Moratorium under Section 14 of the IBC prohibits continuation or initiation of Section 138/141 proceedings against the corporate debtor: Kerala HC, Read Judgment

In a recent ruling, the Kerala High Court addressed the correlation between insolvency proceedings and criminal liability under the Negotiable Instruments Act, 1881 (NI Act). The case stemmed from a complaint against a private limited company involved in entertainment activities, facing proceedings under Section 138 of the NI Act for alleged dishonor of cheques. While the company was undergoing Corporate Insolvency Resolution Process (CIRP) following an order by the NCLT, the Judicial Magistrate declined to stay the criminal proceedings, prompting the petitioner to approach the High Court.

The judgment examined the application of the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), and its effect on ongoing criminal cases, particularly those under the NI Act, while also distinguishing the liability of corporate entities and natural persons.

The petitioner, a private limited company engaged in entertainment activities, was accused in C.C.No.996/2021 for an offence under Section 138 of the Negotiable Instruments Act, 1881. The complaint was filed by the second respondent before the Judicial First Class Magistrate Court, Thiruvananthapuram. Meanwhile, M/s Amar Constructions initiated Corporate Insolvency Resolution Process (CIRP) against the petitioner under the Insolvency and Bankruptcy Code, 2016 (IBC). The NCLT, Indore Bench, admitted the petition and declared a moratorium under Section 14 on 22.03.2024. The petitioner then sought to stay the criminal proceedings before the Magistrate, arguing that they were barred due to the moratorium. However, the Magistrate rejected this plea on 31.07.2024, leading to the present petition before the High Court.

The petitioner argued that once CIRP is initiated and a moratorium is declared under Section 14 of the IBC, all legal proceedings, including criminal cases under Section 138 of the N.I. Act, must be stayed. The petitioner relied on the Supreme Court’s decision in P. Mohanraj & Others v. M/s. Shah Brothers Ispat Pvt. Ltd. (2021), which held that a moratorium applies to Section 138 proceedings against the corporate debtor.

Contentions of the Respondent:

The respondent countered that while the moratorium applies to corporate debtors, it does not extend to natural persons, such as the company’s directors and executives. Relying on Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. (2023), the respondent argued that criminal proceedings against individuals involved in the company should continue despite the moratorium. The respondent also cited P. Mohanraj to support their stance.

The Court noted that the petitioner is a corporate debtor, and the NCLT, Indore Bench, has declared a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, (IBC). As a result, the Corporate Insolvency Resolution Process is currently in progress.

The petitioner argued that due to the moratorium under Section 14 of the IBC, the proceedings under Section 138 of the Negotiable Instruments Act should not continue against the company.

Quoting Section 14 of the IBC, the Court highlighted that the moratorium prohibits "the institution of suits or continuation of pending suits or proceedings against the corporate debtor."

The Supreme Court in P. Mohanraj v. M/s. Shah Brothers Ispat Pvt. Ltd. held that "for the period of moratorium, no Sections 138/141 proceedings can continue or be initiated against the corporate debtor." However, the Court clarified that "such proceedings can be initiated or continued against the persons mentioned in Sections 141(1) and (2) of the Negotiable Instruments Act."

Referring to Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd., the Court reiterated that "the nature of proceedings under IBC and Section 138 of the NI Act are different and do not intercede each other." It emphasized that "Section 138 proceedings are penal in nature and not recovery proceedings."

The Supreme Court in Ajay Kumar Radheyshyam Goenka further observed that "where proceedings under Section 138 had already commenced and the company gets dissolved, the signatories/Directors cannot escape their penal liability under Section 138 of the NI Act."

The Court summarized its conclusions as follows:

• "The moratorium under Section 14 of the IBC prohibits continuation or initiation of Section 138/141 proceedings against the corporate debtor."
• "The moratorium applies only to the corporate debtor and not to the natural persons involved."
• "The natural persons mentioned in Section 141 of the NI Act remain liable under Chapter XVII of the Act."

The impugned order was set aside.

All further proceedings in C.C.No.996 of 2021 against the corporate debtor were deferred until the moratorium was lifted by the competent authority.

The learned Magistrate was permitted to proceed against the natural persons.

In O.P.(Crl.) No.730 of 2023, the learned Magistrate was directed to expedite the trial.

The Magistrate was allowed to continue the case against the natural persons in compliance with the previous directions.

The Original Petition was disposed of accordingly.

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