Now Applicability of Moratorium Under Insolvency Means Stay on Cheque Bounce Proceedings

314228 Thu+05:302022-02-03T23:29:42+05:30+05:3002b+05:30Thu, 03 Feb 2022 23:29:42 +0530 2017
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The Madras High Court in a recent Judgment in M/s Nag Leather Pvt. Ltd. V. M/s Muzain Hides reiterated the observations made by Hon’ble Apex Court in P. Mohanraj Mohanraj and Ors. V. Shah Brothers Ispat, held that upon imposition of Moratorium under Section 14 of Insolvency And Bankruptcy Code (the Code), proceedings under Section 138 of Negotiable Instruments Act, 1881(NI Act) cannot run parallel. Such proceedings can be initiated only against natural persons as described under Section 141 of NI Act.

What is Moratorium under Insolvency and Bankruptcy Code 2016

The moratorium is defined under section 14 of the Insolvency & Bankruptcy Code 2016. As per said section 14 on the commencement of insolvency, the adjudicating authority shall by order declare moratorium for prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.

Legal Position before this Judgement

The interpretation of Section 14 of the Code prior to the present Judgment and P. Mohanraj and Ors. V. Shah Brothers Ispat was that the Proceeding under Section 138 of NI Act being criminal in nature cannot be considered proceeding as described under the said section. Thus, Moratorium was not applicable on Section 138 of NI Act.

Confusing situation before these judgments in respect of criminal proceedings u/s 138 when the moratorium was applicable?

Prior to the judgments, the applicability of section 14 was considered only in civil suits. Hence, a complaint under Section 138 of NI Act could run parallel along with the initiation of corporate insolvency resolution process since there was no clarity whether the “proceedings” mentioned under Section 14 of the Code included only civil proceedings or criminal as well.

The issue first arose before the High Court of Bombay in Tayal Cotton Pvt. Ltd. v. State of Maharashtra. It was held that the words “suits or proceedings” under Section 14, did not include proceedings under Section 138 of the NI Act. Subsequently, the Calcutta High Court in MBL Infrastructure Ltd. v. Manik Chand Somani also held that the declaration of moratorium does not prohibit the continuation of criminal proceedings against the company or its directors.

A similar interpretation was held by the NCLAT in the Shah Brothers Ispatcase. In this case, while the cheque dishonour proceedings were ongoing, parallel proceedings under Section 9 of IBC for initiation of corporate insolvency resolution process by the operational creditor, were initiated by the creditor. NCLT upon admitting the proceedings ordered a moratorium. Thereafter, two cheque bounce cases were stayed by NCLT that were initiated by the creditor. This order was challenged before the NCLAT. The NCLAT setting aside the order held that cases under the NI Act, are criminal in nature and therefore, cannot be considered a “proceeding” under Section 14 of the Code.

Thereafter Hon’ble Apex Court decided the following in the case of P. Mohanraj & Ors. Vs M/s. Shah Brothers Ispat Pvt. Ltd :

  1. Proceedings under Sections 138 and 141 of the Act are considered “proceedings” under Section 14(1)(a) of the Code as Section 14(1)(a) has a broad scope.
  1. Moratorium under the Code would apply equally to actions brought under Section 138 of the NI Act.
  1. Once the moratorium period expires, the proceedings may resume. 
  1. Actions under Section 138 of the NI Act against the corporate debtor’s directors/persons of Company can be continued or begun.

How this Judgment will be helpful for Companies

After the clarification on the interpretation of Section 14 of the Code given by the Apex Court in the event of the imposition of Moratorium under IBC, a criminal complaint under section 138 NI Act can still continue against a natural person. Thus, recovering money from an individual will not go on hold in the scenario of imposition of Moratorium under the Code.

The judgment has come as a magnifying glass to the interpretation of section 14 of IBC, on which the code was ever silent. This would hopefully enable the recovery of money smoother under both the Acts as it harmonises the provisions of the Code and the NI Act.