Introduction

The intersection of insolvency law and criminal liability has emerged as one of the most debated areas in contemporary Indian jurisprudence. The Bombay High Court’s recent judgment delivered by Justice M.M. Nerlikar on October 1, 2025, at the Nagpur Bench has reinforced a critical legal position: directors and officers of a company cannot escape their Personal Criminal Liability of Directors Under Section 138 for offences under the Negotiable Instruments Act, 1881 (NI Act) merely because insolvency proceedings have been initiated against their company under the Insolvency and Bankruptcy Code, 2016 (IBC). This ruling addresses the growing concern among creditors about whether company directors could use insolvency proceedings as a shield against prosecution for cheque dishonour, thereby undermining commercial morality and the sanctity of negotiable instruments.

The case involved M/s. Anand Distilleries and its directors who sought discharge from a criminal complaint for cheque dishonour on the ground that insolvency proceedings were initiated against the company before the cheque bounced. The High Court’s decision clarifies that the timing of IBC proceedings—whether initiated before or after the cause of action under the Section 138 NI Act arises—is immaterial to the personal criminal liability of directors. This judgment reinforces the principle that while corporate entities may receive protection under insolvency moratorium, natural persons who were responsible for the affairs of the company when the offence was committed remain accountable under criminal law.

Understanding Section 138 of the Negotiable Instruments Act

The Negotiable Instruments Act, 1881, was enacted to provide a legal framework for the use of negotiable instruments like cheques, promissory notes, and bills of exchange in commercial transactions. Section 138 was introduced through an amendment in 1988 to address the growing problem of cheque dishonour, which was eroding trust in commercial dealings and hampering business transactions. The provision criminalizes the dishonour of cheques issued in discharge of legal liability or debt.

Section 138 states that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge of any debt or other liability, is returned by the bank unpaid for reasons of insufficient funds or that it exceeds the arrangement made, and the payee or holder makes a demand for payment through notice within thirty days of receiving information from the bank, and the drawer fails to make payment within fifteen days of receipt of such notice, the drawer shall be deemed to have committed an offence. The punishment prescribed includes imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both.

The offence under Section 138 is complemented by Section 141 of the NI Act, which extends criminal liability to persons who were in charge of and responsible for the conduct of the business of the company at the time the offence was committed. This vicarious liability provision is central to how courts assess the personal criminal liability of directors under Section 138, ensuring that directors, managers, and other officers cannot hide behind the corporate veil when a company commits the offence of cheque dishonour. The provision creates a presumption of culpability against such persons unless they can prove that the offence was committed without their knowledge or that they exercised due diligence to prevent the commission of the offence.

The quasi-criminal nature of proceedings under Section 138 distinguishes them from purely civil recovery proceedings. While the primary objective is to facilitate debt recovery through the threat of criminal sanctions, the proceedings follow criminal procedure and result in criminal consequences including imprisonment. This dual character has been the subject of extensive judicial interpretation, particularly in understanding how such proceedings interact with other laws like the IBC.

The Insolvency and Bankruptcy Code and Moratorium Provisions

The Insolvency and Bankruptcy Code, 2016, was enacted as comprehensive legislation to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. The Code represents a paradigm shift from the debtor-in-possession model to a creditor-in-control regime, aimed at maximizing the value of assets and promoting entrepreneurship by balancing the interests of all stakeholders.

Section 14 of the IBC is a crucial provision that declares a moratorium upon admission of an insolvency application. The moratorium provision states that on the insolvency commencement date, the Adjudicating Authority shall by order declare that the moratorium shall have effect from the date of such order. During the moratorium period, several actions are prohibited including the institution of suits or continuation of pending suits or proceedings against the corporate debtor, execution of any judgment, decree or order against the corporate debtor, any action to foreclose, recover or enforce any security interest created by the corporate debtor, and the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

The purpose of the moratorium is multifold. It provides breathing space to the corporate debtor to enable the resolution professional to assess the viability of the business, prepare an information memorandum, and invite resolution plans from prospective resolution applicants. It prevents a race among creditors to enforce their claims, which could lead to the dismemberment of the corporate debtor’s assets and destroy its value as a going concern. The moratorium creates a level playing field where all creditors’ claims are dealt with in a collective and orderly manner rather than through individual enforcement actions.

