Cheque Bounce proceedings against a company subjected to Moratorium under IBC: New Delhi High Court

NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI Company Appeal(Insolvency) No. 3018 IN THE MATTER OF: Shah Brothers Ispat Pvt. Ltd. P. Mohanraj & Ors. Present: For Appellant: For Respondents: Mr. Yugal Kishore Prasad and Mr. Sunil Prem Mr. Sulabh Rewari and Ms. Neha Mathen Lalla Advocates. O R D E R 31.07.2018: The Appellants filed complaint under Section 138 of the Negotiable Instrument Act 1881 before the Metropolitan Magistrate 59th Court Kurla Mumbai. CC No.552 SS 2017 was filed prior to initiation of Corporate Insolvency Resolution Process i.e. prior to 6th June 2017. Another complaint u s 138 of NI Act being CC No.690 SS 2017 was filed after 6th June 2017 i.e. after the order of moratorium. The Respondent Directors moved before the Adjudicating Authority and argued that during the period of moratorium proceeding petition under Section 138 of NI Act was not maintainable. This was opposed by the Appellants but the Adjudicating Authority Single Bench Chennai by order dated 24th May 2018 passed in MA 102 IB 2018 in CP 507 IB 2017 directed the Appellants to withdraw the complaint case filed under Section 138 of NI Act treating it as a proceeding filed after order of moratorium with observation that such action amounts to deliberate attempt on the part of Appellant and sheer misuse of the process of law. The question arises for consideration in this appeal is whether the order of moratorium will cover a criminal proceeding under Section 138 of NI Act which provides punishment of imprisonment for a term which may extend to three years or with fine which may extend to twice the amount of cheque or with 2 both on them. The Company cannot be imprisoned therefore aforesaid punishment under Section 138 cannot be imposed against the companyHowever fine can be imposed by a court of competent jurisdiction on the Company if find guilty. The Directors of the Company Corporate Debtor) being parties so can be imprisoned or fine may be imposed Section 14 of the Insolvency and Bankruptcy Code 2016relates to moratorium which reads as follows: “14. Moratorium.Subject to provisions of sub sections 2) and on the insolvency commencement date the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following namely:— a) 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 b) transferring encumbering alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein c) any action to foreclose recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 Company Appeal(Insolvency) No. 3018 3 d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. 2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period. 3) The provisions of sub section shall not apply to such transactions as may be notified by the Central in consultation with any financial sector 4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process: Provided that where at any time during the corporate insolvency resolution process period if the Adjudicating Authority approves the resolution plan under sub sectionof section 31 or passes an order for liquidation of corporate debtor under section 33 the moratorium shall cease to have effect from the date of such approval or liquidation order as the case may be.” Learned counsel appearing on behalf of the Respondent submitted that the proceeding under Section 138 of the NI Act is covered by clause of Sub sectionof Section 14 of I&B Code therefore proceedings against the corporate debtor including execution of any judgment decree or order in any court of law tribunal arbitration panel or other authority cannot proceed. Company Appeal(Insolvency) No. 3018 4 6. We do not agree with such submission as 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. Imposition of fine cannot held to be a money claim or recovery against the Corporate Debtor nor order of imprisonment if passed by the court of competent jurisdiction on the Directors they cannot come within the purview of Section 14. Infact no criminal proceeding is covered under Section 14 of I&B Code. The Adjudicating Authority having failed to appreciate law we have no option but to set aside the impugned order dated 24th May 2018 passed in MA 102 IB 2018 in CP 507 IB 2017. The court of competent jurisdiction may proceed with the proceeding under Section 138 of NI Act even during the period of moratorium. The appeal is allowed with aforesaid observations. I. A. Nos. 820 2018 821 2018 822 2018 and 823 2018 stands disposed of. No Cost. Justice S. J. Mukhopadhaya] Justice Bansi Lal Bhat] MemberCompany Appeal(Insolvency) No. 3018 

Summary: In relation to Section 138 of the Negotiable Instruments Act, 1888 (“Act”) and Section 14 of the Insolvency and Bankruptcy Code, 2016(IBC) allowed the parallel continuation of proceedings under the Act against a company subjected to moratorium while undergoing resolution process under the IBC held by Justice S.J. Mukopadhyay and Justice Bansi Lal Bhat in Shah Bros. Ispat V. P. Mohanraj [Company Appeal (AT) (Insolvency) No. 306 of 2018)]. Facts related to this case is: Shah Brothers Ispat Pvt. Ltd. (the appellant) herein has filed Company Petition No. 507/IB/2017 before the Hon’ble National Company Law Tribunal, Chennai Bench (NCLT) against M/s. Diamond Engineering Chennai Pvt. Ltd. (corporate debtor) for a debt of Rs. 24, 80, 33, 430 (Rupees twenty-four crore eighty lakh thirty-three thousand four hundred thirty). In view of the non-payment of debt by P. Mohanraj (the respondents), the Hon’ble NCLT vide its order dated June 6, 2017, admitted the Company petition and appointed the Interim Resolution Professional. The moratorium was also declared and Corporate Insolvency Resolution Process (CIRP) was initiated against the corporate debtor. Before the commencement of the CIRP, the appellant had filed CC No. 552/SS/2017 before the Learned Metropolitan Magistrate, 59th Court, Kurla, Mumbai.  After the commencement of the CIRP, the Appellant filed CC No. 690/ SS/ 2017. In MA/102/IB/2018 in CP/507/IB/2017 filed by the respondents, the Hon’ble NCLT by its order dated May 24, 2018, has held that the Appellant had filed proceedings against the corporate debtor in spite of the order of moratorium dated June 6, 2017. Further, the appellant was directed to withdraw the aforesaid complaints forthwith, failing which appropriate order would be passed for violation of the moratorium. The Court while considering the issue of whether the order of moratorium would cover a criminal proceeding under Section 138 of the Act, observed that “Section 138 is a penal provision, which empowers the Court of competent jurisdiction to pass an order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim. Imposition of fine cannot be held to be a money claim or recovery against the corporate debtor nor order of imprisonment, if passed by the Court of competent jurisdiction on the Directors, they cannot come within the purview of Section 14. In fact, no criminal proceeding is covered under Section 14 of I&amp;B Code.” The major precise for allowing the parallel continuation of proceedings was that the moratorium does not cover criminal proceedings, but it is submitted that while this position might be true, proceedings under the NI Act cannot be classified as criminal proceedings in the strict sense. Click here to read the judgement