Moratorium under Section 14 of IBC covers criminal proceedings against Corporate Debtor under Section 138 of NI Act: Supreme Court

Moratorium under Section 14 of IBC covers criminal proceedings against Corporate Debtor under Section 138 of NI Act: Supreme Court

The Supreme Court has ruled that declaration of order of moratorium passed under the Insolvency and Bankruptcy Code (IBC) bars parallel proceedings under Section 138 of the Negotiable Instruments Act (NI Act) against the Corporate Debtor. The moratorium cannot be allowed to continue as the same will be covered by the bar under Section 14 of the IBC.

According to Section 14(1)(a) of the IBC, the institution of suits or the continuation of pending suits or proceedings against the corporate debtor (including the execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority) is prohibited.

According to the Court, moratorium was applicable only to the corporate debtor.

The petitioners appealed to the Supreme Court from the order of the National Company Law Appellate Tribunal (NCLAT) challenging the continuation of criminal trial under Section 138 NI Act during the pendency of liquidation proceedings in the National Company Law Tribunal (NCLT).

The NCLAT by its judgment had approved continuation of parallel proceedings under Section 138 of the Negotiable Instruments Act even as the resolution process under the IBC was under way against the company subjected to moratorium.

The bench of Supreme Court Justices Rohinton Nariman, Navin Sinha and KM Joseph held, "We have held that proceedings under Section 138/141 NI Act are covered by moratorium under Section 14 of IBC."

Last year, a division bench comprising Justices UU Lalit and Aniruddha Bose had issued notice to the Attorney General to determine the issue whether NCLT's moratorium during CIRP will bar the proceedings under Sec 138 of the NI Act.

As to the facts of the case, a moratorium was imposed after the NCLT Chennai bench had initiated Corporate Insolvency Resolution Process (CIRP) against Diamond Engineering Chennai Limited (Corporate Debtor) in June 2017 on a petition by Shah Brothers Ispat Private Limited.

Shah Brothers Ispat Private Limited had earlier filed a complaint under Section 138 before the Metropolitan Magistrate Court, Kurla Mumbai against the Appellants-Directors of the Corporate Debtor. It was filed prior to the initiation of CIRP against the Corporate Debtor. Another complaint under Section 138 of NI Act was also filed after June 6, 2017, i.e. after the order of moratorium.

The Appellant – Directors approached the NCLT contending that during the period of moratorium, petition under Section 138 of NI Act would not be maintainable. The tribunal directed Shah Brothers to withdraw the complaint under Section 138 of NI Act treating it as a proceeding filed after order of moratorium with observation that such action amounts to misuse of the process of law.

Shah Brothers appealed to the NCLAT against the NCLT order. The question before the NCLAT was whether the order of moratorium will cover a criminal proceeding under Section 138 of NI Act.

According to the NCLAT, Section 138 is a penal provision, which empowers the court of competent jurisdiction to pass order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim.

Aggrieved, they appealed to the Apex Court.