However, the scope and extent of the moratorium have been subjects of intense litigation and judicial interpretation. A critical question has been whether the moratorium extends to criminal proceedings, particularly those under Section 138 of the NI Act. This question becomes even more complex when examining whether the moratorium protects not just the corporate debtor but also its directors and officers who face personal liability under criminal law. The law has evolved through several landmark Supreme Court judgments that have attempted to delineate the boundaries of moratorium protection in the context of different types of proceedings.

Evolution of Judicial Interpretation: Supreme Court Precedents

The judicial understanding of the interplay between the IBC moratorium and Section 138 proceedings has evolved significantly through several landmark Supreme Court decisions. These judgments have progressively clarified the scope of moratorium protection and its applicability to different categories of defendants and different stages of proceedings.

In the landmark judgment of P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., decided on March 1, 2021, a three-judge bench of the Supreme Court examined whether proceedings under Section 138 of the NI Act against a corporate debtor would be covered by the moratorium under Section 14 of the IBC [1]. The Court held that when a moratorium order is passed under the IBC, parallel proceedings under Section 138 of the NI Act against the corporate debtor cannot be allowed to continue. The Court reasoned that proceedings under Section 138 and 141 of the NI Act are quasi-criminal in nature and would amount to a proceeding within the meaning of Section 14(1)(a) of the IBC. The judgment emphasized that the legislative intent behind the moratorium was to provide a peaceful period for the resolution professional to attempt to revive the corporate debtor as a going concern.

The Court in P. Mohanraj analyzed the nature of proceedings under Chapter XVII of the NI Act and concluded that despite having criminal elements, these proceedings are fundamentally about debt recovery. The judgment stated that the object of the IBC is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The moratorium provision ensures that during the resolution process, the assets of the corporate debtor remain intact and are not depleted by individual enforcement actions. The Court explicitly held that continuing with Section 138 proceedings would defeat the very purpose of the moratorium as it would deplete the financial resources of the corporate debtor through fines and legal costs.

However, the P. Mohanraj judgment specifically dealt with proceedings against the corporate debtor itself, not its directors or officers. This distinction became crucial in subsequent litigation where directors sought to extend the benefit of moratorium to themselves. The Supreme Court addressed this issue in later judgments, particularly in the context of whether natural persons could claim immunity from Section 138 proceedings by virtue of their company being under insolvency resolution.

The Supreme Court further clarified the position regarding directors and officers in multiple subsequent decisions. In Sandeep Gupta v. Shri Ram Steel Traders decided by the Delhi High Court in 2023, the court held that Section 96 of the IBC concerning pre-packaged insolvency would not apply when a person is arrayed as an accused in a complaint under Section 138 in his capacity as a director of a company [2]. The judgment emphasized that the debt in question belonged to the company, not the director personally, but Section 141 of the NI Act fastens liability on every officer who was in management and control of the company’s affairs. This vicarious liability is personal to the director and cannot be extinguished by moratorium proceedings against the company.

The principle emerging from these cases is clear: while the corporate entity receives protection under the moratorium, natural persons who are liable under Section 141 of the NI Act remain exposed to criminal prosecution [3]. The moratorium cannot be used as a device to shield individual wrongdoers from facing consequences for offences committed while they were managing the company. This interpretation ensures that the protective mechanism of insolvency law does not become a refuge for those who have acted irresponsibly or fraudulently in their capacity as company directors or officers.

The Bombay High Court’s Decision: Case Analysis

The Bombay High Court judgment in the Ortho Relief Hospital and Research Centre case presents a critical clarification on the personal criminal liability of directors under Section 138 of the Negotiable Instruments Act, particularly in relation to insolvency proceedings. This detailed application of legal principles addresses a crucial question: can directors escape their personal criminal liability by invoking insolvency proceedings against their company?

The chronology of events in this case was particularly significant. In February 2018, Punjab National Bank initiated insolvency proceedings against M/s. Anand Distilleries under the IBC. The National Company Law Tribunal (NCLT) admitted the petition on February 14, 2018, which triggered the moratorium under Section 14 and led to the appointment of an Interim Resolution Professional. The petitioner hospital, being a creditor, lodged its claim with the resolution professional as required under the IBC process.

After the moratorium was declared, the directors of the company allegedly reassured the petitioner and asked them to present the cheque for encashment. When the cheque was presented on December 14, 2018, it was dishonoured with the remark of insufficient funds. Following the statutory procedure under the NI Act, the petitioner issued a legal notice on January 5, 2019, giving the drawer an opportunity to make payment within fifteen days. When no payment was received, the petitioner filed a criminal complaint under Section 138 of the NI Act.

