The Supreme Court has ruled that the insolvency resolution of a company will not extinguish a director’s liability under Section 138 of the Negotiable Instruments (NI) Act. The ruling came in response to a case where a director of a company had issued a cheque that had bounced. The director had argued that his liability under Section 138 of the NI Act was extinguished after the company went through the insolvency resolution process. The lower courts had upheld his argument, but the Supreme Court overturned their decision.
Section 138 of the NI Act makes it a criminal offence to dishonour a cheque. If a cheque bounces due to insufficient funds or any other reason, the person who issued the cheque can be held liable under this section. The Supreme Court’s ruling means that directors cannot escape their liability under Section 138 of the NI Act by hiding behind the insolvency of their company. The Court has held that
the liability of a director is separate and distinct from that of the company, and the insolvency of the company does not absolve the director of his or her liability under the Act.
The ruling is significant as it will help in the recovery of debts owed by companies to their creditors. Directors of companies often issue post-dated cheques to creditors as a form of security for repayment of loans. If such cheques bounce, the creditor can initiate criminal proceedings against the director under Section 138 of the NI Act. The insolvency of the company can complicate the recovery process. Creditors may have to go through the insolvency resolution process to recover their dues, which can take a long time. In such cases, directors may argue that their liability under the NI Act has been extinguished due to the insolvency of the company.
The Supreme Court’s ruling clarifies that directors cannot use the insolvency of their company as a shield to avoid their liability under the NI Act. This will help creditors in their efforts to recover their dues from defaulting companies. The ruling also underscores the importance of directors being vigilant about their responsibilities and liabilities under various laws. Directors must ensure that they
do not indulge in any activity that can lead to their liability under the NI Act or any other law.
The Supreme Court’s ruling that the insolvency resolution of a company will not extinguish a director’s liability under Section 138 of the NI Act is a welcome decision. It will help in the recovery of debts owed by companies to their creditors and will ensure that directors are held accountable for their actions. Directors must be aware of their responsibilities and liabilities under various laws and must ensure that they do not engage in any activity that can lead to their liability.
Written By- Lakshya Sharma students of 1 st year BBA LLB at Vivekananda Institute of Professional Studies affiliated to Guru Gobind Singh Indraprastha University
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