SUPREME COURT REITERATES PRINCIPLES OF STATUTORY BAR ON LEGAL PROCEEDINGS AGAINST DEBTOR DURING MORATORIUM

The #SupremeCourt has in a recent case of P. Mohanraj and Others vs M/S Shah Brothers Ispat Pvt Ltd passed a Judgment dated 01-03-2021 regarding whether institution or continuation of proceedings under Section 138/141 of the #NegotiableInstruments Act 1881 (the NI Act) against a corporate debtor is barred by moratorium declared by National Company Law Tribunal (#NCLT) under Section 14 of the #InsolvencyandBankruptcyCode 2016 (the Code).

In this case, certain steel products were supplied by the Respondent, M/s Shah Brothers Ispat Pvt Ltd to M/s Diamond Engineering Pvt Ltd from 21-09-2015 to 11-11-2016 (the Company), for which the Company issued as many as 51 Cheques to the Respondent. All these Cheques were returned dishonoured on the ground of “insufficient funds” on 03-03-2017. Hence, the Respondent issued Demand Notice dated 31-03-2017 under Section 138 read with Section 141 of the NI Act, demanding payment of outstanding amounts from the Company and its three Directors, within 15 days of receipt of the said Notice.

Thereafter, again two Cheques were returned dishonoured on the ground of “insufficient funds” on 28-04-2017. The Respondent issued a Second Demand Notice dated 05-05-2017 under Section 138 read with Section 141 of the NI Act, demanding payment of outstanding amounts from the Company and its three Directors, within 15 days of receipt of the said Notice.

As the Company failed to make payment to the Respondent, two Criminal Complaints were filed on 17-05-2017 and 21-06-2017 against the Company and its Directors (the Appellants) under Section 138 read with Section 141 of the NI Act before the Additional Chief Metropolitan Magistrate (Magistrate), Kurla, Mumbai (Criminal Proceedings).

Meanwhile, a Demand Notice dated 21-03-2017 under Section 8 of the Code was issued by the Respondent to the Company and thereafter, Application for Initiation of Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Code was filed in the NCLT Chennai around 06-06-2017. The NCLT admitted the Section 9 Application filed by the Respondent-Creditor and ordered for commencement of the CIRP proceedings against the Company (the Corporate Debtor). The NCLT also ordered for declaration of moratorium under Section 14 of the Code (Moratorium). In pursuance of the Moratorium, NCLT stayed the Criminal Proceedings under NI Act that were pending before the Magistrate, vide Order dated 24-05-2018.

Aggrieved with the NCLT Order imposing a stay on the Criminal Proceedings under NI Act, the Respondent-Creditor filed an Appeal before the National Company Law Appellate Tribunal (NCLAT), New Delhi. The NCLAT made the following observations in this case:

 

1- That Section 138 of the NI Act is a penal provision, which empowers the court to pass an order of imprisonment or fine. Whereas, Section 14 of the Code provides that after declaration of moratorium, 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 is prohibited.

2- Hence, a penal provision and an order of imprisonment or imposition of fine under Section 138 NI Act cannot be considered as a proceeding or any judgment or decree of money claim (as required under Section 14 of the Code).

3- Thus, criminal proceedings are not covered under Section 14 of the Code.

Therefore, the NCLAT passed an Order dated 31-07-2018, thereby, setting aside the NCLT Order dated 24-05-2018 and allowing the court of competent jurisdiction to proceed with the proceedings under Section 138 of NI Act, even during the period of Moratorium.

Aggrieved, the Appellants-Company Directors filed an Appeal before the Supreme Court. The Apex Court passed an Order dated 26-10-2018 and stayed the Criminal Proceedings against the Corporate Debtor that were pending before the Magistrate.

Thereafter, a Resolution Plan was approved by the Committee of Creditors and the NCLT and Moratorium was lifted vide NCLT Order dated 30-09-2019. However, later the Financial Creditors of the Company filed an Application for Withdrawal of the said Resolution Plan, which is pending to be heard by the NCLT.

Meanwhile, the Supreme Court made the following observations regarding whether institution or continuation of a proceeding under Section 138/141 of the NI Act can be said to be covered by the moratorium provision, i.e. Section 14 of the Code:

1) That Section 14 of the Code prohibits institution or continuation of suits or proceedings against the corporate debtor. It also prohibits the corporate debtor from transferring, encumbering, alienating or disposing of any of its assets or any legal right or beneficial interest therein.

2) The object of such prohibition under Section 14 of the Code is to provide an opportunity to the corporate debtor to get back on its feet during the CIRP and the moratorium period.

3) However, if the proceedings under Section 138/141 of the NI Act are allowed during the moratorium period, then the corporate debtor would have to pay compensation which can amount to twice the amount of the cheque that has bounced. As a result, the assets of the corporate debtor would get depleted and the aforesaid object of Section 14 of the Code would be defeated.

4) Thus, the Apex Court held that the impact that proceedings under Section 138/141 of the NI Act would have on the CIRP process would be the same as the impact that institution or continuation of suits, or execution of a decree in a civil court will have on the CIRP process.

5) Therefore, the moratorium under Section 14 of the Code will not only cover civil suits but also extend to proceedings under Section 138/141 of the NI Act which are quasi-criminal in nature. This would ensure that the corporate debtor gets a fair chance to get back on its feet during the CIRP and the moratorium period.

Hence, the Supreme Court held that the moratorium provision contained in Section 14 of the Code will cover the proceedings against corporate debtor under Section 138/141 of the NI Act. However, the moratorium will not apply to the officers-in-charge of the corporate debtor. Therefore, the creditors can initiate or continue proceedings against the officer-in-charge of the corporate debtor under Sections 141 of the NI Act, even during the moratorium period.

Further, the Apex Court in this case held that as the #Moratorium has been lifted by the NCLT and there is no new management taking over the Corporate Debtor, therefore, there is no legal impediment under Section 14 of the Code. Hence, the Supreme Court allowed the Criminal Proceedings to continue against the Corporate Debtor and its Directors, that are pending before the Magistrate.

 

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer