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.

 

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