Moratorium Under IBC Bars Section 138 NI Act Proceedings Against Corporate Debtor but Not Against Directors
- REEDLAW
- 2 days ago
- 3 min read
The moratorium under the Insolvency and Bankruptcy Code bars proceedings under Section 138 of the Negotiable Instruments Act against the corporate debtor but does not bar such proceedings against its directors or other natural persons.
The Kerala High Court, through a Single-Judge Bench comprising Justice K. Babu, reviewed a criminal original petition and held that during the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC), criminal proceedings under Section 138 of the Negotiable Instruments Act (NI Act) cannot be continued against the corporate debtor. However, such proceedings can lawfully proceed against natural persons who are vicariously liable under Section 141 of the NI Act.
The petitioner, a private limited company engaged in the entertainment industry, challenged the order dated 31.07.2024 passed by the Judicial First-Class Magistrate, Thiruvananthapuram, in C.M.P. No. 4843 of 2024 in a pending complaint case under Section 138 of the Negotiable Instruments Act, 1881. The petitioner contended that the continuation of criminal proceedings during the pendency of the Corporate Insolvency Resolution Process (CIRP) and the imposition of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) were legally impermissible. The company had been admitted to CIRP pursuant to a petition filed by an operational creditor before the NCLT, Indore Bench, which declared a moratorium under Section 14 of the Code on 22.03.2024.
The petitioner argued, relying on the Supreme Court's decision in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REEDLAW 2021 SC 03526, that all proceedings, including prosecutions under Section 138/141 of the NI Act, are stayed as against the corporate debtor during the moratorium. The trial court had rejected this contention, prompting the present petition. The respondent opposed the plea, relying on Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited, REEDLAW 2023 SC 03569, asserting that criminal proceedings under Section 138 are not civil recovery actions and cannot be stayed under Section 14.
The High Court, after detailed consideration of both precedents and the statutory framework, concluded that the moratorium under Section 14 of the IBC applies only to the corporate debtor and not to the natural persons, such as directors or officers, involved in the cheque issuance. It reaffirmed the position in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REEDLAW 2021 SC 03526, that proceedings under Sections 138/141 of the NI Act against a corporate debtor must be stayed during CIRP but may continue against natural persons. The decision in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited, REEDLAW 2023 SC 03569, was also relied upon to affirm the continuation of penal liability of individuals, even where the corporate debtor is protected by the moratorium.
Accordingly, the Court set aside the impugned order and directed that all proceedings in C.C. No. 996/2021 against the corporate debtor (petitioner) shall remain stayed until the moratorium is lifted by the competent authority. However, the learned Magistrate was permitted to proceed with the case against the natural persons, in compliance with the earlier directive of the Court in O.P.(Crl.) No. 730 of 2023. The original petition was disposed of in these terms.
Mr. Arun Samuel, Mr. Jithin Babu A, and Mr. Anood Jalal K.J., Advocates, represented the Petitioner.
Mr. G. Sudheer, Advocate, appeared for the Respondent No. 1.
Mr. M. Sreekumar, Advocate, appeared for the Respondent No. 2.
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