Moratorium-Based Protection Under the IBC: Supreme Court’s New Rule in Vishnoo Mittal v. Shakti Trading Company (2025 INSC 346)

1. Introduction

In the landmark Judgment of Vishnoo Mittal v. M/s. Shakti Trading Company (2025 INSC 346), the Supreme Court of India clarified the interplay between the moratorium imposed under the Insolvency and Bankruptcy Code, 2016 (IBC) and the initiation of criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). The case involved the director of a corporate debtor—Vishnoo Mittal—who was prosecuted under Section 138 of the NI Act after certain cheques were dishonored. However, the cause of action for the offense arose after the insolvency resolution process had started.

The dispute centered on whether corporate insolvency proceedings (and the resultant moratorium under Section 14 of the IBC) could shield the natural person (i.e., the director) from NI Act liability if the alleged dishonor occurred and became actionable only after the imposition of the moratorium. The Supreme Court ultimately quashed the proceedings against the director, setting a new precedent for cases in which the cause of action materializes after the commencement of the insolvency resolution.

2. Background and Key Issues

Background:

• The appellant, Vishnoo Mittal, was a director of M/s Xalta Food and Beverages Private Limited (the corporate debtor).
• The respondent, M/s Shakti Trading Company, had a super stockist arrangement with the corporate debtor. Pursuant to this arrangement, the director issued eleven cheques in favor of the respondent, amounting to approximately Rs. 11,17,326/-. All cheques were dishonored on July 7, 2018.
• On July 25, 2018, the National Company Law Tribunal (NCLT) initiated insolvency resolution proceedings against the corporate debtor, imposing a moratorium under Section 14 of the IBC. Immediately, an Interim Resolution Professional (IRP) took over the management of the corporate debtor.
• The respondent issued a statutory notice under Section 138 of the NI Act to the appellant on August 6, 2018, i.e., after the moratorium. When no payment was forthcoming within 15 days from that notice, the respondent filed a complaint against the appellant.
• The appellant’s petition before the High Court, seeking quashing of the Section 138 NI Act complaint on the ground that he was no longer in control of the corporate debtor’s funds post-moratorium, was dismissed. Hence, he filed this appeal before the Supreme Court.

Key Issues:

• Whether the moratorium imposed under Section 14 of the IBC protects directors or natural persons from NI Act proceedings when the cause of action arises after the insolvency commencement date.
• Whether distinguishing facts from earlier precedents (especially P. Mohan Raj v. M/s. Shah Brothers Ispat Pvt. Ltd.) could warrant quashing of NI Act proceedings against the director of a corporate debtor.

3. Summary of the Judgment

The Supreme Court allowed the appeal and quashed the Section 138 NI Act proceedings against the director. This was based on the fact that:

• The imposition of the moratorium predated the cause of action for the Section 138 NI Act offense. The dishonor alone does not create an offense unless the statutory notice period lapses without payment.
• On July 25, 2018, when the moratorium started, the corporate debtor’s management was transferred to the IRP under Section 17 of the IBC. Subsequently, the appellant had no power or capacity to handle the company’s finances or to pay any outstanding liabilities after the statutory demand was made in August 2018.
• The Supreme Court emphasized that P. Mohan Raj was factually distinguishable because the cause of action in that case arose prior to the moratorium, whereas here it arose only after the moratorium.

As a result, the Court concluded that continuing the Section 138 NI Act prosecution against the appellant was untenable, given that he could not legally fulfill the payment demand once he was divested of management powers.

4. Analysis

4.1 Precedents Cited

The primary precedent the Supreme Court discussed was P. Mohan Raj v. M/s Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258. That case held that while the moratorium under Section 14 of the IBC bars Section 138 NI Act proceedings against the corporate debtor, it does not bar proceedings against natural persons for cheques issued prior to the insolvency commencement date.

However, the Court in the present case highlighted the critical distinction: in P. Mohan Raj, the cause of action under the NI Act had crystallized before the moratorium. This stands in contrast to Vishnoo Mittal, where the cause of action arose only after the moratorium, as the statutory notice was served post-commencement of the insolvency proceedings.

4.2 Legal Reasoning

The Court’s reasoning focuses on two elements:

1. Cause of Action Under Section 138 of NI Act: Offenses under Section 138 do not materialize upon the mere dishonor of the cheque. Instead, the cause of action arises only if the drawer fails to pay within 15 days from the statutory notice of dishonor. In this case, that period began and ended after the moratorium was already in place.
2. Lack of Capacity During Moratorium: Once the IRP is appointed under Sections 14 and 17 of the IBC, the board of directors of the corporate debtor is suspended. Consequently, the director cannot exercise control over bank accounts or settle liabilities. Hence, penalizing the director under Section 138 when they lack the legal capacity to pay is unjustified.

4.3 Impact

This Judgment has far-reaching implications for insolvency and cheque-bounce jurisprudence:

• Extended Protections: If the cause of action for dishonor arises after the moratorium has commenced, directors or other individuals in charge of the corporate debtor may have a valid defense under Section 14 of the IBC.
• Distinguishing Factors: Courts must examine the precise timing of the statutory notice and the lapse of the 15-day payment window in NI Act cases involving companies under insolvency resolution. Merely referencing a blanket rule from P. Mohan Raj (that personal liability remains unaffected by the moratorium) will not suffice if the underlying facts differ on the sequence of events.
• Clarity for Creditors: Creditors are encouraged to promptly issue notices and institute proceedings before the corporate debtor enters into insolvency proceedings, or else they risk encountering the defenses established in this Judgment.
• Impact on IBC Framework: This ruling reinforces the principle that once the IRP steps in, the suspended management can no longer be held liable for non-payment that is outside their control.

5. Complex Concepts Simplified

Moratorium (Section 14 of the IBC): A legal “pause” on all suits or proceedings against the corporate debtor. During this moratorium, creditors cannot enforce their claims in court or through arbitration. The corporate debtor’s board of directors is suspended, and an IRP or Resolution Professional takes over management, meaning original management’s authority to make financial decisions is revoked.

Cause of Action Under Section 138 NI Act: Cheque-bounce liability does not occur solely because the bank returns a cheque unpaid. It requires:

1. Receipt of statutory notice from the payee within the stipulated timeframe.
2. Failure to make the demanded payment within 15 days of that notice.

Only after these steps does the offense under Section 138 become complete.

6. Conclusion

In Vishnoo Mittal v. M/s. Shakti Trading Company (2025 INSC 346), the Supreme Court underscored that while P. Mohan Raj remains good law in cases where the cause of action arises before the moratorium, it cannot apply blindly to situations where the statutory notice period and the resultant liability crystallize after the insolvency process has commenced. The Judgment highlights the injustice of criminalizing non-payment when the director is rendered powerless by virtue of Sections 14 and 17 of the IBC.

Effectively, the Court has expanded the protective umbrella of Section 14 in favor of company directors, but only in circumstances whereby they are unable to act or make payments due to the moratorium. This precedent provides crucial guidance to lower courts, litigation strategists, and corporate managements about the timing of the cause of action under Section 138 of the NI Act in relation to IBC moratoriums. It also serves as a strong reminder to creditors to scrutinize insolvency timelines carefully before proceeding with criminal remedies.