Ajay Gupta and another v. Can Bank Factors Limited

What happened

Can Bank Factors Limited filed Criminal Complaint No. 6614 dated 29 September 2015 against Supreme Tex Mart Limited and its directors, alleging an offence under section 138 of the Negotiable Instruments Act, 1881 (with section 420 IPC) before the Judicial Magistrate First Class, Ludhiana, over cheques of June 2015 given to repay a factoring facility of ₹5 crore, which were dishonoured with the remark 'Exceeds Arrangement'. The petitioners were summoned on 31 May 2016. They argued that the NCLT, Chandigarh Bench, admitted a section 7 petition and declared a moratorium on 29 September 2017, an Interim Resolution Professional was appointed on 11 October 2017, and liquidation was ordered on 8 August 2018, after which the Board's powers vested in the Liquidator and they ceased to have control. They also said the complainant was a member of the Committee of Creditors and that its claim formed part of the insolvency proceedings.

Questions before the court

• Can a section 138 complaint against directors be quashed because the company later entered insolvency and liquidation?

Why the court ruled this way

The offence was complete on dishonour of the cheques in 2015, well before the insolvency proceedings commenced in 2017, so the later moratorium or liquidation could not wipe out the liability that had already arisen (paragraph 9). In P. Mohanraj v. Shah Brothers Ispat Private Limited, (2021) 6 SCC 258, the Supreme Court held that the moratorium under section 14 operates for the corporate debtor but the liability of natural persons under section 141 continues, and Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Limited, (2023) 10 SCC 545 reaffirmed that resolution or discharge of the corporate debtor does not absolve directors (paragraph 10). Liability under section 141 is examined by the status of the accused when the offence was committed, so later divesting of managerial powers does not erase it (paragraph 10). The argument of parallel proceedings failed because section 138 proceedings are predominantly criminal and the moratorium postpones civil debt enforcement, not criminal accountability (paragraph 11). Whether the petitioners were in charge and whether the ingredients are made out are for the trial court on evidence (paragraph 12).

Controlling point

No ground was made out to quash the complaint at the threshold.

Order and next steps

The petition was dismissed. It was made clear that the observations are not an expression on the merits of the case pending before the trial court.

Practical implications

Directors facing a cheque-dishonour complaint cannot expect the company's insolvency moratorium or liquidation to end their own prosecution, and should concentrate on showing they were not in charge of the business at the relevant time.

Limits of this ruling

• The Court did not decide whether the petitioners were in charge of the company's affairs or whether the offence was proved; those questions go to trial.