The trial court, however, allowed an application filed by the directors on January 31, 2025, and discharged them from the criminal proceedings. The trial court’s reasoning was that since insolvency proceedings were initiated against the company before the cheque was dishonoured, the subsequent criminal complaint was barred by the moratorium provisions of the IBC. This interpretation suggested that the timing of the initiation of IBC proceedings was determinative of whether Section 138 proceedings could be maintained.

The petitioner challenged this discharge order before the Bombay High Court, represented by Advocate S.S. Dewani. The petitioner’s primary argument was that proceedings under the NI Act are penal in nature and fundamentally different from recovery proceedings under the IBC. It was contended that an approved resolution plan under the IBC pertains to the corporate debtor’s liabilities and does not absolve directors from their Personal Criminal Liability of Directors Under Section 138, which flows independently through Section 141 of the NI Act. The petitioner emphasized that directors, being natural persons, remain statutorily liable for prosecution regardless of any moratorium applicable to the corporate entity.

The respondent directors, represented by Advocate S.D. Khati, placed significant emphasis on the timeline of events. They argued that the IBC proceedings and moratorium were initiated on February 14, 2018, well before the cause of action for the Section 138 complaint arose through cheque dishonour on December 14, 2018. Their contention was that Section 14 of the IBC bars the institution of any legal proceedings against the corporate debtor after a moratorium is declared, and this bar should logically extend to directors who are prosecuted solely by virtue of their connection with the company. They sought to distinguish their case from situations where the cause of action arose before IBC proceedings, arguing that the temporal sequence was material to determining liability.

Justice M.M. Nerlikar framed the central legal question succinctly: whether prior initiation of proceedings under the IBC would frustrate the claim of the petitioner under Section 138 of the NI Act. After examining the Supreme Court precedents, the High Court concluded that the law on this issue is well-settled and the timing argument advanced by the respondents was legally untenable.

The High Court held that the moratorium under Section 14 of the IBC applies only to the corporate debtor, and natural persons mentioned in Section 141 continue to remain liable, reaffirming the personal criminal liability of directors under section 138 irrespective of insolvency proceedings. The judgment emphasized that proceedings under Section 138 are not recovery proceedings but are penal in nature, aimed at upholding the integrity of commercial transactions and maintaining faith in negotiable instruments. The personal penal liability of directors continues because such liability flows from their role in managing the company when the offence was committed, not merely from their association with the company.

The court explicitly rejected the timing argument, stating: “From the above discussion it is clear that it makes no difference whether the proceedings are initiated prior to initiation of IB Code proceeding or thereafter. The Supreme Court has in unequivocal terms held that natural persons cannot escape from their personal liability under Section 138 of the NI Act.” This categorical statement eliminates any ambiguity about whether the sequence of events affects the liability of directors under the NI Act.

The judgment further clarified that criminal proceedings do not fall under the category of proceedings that are to be kept in abeyance under Section 14 of the IBC when it comes to personal liability of directors and officers. The court held that the trial court had committed a gross error in allowing the discharge application and thereby discharging the accused directors. Consequently, the High Court allowed the writ petition, quashing and setting aside the trial court’s orders, and directed that the criminal complaint against the directors would proceed to trial. The court also rejected the respondents’ request to stay the judgment, indicating confidence in the correctness of its legal position.

Regulatory Framework Governing Directors’ Liability

The liability of company directors under Indian law is governed by a complex regulatory framework that spans multiple statutes including the Companies Act, 2013, the Negotiable Instruments Act, 1881, and the Insolvency and Bankruptcy Code, 2016. Understanding this framework is essential to appreciate how directors can be held personally liable for corporate defaults.

Section 141 of the Negotiable Instruments Act creates a specific statutory regime for holding company officials accountable for offences committed by the company. The provision states that if the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. This creates a presumption of culpability against directors and managing directors, subject to proving that the offence was committed without their knowledge or that they had exercised all due diligence to prevent the commission of the offence.

The Supreme Court has consistently held that to make a director liable under Section 141, it must be shown that he was in charge of and responsible for the conduct of the business of the company at the relevant time. Merely being a director is not sufficient unless the role is clearly established. However, once it is shown that a person was a director and was responsible for the affairs of the company, the burden shifts to that person to prove that they had no knowledge of the offence or had exercised due diligence.

