s immunity for the corporate debtor post plan approval does not extend to natural persons.

In practical terms, complainants can continue or initiate Section 138 prosecutions against directors even during CIRP or liquidation; trial courts should not discharge directors merely because of pending insolvency processes. The decision prioritises the integrity of the banking and negotiable instrument ecosystem while respecting IBC’s corporate rescue objectives, achieving a coherent coexistence of the two statutes.