IBC Resolution Will Not Save You From a Cheque-Bounce Case: Ajay Goenka on Section 138 Liability

When a company collapses into insolvency, the directors who signed its cheques often assume the slate is wiped clean. It is a costly assumption. On 15 March 2023, the Supreme Court of India settled the question in Ajay Kumar Radheyshyam Goenka v Tourism Finance Corporation Ltd: approval of a resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC) may extinguish the corporate debtor's financial liability, but it does nothing to erase the personal criminal liability of the signatory-director under Section 138 of the Negotiable Instruments Act, 1881. The two proceedings run on separate tracks, and one does not halt the other.

This matters for every promoter, managing director, or authorised signatory who has ever signed a cheque on behalf of a company that later entered the corporate insolvency resolution process (CIRP). The resolution plan can hand the corporate debtor a fresh start; it cannot hand the person who signed the dishonoured instrument an acquittal. Below is the statutory position, the procedure, the defences that remain open, and what the courts have actually held. The full judgement of 15 March 2023 is on the public record at indiankanoon.org.

The Statutory Position

Section 138 of the Negotiable Instruments Act, 1881, criminalises the dishonour of a cheque for insufficiency of funds. The punishment is imprisonment for a term which may extend to two years, or a fine which may extend to twice the amount of the cheque, or both. Crucially, this is a personal offence attached to the drawer of the instrument, not merely a debt owed by the company.

Where the drawer is a company, Section 141 of the same Act extends the liability. Every person who, at the time the offence was committed, was in charge of and responsible to the company for the conduct of its business is deemed guilty, alongside the company itself. This is the hook that catches directors and authorised signatories: the company draws the cheque, but the natural persons steering it carry the criminal exposure.

The insolvency framework appears, at first glance, to offer an escape. Section 31 of the IBC makes an approved resolution plan binding on the corporate debtor and all stakeholders, and Section 14 imposes a moratorium during the CIRP that freezes proceedings against the corporate debtor. Section 32A, inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2020 with effect from 28 December 2019, goes further and grants the corporate debtor immunity from prosecution for offences committed before the CIRP once a resolution plan is approved and a change of management occurs.

The decisive words in Section 32A are the ones that carve out the individuals. The provision expressly states that its immunity does not extend to persons who were promoters, or in the management or control of the corporate debtor, at the time the offence was committed. In other words, the statute cleanses the company for the sake of the new owner, but it deliberately leaves the erstwhile signatory-director exposed. The following table sets out who each provision protects.

The architecture is deliberate. A guarantee given for a company's debt survives the company's insolvency for the same structural reason: the IBC resolves the corporate debtor's estate, not the independent obligations of the humans behind it. The bare text of both the Negotiable Instruments Act, 1881 and the IBC, 2016 is available on the government repository at indiacode.nic.in.

Procedure Step by Step

A Section 138 prosecution follows a fixed statutory sequence. Missing a single deadline can be fatal to the complainant, which is precisely why a defending signatory must understand each stage.

1. Dishonour and return memo. The cheque is presented and returned unpaid by the bank with a return memo citing insufficiency of funds or a closed account. The cheque must be presented within its validity period, which the Reserve Bank of India reduced to three months from the date of the instrument with effect from 1 April 2012.

1. Demand notice within 30 days. Under the proviso to Section 138, the payee must issue a written demand notice within 30 days of receiving the return memo, calling upon the drawer to pay the cheque amount.

1. 15-day payment window. The drawer then has 15 days from receipt of that notice to make the payment. The offence crystallises only if payment is not made within these 15 days; the cause of action arises on the sixteenth day.

1. Complaint within one month. Under Section 142(1)(b), the payee must file a written complaint before a competent Magistrate within one month of the date the cause of action arose. Courts retain discretion to condone delay for sufficient cause.

1. Cognizance and summons. The Magistrate takes cognizance and issues summons to the company and to the persons arraigned under Section 141, including the signatory-director.

1. Interim compensation. Under Section 143A, inserted by the Negotiable Instruments (Amendment) Act, 2018 with effect from 1 September 2018, the court may direct the drawer to pay interim compensation of up to 20 per cent of the cheque amount even before conviction.

1. Trial and, on conviction, appellate deposit. On conviction, if the accused appeals, Section 148 empowers the appellate court to order a deposit of a minimum of 20 per cent of the fine or compensation awarded.

Where the same company is simultaneously in insolvency, the CIRP proceeds in parallel before the National Company Law Tribunal. The moratorium under Section 14 will stay the Section 138 proceeding against the company, but the trial against the individual signatory continues. Borrowers weighing the cost of settling a dishonoured cheque against continued litigation may find our debt consolidation calculator and personal loan EMI calculator useful for modelling the numbers before negotiating.

Borrower Defences Available

A signatory-director facing a Section 138 complaint after an IBC resolution is not defenceless. The defences, however, are narrow and technical, and none of them is "the resolution plan discharged the debt".

No debt or liability on the date of the cheque. Section 138 is attracted only where the cheque was issued in discharge of a legally enforceable debt or liability. If the resolution plan or the CIRP timeline shows that the underlying liability had already been settled or restructured before the cheque was presented, that goes to the foundation of the offence. The burden of rebutting the statutory presumption under Section 139 lies on the accused.