When a director signs a cheque on behalf of the company, they are acting in their official capacity as a corporate agent. However, the personal criminal liability of directors under Section 138 that may arise from the cheque’s dishonour is distinctly personal and cannot be deflected onto the corporate entity. This is because the criminal liability relates directly to the individual director’s role in the decision-making process that led to the dishonour.

The IBC adds another layer to this framework. While Section 14 provides moratorium protection to the corporate debtor, Section 32A of the IBC specifically addresses criminal liability in approved resolution plans. This provision states that where the Adjudicating Authority has approved a resolution plan, no action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process. However, this protection extends only to the corporate debtor and its properties, not to any person other than the corporate debtor who is involved in the commission of such an offence.

The distinction drawn by Section 32A is critical. It recognizes that while the corporate debtor should be allowed a fresh start under an approved resolution plan, individuals who committed offences while managing the company should not escape personal accountability. This ensures that insolvency resolution does not become a mechanism for personal immunity from criminal prosecution [5].

The interplay between these provisions creates a nuanced system where corporate rehabilitation is balanced against individual accountability. The corporate entity may be protected to enable its revival, but those who were responsible for decisions leading to criminal offences remain answerable under law. This prevents moral hazard where directors might engage in reckless or fraudulent conduct knowing that subsequent insolvency proceedings would shield them from consequences.

Distinction Between Corporate and Personal Liability

One of the fundamental principles established through judicial interpretation is the clear distinction between the corporate entity and the natural persons who manage it. This distinction is rooted in the basic principle of corporate law that a company is a separate legal entity distinct from its shareholders and directors. However, this separation does not mean that individuals can always escape liability for corporate wrongdoing.

When a cheque issued by a company is dishonoured, two parallel liabilities are created under the NI Act. First, the company as the drawer of the cheque is liable under Section 138. Second, by virtue of Section 141, directors and officers who were in charge of the company’s affairs at the relevant time also become personally liable. These are distinct liabilities even though they arise from the same wrongful act.

The moratorium under Section 14 of the IBC operates only on the corporate debtor. The term corporate debtor is specifically defined in Section 3(8) of the IBC to mean a corporate person who owes a debt to any person. This definition does not include natural persons who are directors or officers of the corporate debtor. Therefore, when a moratorium is declared, it freezes actions against the corporate debtor but does not automatically extend to individuals connected with that corporate debtor.

This distinction has important practical implications. When the NCLT admits an insolvency application and declares a moratorium, creditors cannot proceed with recovery actions against the company, attach its properties, or continue litigation against it for recovery of debts. However, these restrictions do not prevent creditors from proceeding against directors who are personally liable under statutory provisions like Section 141 of the NI Act [6].

The rationale for maintaining this distinction is grounded in both legal principle and policy considerations. From a legal standpoint, criminal liability is personal and cannot be diluted by corporate insolvency. The offence under Section 138 involves elements of mens rea and actus reus that are attributable to individuals who made decisions on behalf of the company. These individuals had the power to ensure that cheques issued by the company would be honored, and their failure to do so attracts personal criminal liability.

From a policy perspective, allowing directors to escape prosecution by hiding behind corporate insolvency would undermine the entire purpose of Section 138 of the NI Act. The provision was enacted to restore credibility to negotiable instruments and ensure that parties who issue cheques do so responsibly. If directors knew they could avoid prosecution through insolvency proceedings, it would incentivize irresponsible issuance of cheques and erode commercial morality.

The Supreme Court has emphasized that the IBC is designed to provide a fresh start to the corporate entity as a going concern, not to provide immunity to individuals who may have engaged in wrongful conduct. The resolution plan under the IBC addresses the debts and liabilities of the company, not the criminal liability of individuals. An approved resolution plan may release the company from its financial obligations, but it cannot extinguish the criminal prosecution of directors who were responsible for offences committed during their tenure.

Impact on Commercial Transactions and Creditor Protection

The Bombay High Court’s judgment has significant implications for commercial transactions and creditor rights in India. By clarifying that directors remain personally liable for cheque dishonour regardless of insolvency proceedings against the company, the judgment strengthens the deterrent effect of Section 138 and enhances creditor protection.

