Himachal Pradesh High Court Rules That Section 138 NI Act Proceedings Continue Despite Initiation Of Insolvency Proceedings

Himachal Pradesh High Court Rules That Section 138 NI Act Proceedings Continue Despite Initiation Of Insolvency Proceedings

In a significant judgment, the Himachal Pradesh High Court upheld the personal liability of an accused under the Negotiable Instruments Act, despite ongoing insolvency proceedings initiated under the Insolvency and Bankruptcy Code (IBC).

Tushar Sharma and his wife, Smt. Shaveta Sharma, applied for a house loan of ₹2 crores, which was approved and granted on January 24, 2015. The loan was secured by mortgaging a property in Chandigarh, owned by Smt. Shaveta Sharma. Following a default in repayment, Tushar Sharma issued a cheque for ₹5,90,000 to partially discharge the liability. However, this cheque was dishonoured on February 14, 2019, due to insufficient funds.

The State Bank of India (SBI) filed a complaint under Section 138 of the Negotiable Instruments Act, initiating criminal proceedings against Tushar Sharma for cheque dishonour. While these proceedings were ongoing, Sharma filed an application before the National Company Law Tribunal (NCLT) in Chandigarh, seeking insolvency protection. The NCLT dismissed his request to stay the Section 138 proceedings, leading him to approach the High Court under Section 482 of the Criminal Procedure Code.

Sharma contended that the interim moratorium under Section 96(1)(a) of the IBC applies from the date of the application and prevents any pending legal actions regarding debts during this period, as stipulated in Section 96(1)(b)(i) and (ii). Conversely, SBI argued that the property in question belonged solely to Smt. Shaveta Sharma and that the bank, as a secured creditor, retained the primary charge on the property.

The primary question for the High Court was whether the Section 138 proceedings could be halted following the initiation of insolvency proceedings under the IBC.

The High Court referenced the Supreme Court judgment in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd (2023), which established that the moratorium under Section 14 of the IBC applies only to corporate debtors and does not absolve directors and signatories of personal liability under Section 138 of the Negotiable Instruments Act. The Supreme Court emphasized:

“Thus, where the proceedings under Section 138 of the NI Act had already commenced and during the pendency the plan is approved or the company gets dissolved, the directors and the other accused cannot escape their liability by citing its dissolution."

Furthermore, the High Court reiterated the ruling in P. Mohanraj and Ors. v. Shah Brothers Ispat Pvt. Ltd. (2021), clarifying that the moratorium applies to corporate debtors and not to individuals responsible for the company’s business.

The court concluded that criminal proceedings under Section 138 are distinct from debt recovery processes governed by the IBC. The Supreme Court noted:

“To put it clearly, the complainant approaches the criminal court not for recovery of the legally enforceable debt but for taking penal action under Section 138 of the NI Act for the offence already committed by the accused.”

The High Court ruled that proceedings under Section 138 and the IBC could proceed simultaneously. Consequently, it rejected the accused's arguments and allowed the criminal proceedings to continue, holding him liable for cheque dishonour despite the ongoing insolvency proceedings.