Liability of a Director after commencement of CIRP: A Shield?

The Liability of a Director after commencement of CIRP is a critical issue when determining the Impact of insolvency on cheque dishonour case proceedings. Many legal professionals ask: Can director be sued for a cheque if the NCLT has already blocked company’s bank account? This article explores the landmark judgment of the Hon’ble High Court of Delhi, clarifying whether an Is accused still a ‘Director in charge’ if an Interim Resolution Professional (IRP) has taken over the company in a section 138 NI case? We further analyze What happens to a pending cheque bounce case once a moratorium is declared under Section 14 of the IBC to provide clear insights for both complainants and accused persons facing litigation amidst corporate insolvency.

STAY UPDATED: We will continue to update this page with the latest judgments from the Hon’ble Supreme Court or Hon’ble High Court regarding the Liability of a Director after commencement of CIRP and the evolving Impact of insolvency on cheque dishonour case law.

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The following sections provide a detailed breakdown of the judicial reasoning used to determine the Liability of a Director after commencement of CIRP. This guide answers critical questions, such as: Can director be sued for a cheque if the NCLT has already blocked company’s bank account?

Liability of a Director after commencement of CIRP: A Shield?

1. Bibliographic Details of the Judgment: Liability of a Director after commencement of CIRP

To understand the Liability of a Director after commencement of CIRP, it is essential to look at the specific details of this recent adjudication by the Hon’ble High Court of Delhi:

• Title of the Judgment: FARHAD SURI & ANR. v. PRAVEEN CHOUDHARY & ORS.
• Name of the Judge: Hon’ble Ms. Justice Neena Bansal Krishna
• Citation Number: 2025 DHC 11418
• Date of the Judgment: December 16, 2025

2. Brief Facts of the Case and Timelines

The Impact of insolvency on cheque dishonour case is best understood through the sequence of events that led the parties to the Hon’ble High Court.

2.1. The Complainant’s Claims: Loan Transactions and Tenancy Disputes

The complainants, Praveen and Jitender Choudhary, alleged providing friendly loans to the company in 2016 via RTGS. They claimed the accused issued three cheques dated September 7, 2020, to settle outstanding liabilities. The cheques, totaling significant amounts (Rs. 75,00,000; Rs. 24,00,000; and Rs. 1,10,00,000), were returned unpaid with the remark “ACCOUNT BLOCKED”.

2.2. The Accused’s Defense: Timeline of NCLT Intervention

The accused argued that the Liability of a Director after commencement of CIRP cannot exist when control is lost. The timeline is critical:

• April 15, 2019: M/s Sumeru Processors Pvt. Ltd. was admitted to CIRP by the NCLT.
• December 3, 2019: A Liquidator was appointed, taking complete charge of the company.
• September 7, 2020: Date when the impugned cheques were allegedly issued.
• October/November 2020: Cheques dishonoured with the remark “ACCOUNT BLOCKED”.

3. Statutory Framework: Impact of insolvency on cheque dishonour case

The Hon’ble High Court examined how the Section 138 NI Act and IBC moratorium interact.

3.1. Understanding Section 138 and 141 of the NI Act

Section 138 creates an offence when a cheque is drawn on an account maintained by a person and is dishonoured for insufficiency of funds. Section 141 extends vicarious liability to those in charge of the company’s business. However, this liability is contingent upon the primary offence under Section 138 being established against the company.

3.2. Section 14 of the IBC: What happens to a pending cheque bounce case once a moratorium is declared?

Section 14 IBC imposes a moratorium prohibiting legal proceedings against the Corporate Debtor. Sections 17 and 18 vest complete management and control of the company in the IRP/Liquidator. The Hon’ble High Court noted that while the Corporate Debtor is protected, natural persons may remain liable, provided the underlying offence is validly made out.

4. Core Legal Issue 1: Is accused still a ‘Director in charge’ if an IRP has taken over the company?

4.1. Loss of Authority: Perspective of the Accused

The accused contended that because the company was divested of management nearly 18 months before the cheques were presented, they lacked the authority to validly issue those cheques.

4.2. Allegations of Concealment: Perspective of the Complainant

The complainant argued that the accused concealed the ongoing NCLT proceedings and issued the cheques under their knowledge and instruction, which they claimed amounted to cheating.

5. Core Legal Issue 2: Can director be sued for a cheque if the NCLT has already blocked company’s bank account?

5.1. The meaning of “Account Maintained” under Section 138

The Hon’ble High Court observed that for an account to be “maintained,” the holder must have the authority and control over it. The Hon’ble Judge stated: “If the holder is deprived of his authority and control over the bank account, it cannot be said that the account was being maintained by him.”