In commercial practice, cheques serve as important instruments of credit and payment. Businesses routinely accept post-dated cheques as security for loans and advances, relying on the legal consequences of dishonour as a safeguard against default. If directors could escape liability by initiating insolvency proceedings against the company after issuing cheques, it would significantly undermine the utility of cheques as security instruments. Creditors would become reluctant to accept cheques, leading to increased transaction costs and reduced liquidity in commercial dealings.

The judgment ensures that creditors who have accepted cheques as security retain meaningful recourse against responsible individuals even when the corporate entity enters insolvency. This is particularly important for small and medium enterprises that often extend credit to larger companies based on the assurance provided by cheques signed by responsible directors. These creditors may not have the resources to conduct extensive due diligence or secure complex collateral arrangements, and they rely heavily on the deterrent effect of criminal prosecution under Section 138.

The decision also addresses a potential avenue for abuse where unscrupulous directors might deliberately trigger insolvency proceedings after issuing multiple cheques to different creditors, hoping to escape personal liability. By holding that the timing of IBC proceedings is irrelevant to directors’ liability under Section 138, the court eliminates this possibility and ensures that individuals cannot strategically use insolvency law to evade criminal consequences [7].

However, the judgment also maintains a balance by recognizing that not all directors are automatically liable. The requirement under Section 141 that the accused must have been in charge of and responsible for the conduct of business provides a safeguard against indiscriminate prosecution of all directors. Nominee directors, independent directors, or those who had no role in the financial decisions leading to the dishonour can potentially defend themselves by demonstrating their lack of involvement.

From the perspective of insolvency resolution, the judgment does not hinder the IBC process. The corporate debtor continues to receive moratorium protection, allowing the resolution professional to work on revival plans without interference from individual creditors. The continuation of criminal proceedings against directors operates on a parallel track and does not impede the collective resolution process. In fact, by maintaining pressure on directors who were responsible for the company’s financial mismanagement, it may incentivize better cooperation with the resolution process and more realistic resolution proposals.

Comparative Analysis with Personal Insolvency Provisions

An interesting dimension of the legal framework is the treatment of directors under personal insolvency provisions. Section 96 of the IBC deals with interim moratorium in personal insolvency cases. When an individual debtor files an application for initiating a resolution process, an interim moratorium period commences during which various actions against the debtor are prohibited.

Several directors who faced Section 138 prosecution have attempted to invoke Section 96 by filing personal insolvency applications, arguing that they should receive moratorium protection in their individual capacity. However, courts have consistently rejected this argument, holding that directors cannot escape their vicarious criminal liability under Section 141 of the NI Act by resorting to personal insolvency proceedings [8].

The Delhi High Court in Sandeep Gupta v. Shri Ram Steel Traders explicitly addressed this issue, holding that Section 96 of the IBC would not be applicable when a person is arrayed as an accused in a complaint under Section 138 in his capacity as a director of a company. The court reasoned that the debt for which the cheque was issued belonged to the company, not the director personally. The director’s liability under Section 141 is not because he owes the debt but because he was responsible for the company’s conduct when it committed the offence—an approach that reflects how courts have treated the personal criminal liability of directors under Section 138 as independent of any insolvency process.

This distinction is crucial. Personal insolvency provisions are designed to provide relief to individual debtors who are unable to pay their personal debts. They are not intended to shield individuals from criminal liability arising from their role in corporate management. If directors could use personal insolvency to avoid Section 138 prosecution, it would create an absurd situation where any person facing criminal prosecution could escape by declaring personal insolvency.

The courts have emphasized that criminal liability is not a debt that can be discharged through insolvency. The punishment under Section 138 includes both fine and imprisonment, and the imprisonment aspect cannot be addressed through any insolvency mechanism. Even if the fine component could theoretically be considered a debt, the criminal nature of the proceedings and the imprisonment sanction distinguish them from ordinary debt recovery.

Conclusion and Future Implications

The Bombay High Court’s judgment represents an important affirmation of established legal principles regarding the interplay between insolvency law and criminal liability under the Negotiable Instruments Act. By holding that directors cannot escape their personal liability for cheque dishonour by relying on insolvency proceedings against the company, the court has strengthened creditor protection and maintained the deterrent effect of Section 138.

The judgment resolves an important question about timing by clarifying that it is immaterial whether IBC proceedings were initiated before or after the cause of action under Section 138 arose. What matters is whether the accused was in charge of and responsible for the company’s affairs at the time the cheque was issued and dishonoured. This temporal neutrality prevents strategic manipulation of insolvency law to evade criminal liability.

