Moratorium under the IBC cannot protect the applicant from proceedings under Section 138/141 of the Negotiable Instruments Act for his vicarious liability

Allahabad High Court held that the moratorium under the IBC cannot protect the applicant from proceedings under Section 138/141 of the Negotiable Instruments Act for his vicarious liability.

Allahabad High Court Bench of Justice Arun Kumar Singh Deshwal was hearing an application and observed that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, applies only to proceedings against the corporate debtor and does not extend to natural persons, such as company directors, who may be held vicariously liable under Section 138/141 of the Negotiable Instruments Act. The High Court Bench noted the moratorium under the IBC did not protect the applicant from proceedings under Section 138/141 of the Negotiable Instruments Act for his vicarious liability.

The High Court heard an Application where the applicant sought to quash the order dated 12.01.2024 passed by the Additional District & Sessions Judge, Gorakhpur, in Criminal Revision No. 107 of 2023 and the order dated 23.03.2023 passed by the Additional Civil Judge (J.D.), Gorakhpur. The applicant also sought to stay further proceedings in Complaint Case No. 6272 of 2020 under Section 138 of the Negotiable Instruments Act.

The case arose from an application filed by the second respondent under Section 138 of the Negotiable Instruments Act against the applicant and his company, M/s Saraya Industries Ltd. The trial court had issued a summons to the applicant, being an active director of the company. The applicant challenged this order through a revision petition, which was dismissed on 12.01.2024. Aggrieved by both orders, the applicant filed the present application.

The applicant argued that, as insolvency proceedings were ongoing against the company under the Insolvency and Bankruptcy Code, 2016 (IBC), Section 14 of the IBC imposed a moratorium on any proceedings against the company, including under Section 138 of the Negotiable Instruments Act. The applicant contended that he had not personally guaranteed the amount payable under the cheque and had no active role in the company’s day-to-day business. The applicant relied on the Supreme Court’s judgment in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REEDLAW 2021 SC 03526, which held that insolvency proceedings stay actions against the corporate debtor.

Conversely, the State argued that Section 14 of the IBC applied only to the corporate debtor and not to natural persons. They contended that specific allegations implicated the applicant in actively persuading the second respondent to invest in the company.

The High Court found that the applicant had played an active role in the company's business and had persuaded the second respondent to invest. The court clarified that Section 14 of the IBC imposes a moratorium only on actions against the corporate debtor, not on natural persons like the applicant. The Supreme Court’s ruling in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REEDLAW 2021 SC 03526 reinforced this interpretation. Thus, the moratorium under the IBC did not protect the applicant from proceedings under Section 138/141 of the Negotiable Instruments Act for his vicarious liability.

The High Court concluded that there were no grounds to quash the proceedings against the applicant. The court dismissed the application, allowing the applicant to raise these issues during the trial.

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REEDLAW 2024 All 04613