Directors’ Liability for Bounced Cheques During Insolvency

Post-dated cheques are a critical element of trust in the world of business. They are often issued by company directors to secure debts and foster confidence in commercial relationships. But when a cheque bounces, and the company and/or its directors face insolvency, can directors rely on insolvency laws to avoid legal consequences? Recent judgments have given a clear answer. This article unpacks the intersection of insolvency and cheque bounce laws, and what it means for directors, companies, and creditors.

The Legal Tension: Civil Recovery vs. Criminal Accountability

The Insolvency and Bankruptcy Code, 2016 (IBC)

The IBC provides a financial “breathing space” for companies in distress. When a company enters insolvency, a moratorium is imposed under Section 14, staying all civil suits and recovery proceedings against the company. The intent is to facilitate business restructuring and asset protection for the benefit of all stakeholders.

The Negotiable Instruments Act, 1881 (NI Act)

In contrast, Section 138 of the NI Act treats the dishonour of a cheque as a criminal offence. Section 141 of the NI Act extends liability to any person (such as a director) in charge of and responsible for company business at the time of the offence.

This tension often leads directors to argue that the IBC’s moratorium should shield them from prosecution for cheque bounce. However, the judiciary has clarified that these laws have distinct objectives, and criminal liability cannot be washed away through insolvency proceedings.

Clear Judicial Message: Insolvency is No Shield for Directors

Supreme Court Rulings

The Supreme Court, in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258 and Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. (2023) 10 SCC 545, settled the issue: the IBC’s moratorium protects only the company, not directors, signatories, or guarantors. Directors and officers can be prosecuted under Section 138, no matter the status of insolvency proceedings.

The rationale is straightforward—while companies are separate legal entities entitled to insolvency protection, personal accountability for criminal acts remains with the individuals responsible.

Timing Does Not Matter

The Bombay High Court in Ortho Relief Hospital v. Anand Distilleries 2025 SCC OnLine Bom 3580, confirms that the sequence of insolvency and cheque bounce complaints is irrelevant. Directors remain liable whether insolvency started before or after the cheque proceeding.

No Escape Through Personal Insolvency

Some directors try to claim protection by initiating personal insolvency as guarantors of company debts. The Supreme Court has rejected such attempts, most recently in Rakesh Bhanot v. Gurdas Agro Private Limited 2025 SCC OnLine SC 728, holding that personal insolvency does not stay or prevent criminal prosecution for cheque dishonour. The IBC is not designed to block penal consequences under the NI Act.

Double Recovery: Protection Against Overcompensation

A logical worry for directors is that creditors might recover from both the company’s insolvency process and a criminal sentence on the director, leading to “double recovery.” The Supreme Court, in Ajay Kumar Radheyshyam Goenka, clarified that while criminal proceedings can continue, the financial penalty can be adjusted based on amounts already recovered through the resolution plan. This ensures fairness: the complainant cannot recover more than what is owed, although criminal penalties like imprisonment may still apply. This safeguard preserves both accountability and equity.

Key Takeaways for Creditors and Directors

For Creditors

1. Criminal proceedings under Section 138 of the NI Act can continue against directors even if the company is in insolvency.
2. Creditors have parallel remedies:
   a) File a claim in the insolvency process against the company; and
   b) Initiate or continue Section 138 prosecution against individuals responsible.
3. Courts have mechanisms to prevent over-recovery so creditors will only obtain what they are rightfully owed.

For Directors

1. Neither a company’s nor a personal insolvency proceeding can prevent criminal prosecution for cheque dishonour.
2. Restructuring or extinguishing underlying debts by an insolvency plan does not remove personal criminal liability.
3. Directors should be aware that signing cheques, especially those issued as a personal guarantor, brings significant and non-transferable risk.

The Legal Consequences Remain Firm

Recent verdicts send an unequivocal message: the IBC is a financial rehabilitation tool, not an escape hatch from criminal accountability. Directors and signatories are held personally responsible for dishonoured cheques, regardless of the company’s insolvency status or changes in its financial obligations. The legal framework ensures that creditors have access to both civil and criminal remedies, but not unjust overcompensation. The act of issuing a cheque as a director carries enduring and substantial personal risk.