Looking forward, this judgment is likely to significantly influence how directors approach their responsibilities in managing company finances. With the law now clarifying that Personal Criminal Liability of Directors Under Section 138 cannot be avoided through corporate insolvency proceedings, directors have a stronger incentive to maintain responsible financial stewardship and ensure stricter compliance in all cheque-related transactions.

For creditors, the judgment provides assurance that accepting cheques as security remains meaningful even in situations where the debtor company subsequently faces insolvency. This is particularly valuable for small creditors who may not have sophisticated security arrangements and rely primarily on the deterrent effect of criminal prosecution [9].

The decision also contributes to the evolving jurisprudence on the scope and limits of moratorium protection under the IBC. While the Code provides powerful tools for corporate rehabilitation, it does not create a zone of absolute immunity. The balance struck by courts between protecting viable businesses and ensuring individual accountability is essential for maintaining trust in both the insolvency system and the broader commercial ecosystem.

As insolvency law continues to develop in India, the principles established in this judgment will serve as important guideposts. They affirm that corporate rehabilitation and individual accountability are not mutually exclusive objectives but can coexist within a coherent legal framework. The judgment demonstrates judicial commitment to preventing the abuse of beneficial legislation while ensuring that legitimate creditor rights are protected.

References

[1] Supreme Court of India. (2021). P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd., (2021) 6 SCC 258. Available at: https://indiankanoon.org/doc/97452657/ 

[2] Delhi High Court. (2023). Sandeep Gupta v. Shri Ram Steel Traders & Anr., CRL.M.C. 381/2022. Available at: https://www.scconline.com/blog/post/2023/03/17/initiation-ibc-proceedings-does-not-absolve-company-director-signatories-of-criminal-liability-under-section-138-negotiable-instruments-act-supreme-court-legal-research-news-updates/ 

[3] LiveLaw. (2021). Moratorium Under Section 14 IBC Covers Section 138 NI Act Proceedings Against Corporate Debtor. Available at: https://www.livelaw.in/top-stories/moratorium-under-section-14-ibc-covers-section-138-ni-act-proceedings-against-corporate-debtor-supreme-court-170508 

[4] Bombay High Court. (2025). Ortho Relief Hospital and Research Centre v. M/s. Anand Distilleries & Ors., decided on October 1, 2025. Available at: https://lawtrend.in/prior-ibc-proceedings-do-not-bar-section-138-ni-act-action-against-company-directors-bombay-hc/ 

[5] Bar & Bench. (2021). Moratorium order under Section 14 IBC bars parallel proceedings against Corporate Debtor under Section 138 of NI Act. Available at: https://www.barandbench.com/news/litigation/moratorium-order-section-14-ibc-bars-parallel-proceedings-section-138-negotiable-instruments-act-supreme-court 

[6] SCC Online. (2023). Liability of the Erstwhile Directors: Section 138, Negotiable Instruments Act versus Insolvency and Bankruptcy Code, 2016. Available at: https://www.scconline.com/blog/post/2023/10/12/liability-of-the-erstwhile-directors-section-138-negotiable-instruments-act-versus-insolvency-and-bankruptcy-code-2016/ 

[7] LiveLaw. (2025). No S.138 NI Act Case Against Ex-Director Of Company When Cause Of Action Arose After IBC Moratorium Was Declared: Supreme Court. Available at: https://www.livelaw.in/supreme-court/no-s138-ni-act-case-against-ex-director-of-company-when-cause-of-action-arose-after-ibc-moratorium-was-declared-supreme-court-286691 

[8] LegitEye. (2023). Only corporate debtor is protected by moratorium while signatories/directors cannot escape from their penal liability u/s 138 of NI Act. Available at: https://legiteye.com/in-crlmc-3812022-punj-hc-only-corporate-debtor-is-protected-by-moratorium-while-signatoriesdirectors-cannot-escape-from-their-penal-liability-us-138-of-ni-act-by-filing-personal-insolvency-proceedings-delhi-hc-justice-jasmeet-singh-15-05-2023/ 

[9] iPleaders. (2021). The changing dynamics of section 14 of the IBC, 2016 vis-à-vis section 138 proceeding of NI Act,1881. Available at: https://blog.ipleaders.in/changing-dynamics-section-14-ibc-2016-vis-vis-section-138-proceeding-ni-act1881/ 

The post Personal Criminal Liability of Directors Under Section 138 NI Act Remains Unaffected by IBC Moratorium: Bombay High Court Ruling appeared first on Bhatt & Joshi Associates.

