Prosecution of Directors under S.138 of NI Act, 1881 and Effect of IBC, 2016

Prosecution of Directors under S.138 of NI Act, 1881 and Effect of IBC, 2016

In recent case, the company was facing proceedings for insolvency under the provisions of IBC, 2016. Additionally, the cheque issued was dishonoured. The Ld. NCLT had discharged the accused of offences under S.138 of N.I. Act, 1881. 

The issue that was discussed and answered here was "“Whether prior initiation of proceeding under the IB Code would frustrate the claim of the petitioner under Section 138 of the NI Act ?”

It was seen that Section 138 of the NI Act, as can be gathered from the record that the cheque dishonored on 14.12.2018 and complaint under Section 138 of the NI Act came to be filed on 18.02.2019. Whereas the moratorium was imposed on 14.02.2018, that means that the proceedings under IB Code were initiated much prior to initiation of the proceedings under Section 138 of the NI Act.

It was held that S.32A of IBC, 2016 would demonstrate that it bars prosecution in respect of corporate debtor for offences committed prior to commencement of the proceedings under IB Code. However, an exception has been carved out, so far as the second proviso is concerned, which speaks about persons against whom the prosecution would continue and therefore, the prosecution against natural persons can be continued.

If Section 138 proceedings are initiated after the initiation of proceedings under IB Code, in such circumstances, the provision of IB Code bars initiation of proceedings under Section 138 of the NI Act.

Proceedings under Section 138 of the NI Act is not a recovery proceeding.

IB Code proceeding and Section 138 NI Act proceedings are altogether different. 

The Directors of the Company remain liable under Section 138 of the NI Act, even if Company’s debt is resolved under the IB Code.

A resolution plan approved under the IB Code does not automatically extinguish the criminal liability of Directors under Section 138 of the NI Act.

Section 138 of the NI Act proceedings are penal in nature, aimed at maintaining the integrity of commercial transactions and not just compensating

The approval of a resolution plan under Section 31 of the IB Code does not automatically discharge the signatory/ Directors from the liability under Section 138 of the NI Act.

Section 32A protects the corporate debtor, but, not individuals responsible for Company’s conduct.

It makes no difference whether the proceedings are initiated prior to initiation of IB Code proceeding or thereafter.natural persons cannot escape from their personal liability under Section 138 of the NI Act.

The nature of proceedings which have to be kept in abeyance under Section 14 of the IB Code, would not include criminal proceedings, which is the nature of proceedings under Section 138 of the NI Act. 

Case Reference : Ortho Relief Hospital and Research Centre v Anand Distilleries [2025] GCtR 1663 (Nagpur, Bombay)