5.2. Whether “ACCOUNT BLOCKED” constitutes Dishonour for Insufficiency of Funds

The return reason “ACCOUNT BLOCKED” resulted from the statutory moratorium. The Hon’ble High Court held: “Where the dishonour of cheque was for the reason that the account had been frozen in terms of some statutory authority, the offence as envisaged in Section 138 NI Act, would not be made out.”

6. Judicial Precedents Cited by the Hon’ble High Court

The Hon’ble High Court relied on several landmark cases to decide on the Liability of a Director after commencement of CIRP:

6.1. The Impact of P. Mohanraj and Ors. vs. Shah Brothers Ispat Pvt. Ltd.

This established that the moratorium under Section 14 IBC prevents prosecution of the Corporate Debtor.

6.2. Parallel Authorities: Ganesh Chandra Bamrana and Govind Prasad Todi

In Ganesh Chandra Bamrana & Ors. vs. Rukmani Gupta, the court held that once CIRP commences, directors lose control over bank accounts and cannot be prosecuted for later dishonours. Similarly, Govind Prasad Todi vs. State of NCT of Delhi confirmed that once an IRP is in charge, the role of natural persons in conducting the business of the company ceases.

7. Operative Portion and Final Conclusion

The Hon’ble High Court concluded that since the petitioners had no control over the company’s accounts after April 2019, the summoning orders were unsustainable.

Operative Order:

“In view of the aforesaid discussion, all the three Complaints along with the summoning Orders dated 19.01.2021 (in CC No. 90/2021); 21.01.2021 (in CC No. 113/2021); 22.01.2021 (in CC No. 117/2021), and all the proceedings emanating therefrom, are quashed.”

Conclusion:

• For the Accused (Petitioners): The judgment confirms that statutory blocking of accounts does not establish the “insufficiency of funds” required for a criminal conviction.
• For the Complainant (Respondent): The case highlights that if the management is taken over by an IRP/Liquidator, directors cannot be held vicariously responsible for cheques dated and presented after that takeover.

8. Frequently Asked Questions

1. Q: What is the primary factor determining the Liability of a Director after commencement of CIRP in a cheque bounce case? The primary factor is whether the director had the authority and control to operate the account at the time of cheque presentation. Once an IRP or Liquidator is appointed, the directors lose this control, and the account is no longer considered to be “maintained by him” under Section 138 of the NI Act.

2. Q: Impact of insolvency on cheque dishonour case: Does a moratorium protect directors? A moratorium under Section 14 IBC protects the Corporate Debtor from prosecution. While natural persons may remain liable for previous acts, they cannot be held vicariously responsible for cheques presented after they have been divested of powers by the IRP/Liquidator.

3. Q: Can director be sued for a cheque if the NCLT has already blocked company’s bank account? If the return memo shows “ACCOUNT BLOCKED” due to statutory orders or IRP intervention, it generally does not constitute an offence under Section 138. This is because the dishonour is not due to “insufficiency of funds” but due to a statutory prohibition.

4. Q: Is accused still a ‘Director in charge’ if an Interim Resolution Professional (IRP) has taken over the company in a section 138 NI case? No, the Hon’ble High Court clarified that once the IRP is in charge, the role of natural persons as directors in managing the business and bank accounts of the company ceases.

5. Q: What happens to a pending cheque bounce case once a moratorium is declared under Section 14 of the IBC? The moratorium imposes a legal impediment that makes it impossible to continue the proceedings under Section 138 against the Corporate Debtor. For natural persons, liability depends on whether the essential ingredients of the offence were complete before they lost control.

6. Q: Does the reason “ACCOUNT BLOCKED” qualify as a criminal offence under Section 138 of the NI Act? The Hon’ble High Court held that “ACCOUNT BLOCKED” for reasons not attributable to the account holder—such as statutory freezing during liquidation—falls outside the ambit of Section 138 NI Act.

7. Q: Can a complainant file multiple cases based on the same transaction during insolvency? While complainants may file multiple cases, the Hon’ble High Court noted that filing multiple complaints based on the same transaction can indicate mala fides and an attempt to harass the parties.

8. Q: Is a director liable if they issued a cheque personally before the company went into liquidation? If a director is suspended from their position upon the appointment of an IRP, the bank accounts operate under IRP instructions, making it legally impossible for the director to repay the amount.

9. Q: What should an accused director do if they receive a demand notice after the company is in CIRP? The director should reply to the demand notice explaining the insolvency status and loss of control. In this case, providing such a reply was a key factor in the Hon’ble High Court’s reasoning.

10. Q: What is the significance of the “Section 138 NI Act and IBC moratorium” relationship? This relationship ensures that the criminal law is not used to punish individuals for actions (like blocking an account) that were mandated by statutory insolvency proceedings.

Disclaimer: In compliance with the Bar Council of India guidelines, this article is intended for informational purposes only and does not constitute legal advice or a solicitation for legal services.