In a landmark decision, the Supreme Court of India, in the case of *M/s Orator Marketing Pvt. Ltd. vs. M/s Samtex Desinz Pvt. Ltd.*, delves into the intricacies of financial debt under the Insolvency and Bankruptcy Code, 2016 (IBC). This judgment, rendered by a bench comprising Justice Indira Banerjee and Justice V. Ramasubramanian, addresses the nuanced question of whether an interest-free term loan, extended to meet the working capital requirements of a corporate entity, qualifies as a financial debt under the IBC.

The Genesis of the Dispute

The appeal was against the National Company Law Appellate Tribunal (NCLAT), New Delhi’s dismissal of Orator Marketing Pvt. Ltd.’s plea. The crux of the matter revolved around the rejection of a petition filed under Section 7 of the IBC by the National Company Law Tribunal (NCLT), New Delhi, predicated on the understanding that an interest-free loan does not constitute a financial debt as it ostensibly lacks the consideration for the time value of money.

“The short question involved in this Appeal is whether a person who gives a term loan to a Corporate Person free of interest on account of its working capital requirements is not a Financial Creditor and therefore incompetent to initiate the Corporate Resolution Process under Section 7 of the IBC.”

The Legal Conundrum

At the heart of the dispute was the interpretation of the term “financial debt” under Section 5(8) of the IBC and whether an interest-free loan disbursed for working capital requirements could be construed under this ambit. The original lender, M/s Sameer Sales Private Limited, had advanced a term loan of Rs.1.60 crores to the corporate debtor, which was subsequently assigned to Orator Marketing Pvt. Ltd.

“According to the Appellant the loan was due to be repaid by the Corporate Debtor in full within 01.02.2020. The Appellant claims that the Corporate Debtor made some payments but Rs.1.56 crores still remain outstanding.”

Financial Debt Under IBC: Judicial Reasoning and Analysis

The Supreme Court meticulously analyzed the provisions of the IBC, particularly the definitions of “debt,” “claim,” “default,” “financial creditor,” and “financial debt.” The bench underscored the expansive nature of these definitions, noting the absence of an express exclusion of interest-free loans from the ambit of “financial debt.”

“The NCLT and NCLAT have overlooked the words “if any” which could not have been intended to be otiose. ‘Financial debt’ means outstanding principal due in respect of a loan and would also include interest thereon if any interest were payable thereon.”

The critical observation by the Supreme Court, pointing out the oversight of the words “if any” by the NCLT and NCLAT, is in reference to the definition of “financial debt” under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC). This section is pivotal in determining what constitutes a financial debt, thereby identifying the entities eligible to initiate the Corporate Insolvency Resolution Process.

Section 5(8) of the IBC: A Closer Look

Section 5(8) of the Insolvency and Bankruptcy Code, 2016, defines “financial debt” as follows:

“(8) ‘financial debt’ means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

…

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing…”

This definition explicitly acknowledges that a “financial debt” may include interest but crucially adds the qualifier “if any” to indicate that the presence of interest is not a mandatory criterion for a debt to qualify as a financial debt. The inclusion of “if any” suggests that the legislation intentionally accommodates interest-free loans within the ambit of financial debts, provided they meet the core requirement: the disbursement of debt against the consideration for the time value of money.

Understanding “if any” in the Context of Financial Debt

The phrase “if any” plays a significant role in the interpretation of “financial debt.” It signifies that while interest is a common feature of financial debts, its absence does not preclude a debt from being recognized as a financial debt under the IBC. This interpretation is vital for comprehending the breadth of financial debts and ensuring that the provisions of the IBC are inclusively applied to encompass a range of financial arrangements, including interest-free loans. 

By highlighting the overlooked “if any” phrasing, the Supreme Court clarifies that the IBC’s framework is designed to be comprehensive, capturing various forms of credit arrangements that extend beyond traditional interest-bearing loans. This understanding is critical for stakeholders in insolvency proceedings, ensuring that the legislative intent of the IBC—to streamline and encompass a broad spectrum of financial relationships within its purview—is faithfully executed.

