APPLICABILITY OF MORATORIUM

Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC,2016” or “Code”) provides for moratorium which shall be applicable upon the commencement of the Insolvency proceedings and there have been differing views taken by various Courts on the applicability of moratorium on matters filed under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”), due to its quasi-criminal nature; most of course stating till recently that moratorium will not cover cases filed under Sec 138 of NI Act (cheque bounces cases).

PREVIOUS JUDGMENTS AND VIEWS:

In the case of MBL Infrastructure Ltd. & Anr. Vs. Sri Manik Chand Somani (Calcutta High Court) CRR 3456/2018), the Hon’ble High Court of Calcutta refused to quash the criminal complaint under Section 138 of NI Act only because of a moratorium which was declared under Section 14 of the Code and held that:

“Declaration of moratorium itself does not create any bar for continuation of the criminal proceedings under Section 138/141 of the Negotiable Instruments Act.”

In the case of M/S.Nag Leathers Pvt Ltd vs J.L.Sobhana (Crl.O.P.No.8869 of 2018 and Crl.M.P.Nos.4587, 4588 & 8466 of 2018), the Hon’ble Madras High Court held that proceedings under Section 14 of IBC are only civil in nature and does not attract penal liability and held that:

“… criminal proceedings is not covered under the prohibition and as such the petitioner cannot have a shelter under Section 14 of Insolvency and Bankruptcy Code.”

In the case of Tayal Cotton Pvt. Ltd., Through v. The State Of Maharashtra (Bombay High Court,( 2018 SCC OnLine Bom 2069) the Hon’ble Bombay High Court stated that the principle of ejusdem generis is to be taken into consideration and held that:

“Therefore, applying this principle of interpretation, one cannot put any other interpretation on this provision contained in Section 14 of the Code except that it only prohibits a suit or a proceeding of a like nature and does not include any criminal proceeding.”

 

LATEST VIEW OF THE COURT: P Mohanraj V. M/S Shah Brothers Ispat Pvt Ltd (Civil Appeal No.10355 Of 2018) – Order dated 01.03.2021

A final decision has been arrived at, recently through the aforementioned case by the Hon’ble Supreme Court of India. The summarization has been provided below:

• A complaint was filed u/s.138 of NI Act prior to imposition of moratorium against the Corporate Debtor and subsequently, post moratorium there was another complaint filed by them.
• The Hon’ble NCLT vide an order had asked to withdraw the criminal complaint as a moratorium is in place.
• Further, the Hon’ble NCLAT, had quashed the order of NCLT and held that Section 138 is a penal provision and not a proceeding under section 14 of IBC. It held that no penal proceedings are covered under section 14 of IBC.
• The issue before the apex court whether such proceedings of Section 138 of NI Act are covered under Section 14 of IBC?
• The Hon’ble Supreme Court held that the moratorium under Section 14 of the Code is only applicable to the Corporate Debtor and natural persons as mentioned in Section 141 of the NI Act (including but not limited to the Directors) will continue to be liable.
• The Hon’ble Supreme Court overruled the previous judgments to hold that:

 “respectively, we hold that a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC.”

AMA View – from a practical angle for Businesses to consider

• In the Mohan Raj v. Shah Brothers case, the situation was finally settled before the Apex Court and has been held that the cases under section 138/141 of the NI Act will be covered under the moratorium under Section 14 of the Code to the extent against the Corporate Debtor and the proceedings against the individuals continues.
•  This view taken by the Hon’ble Supreme Court is against the Creditors who have been relying on the Sec 138 cases (cheque bounce cases) as a parallel proceeding and alternate means to the IBC cases. This will hit the business community which is on the creditor side of a company undergoing the insolvency process as their last hope of cheque bounce cases would be hit. However the moratorium is only with respect to the Corporate Debtor per se and not its directors, are managerial personnel who are usually made parties in such cases. Hence creditors have to be cautious while issuing such notices and proceedings.
•  On the other hand, the Corporate Debtor and the Insolvency Professional shall be freed from the burden of defending the Corporate Debtor in the Sec 138 cases for the defaults made prior to the company going into insolvency due to the acts of the erstwhile management. However the erstwhile promoters/management needs to continue and be cautious as the proceedings against them shall continue.