Section 138 of NI Act made part of Moratorium under IB Code

Background: The Hon’ble Supreme Court of India on March 1, 2021 ruled that when an order of moratorium is passed under the Insolvency and Bankruptcy Code, 2016 (“IB Code”), parallel proceedings under Section 138 of the Negotiable Instruments Act (“NI Act”) against the Corporate Debtor cannot be allowed to continue as the same will be covered by the bar under Section 14 of the IB Code (“P Mohanraj v. M/S Shah Brothers Ispat Pvt Ltd.”).

1. What is a moratorium and what are the provisions of moratorium under s.1 4(1)(a) of the IB Code?
The moratorium under the IB Code implies a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be initiated or proceeded against the Corporate Debtor. Under section 13(1)(a) of the IB Code, the Hon’ble Adjudicating Authority is required to enforce a moratorium for matters mentioned in Section 14.
Section 14(1)(a) of the IB Code provides that when an order declaring moratorium is passed, the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel will be prohibited.

2. What was the position prior to the passing of the present judgment?
Basis judgments of the Hon’ble National Company Law Appellate Tribunal as well as various High Courts, it was an accepted position that proceedings under Section 138 of the NI Act are not covered under the moratorium prescribed in the IB Code since the same fall within the ambit of criminal or punitive proceedings.

3. What was held by the Hon’ble Supreme Court of India in the present case?
The Hon’ble Supreme Court of India after analysing the catena of judgments relied upon by the parties held that the sweep of Section 14 is very wide, and proceedings under Sections 138/ 141 of the NI Act against a Corporate Debtor will be hit by the moratorium prescribed under Section 14(1)(a) of the IB Code.
Thus, the Hon’ble Supreme Court of India finally settled the issue and laid down that proceedings under the NI Act against a Corporate Debtor will be stopped upon admission and commencement of Corporate Insolvency Resolution Process (“CIRP”).
However, the Hon’ble Court also clarified that the Moratorium provision contained in Section 14 of the IB Code would apply only to the corporate debtor, and the directors and personnel in the management of the Corporate Debtor as mentioned in Section 141 will continue to be statutorily liable under Chapter XVII of the NI Act.

Disclaimer

Discalimer

By proceeding further, you the user acknowledge that you of your own accord wish to know more about UKCA and Partners LLP (“UKCA”) for your own information and use. You further acknowledge that there has been no solicitation, invitation or inducement of any sort whatsoever from UKCA or any of its Employees, Associates, Partners or Attorneys to create an Attorney-Client relationship through this website. You further acknowledge having read and understood the terms and conditions as stated below:

This website is a resource for informational purposes only and is intended, but not promised or guaranteed, to be correct, complete, and up-to-date. UKCA does not warrant that the information contained on this webpage is accurate or complete, and hereby disclaims any and all liability to any person for any loss or damage caused by errors or omissions, whether such errors or omissions result from negligence, accident or any other cause.

UKCA further assumes no liability for the interpretation and/ or use of the information contained on this webpage, nor does it offer a warranty of any kind, either expressed or implied. UKCA does not intend links from this site to other internet websites to be referrals to, endorsements of, or affiliations with the linked entities. UKCA is not responsible for, and makes no representations or warranties about the contents of Websites to which links may be provided from this Website.

This website is not intended to be a source of advertising or solicitation and the contents of the website should not be construed as legal advice. The reader should not consider this information to be an invitation for an attorney relationship and should not rely on information provided herein and should always seek the advice of competent counsel licensed to practice in the reader’s country/ state. Transmission, receipt or use of this website does not constitute or create a attorney-client relationship. No recipients of content from this website should act, or refrain from acting, based upon any or all of the contents of this page.

Furthermore, UKCA does not wish to represent anyone desiring representation based solely upon viewing this website or in a country/ state where this website fails to comply with all laws and ethical rules of that country/ state. Finally, the reader is warned that the use of Internet e-mail for confidential or sensitive information is susceptible to risks of lack of confidentiality associated with sending email over the Internet.