This nuanced interpretation underlines the IBC’s goal of addressing corporate insolvency in a manner that is both pragmatic and inclusive, acknowledging the diversity of financial instruments and arrangements in the contemporary financial landscape. The Supreme Court’s clarification ensures that the scope of “financial debt” is adequately broad to include interest-free loans, thereby affirming the rights of creditors holding such instruments to participate in the insolvency resolution process.

The Verdict: Clarifying Financial Debt Under IBC

In setting aside the judgments of both the NCLAT and NCLT, the Supreme Court unequivocally held that interest-free loans advanced to finance the business operations of a corporate body do indeed qualify as “financial debt” under the IBC. The apex court emphasized the need for a broad interpretation of the term “financial debt” to encompass interest-free loans, thereby aligning with the overarching objectives of the IBC.

“‘Financial Debt’ would have to be construed to include interest-free loans advanced to finance the business operations of a corporate body. The appeal is therefore allowed… The petition under Section 7 stands revived and may be decided afresh in accordance with law and in the light of the findings above.”

Expanding the Definition of Time Value of Money

The concept of the “time value of money” under the IBC has been a subject of extensive judicial scrutiny. In the landmark decision of Pioneer Urban, the Supreme Court elucidated that TVM extends beyond mere interest on loans to include the intrinsic benefits derived from financial transactions, such as advance payments for property construction. This broader interpretation signifies a shift towards recognizing the multifaceted nature of financial contributions and their impact on corporate financing.

“The Supreme Court in Pioneer Urban recognized that the time value of money includes the benefits accrued from advance payments, challenging the conventional notion that financial debt is synonymous with interest-bearing loans.”

The Orator Marketing Decision: A Critical Shift

The Orator Marketing case further delved into the ambit of financial debt, particularly focusing on whether interest-free loans qualify as financial debt under the IBC. The Supreme Court’s affirmative stance in this case underscores the principle that the essence of a financial debt lies in the consideration for the time value of money, irrespective of the accrual of interest. This decision opens up new avenues for creditors to assert their rights under the IBC, emphasizing the commercial effect of borrowing as a key determinant.

“In Orator Marketing, the Supreme Court posited that interest-free loans, by their commercial effect, fall within the scope of financial debt, broadening the category of financial creditors eligible to initiate insolvency proceedings.”

Implications of Financial Debt Under IBC for Creditors and the Insolvency Resolution Process

The expansive interpretation of financial debt, particularly regarding the time value of money, has profound implications for the insolvency resolution process. By including a wider array of financial transactions as financial debt, the IBC allows for a more inclusive creditor participation in the Committee of Creditors (CoC). This inclusivity, while enhancing the democratic nature of the insolvency process, also necessitates a careful balance to ensure that the CoC’s decision-making remains effective and aligned with the objective of maximizing the debtor company’s value.

“The inclusion of creditors with interest-free loans within the CoC underscores the need for a nuanced understanding of financial debt, ensuring that the resolution process remains both inclusive and focused on the optimal recovery for all stakeholders.”

Towards a Refined Jurisprudence on Financial Debt under IBC

The evolving jurisprudence on financial debt, marked by significant rulings like Pioneer Urban and Orator Marketing, calls for a refined understanding of the IBC’s provisions. It highlights the necessity for legislative clarity and judicial consistency in interpreting the time value of money and its implications for defining financial debt. As the IBC continues to mature, the legal community and stakeholders alike must navigate these complexities to foster a robust insolvency resolution framework.

“The journey towards a comprehensive jurisprudence on financial debt under the IBC underscores the dynamic nature of insolvency law and the critical role of the judiciary in shaping its contours for the benefit of the Indian economy.”

These sections can seamlessly integrate into the “Navigating the Financial Debt Terrain” article, offering a detailed exploration of the time value of money and its significance in the context of financial debt under the IBC.

Conclusion

This landmark decision by the Supreme Court significantly broadens the scope of what constitutes a financial debt under the IBC, thus impacting the rights and remedies available to creditors of corporate debtors. It affirms the principle that the essence of a financial debt lies not in the accrual of interest but in the disbursement of a loan against the consideration for the time value of money, whether or not interest is chargeable. This judgment not only clarifies the legal position concerning interest-free loans but also underscores the IBC’s goal of facilitating the resolution of corporate insolvency in a creditor-friendly manner, ensuring that the mechanism for the resolution of financial distress is both inclusive and effective.

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