Signatory was not in charge under Section 141. A director who was not in charge of and responsible for the conduct of the business at the relevant time cannot be roped in merely by virtue of holding office. The complaint must contain specific averments about the person's role; a bald assertion is insufficient.

Resignation before the offence. A director who had resigned, evidenced by Form DIR-11 or DIR-12 filings with the Ministry of Corporate Affairs before the cheque was issued or dishonoured, can seek discharge. The date of the return memo, not the date of the loan, is the reference point.

Procedural lapses by the complainant. The 30-day notice window, the 15-day payment period, and the one-month limitation for the complaint are jurisdictional. A demand notice issued on the 31st day, or a complaint filed beyond one month without a condonation application, is liable to be quashed.

The table below contrasts what the IBC extinguishes for the company against what survives for the individual.

None of these defences is guaranteed to succeed, and each depends heavily on the documentary record. A signatory who understands the moratorium mechanism can at least avoid the trap of assuming that the freeze on the company protects the person too. For borrowers whose exposure also runs through secured lending, the parallel recovery machinery under the SARFAESI route and adjudication before the Debts Recovery Tribunal operate on their own tracks and do not merge with the criminal cheque case.

Recent Tribunal/HC Position

The governing authority is the Supreme Court's decision in Ajay Kumar Radheyshyam Goenka v Tourism Finance Corporation Ltd, delivered on 15 March 2023. The appellant, a director and signatory, argued that once the resolution plan for the corporate debtor was approved and the debt stood extinguished, the Section 138 prosecution against him could not survive. The Court rejected the argument squarely.

The reasoning turned on the distinct character of the two proceedings. A Section 138 case is penal in nature; it punishes the act of issuing a cheque that bounces, not the mere existence of an unpaid debt. The IBC, by contrast, is a mechanism for resolving the financial affairs of the corporate debtor. Extinguishing the debt under an approved plan settles the civil, money side of the matter as against the company, but it cannot retrospectively decriminalise the dishonour or absolve the natural person who signed the instrument. The Court held that Section 32A protects only the corporate debtor and does not extend its shield to the erstwhile directors or signatories in charge of the company. The penal proceeding under Section 138 therefore runs independently of, and is unaffected by, the outcome of the IBC process for the individual.

The decision built on the earlier position that a moratorium under Section 14 of the IBC operates only in respect of the corporate debtor. Proceedings against the natural persons behind the company are not covered by that statutory freeze. The practical consequence is stark: a director can watch the company's debt vanish in the resolution plan while continuing to stand trial, and potentially be convicted and sentenced, on the cheque he signed.

For the defending signatory, the lesson from Goenka is not to look to the resolution plan for salvation, but to build a defence within the four corners of the Negotiable Instruments Act itself: absence of an enforceable liability on the relevant date, non-fulfilment of the Section 141 "in charge" test, or a fatal procedural lapse by the complainant. Anyone whose personal exposure includes a foreclosed security should separately model the cost of clearing it using our loan foreclosure calculator before deciding whether to contest or compound the case.

FAQ

Does an approved IBC resolution plan end a Section 138 case against the director?

No. In Ajay Kumar Radheyshyam Goenka v Tourism Finance Corporation Ltd (Supreme Court, 15 March 2023), the Court held that approval of a resolution plan extinguishing the corporate debtor's debt does not discharge the signatory-director's personal criminal liability under Section 138 of the Negotiable Instruments Act, 1881. The criminal case continues against the individual.

Does the IBC moratorium under Section 14 stop the cheque case?

The moratorium under Section 14 of the IBC freezes proceedings against the corporate debtor only. It stays the Section 138 case against the company during the CIRP, but the prosecution of the natural persons in charge under Section 141 is not covered and proceeds independently.

Who does Section 32A of the IBC actually protect?

Section 32A, inserted with effect from 28 December 2019, grants immunity from prior offences to the corporate debtor once a resolution plan is approved and management changes. It expressly excludes persons who were promoters, or in the management or control of the company, when the offence was committed. Directors and signatories get no immunity.

What is the punishment under Section 138?

Section 138 provides for imprisonment for a term which may extend to two years, or a fine which may extend to twice the amount of the cheque, or both. The court may also direct interim compensation of up to 20 per cent of the cheque amount under Section 143A, in force from 1 September 2018.

What are the deadlines a complainant must meet?

The demand notice must be issued within 30 days of the return memo; the drawer then has 15 days to pay; and the complaint must be filed within one month of the cause of action under Section 142(1)(b). A cheque itself must be presented within three months of its date under RBI rules effective 1 April 2012.

Can a resigned director be prosecuted?

A director who resigned before the cheque was issued or dishonoured, evidenced by Form DIR-11 or DIR-12 filings with the Ministry of Corporate Affairs, can seek discharge on the ground that he was not in charge under Section 141 at the relevant time. The date of dishonour, not the date of the loan, is the reference point.

Is the position different if I gave a personal guarantee?

Yes, and it is worse. A personal guarantee is an independent obligation that survives the corporate debtor's insolvency. The resolution of the company's debt under Section 31 of the IBC does not discharge the guarantor, who can be pursued separately, in addition to any Section 138 exposure on cheques he signed.