Insolvency Bankruptcy Code provides for the moratorium period which is defined under Section 14 of the same. The Moratorium period’s definition is exhaustive one certainly means a moratorium granted by the tribunal is the authorization to either postpone the execution of obligations or repayment of debts or to temporarily halt specific actions or laws against the corporate debtor. The object of the moratorium period is to revive the corporate debtors from all the debts incurred, for a limitless duration till the desired outcome has been achieved.
The suits which are covered under the IBC during the moratorium period include any sale or transfer of assets, recovery of debts, termination of essential contracts, interest on securities, etc. The moratorium period is granted when the petition for proceedings has been accepted by the IBC and the corporate insolvency resolution process (CIRP) has been initiated.
The corporate insolvency resolution process is a recovery mechanism for corporate debtors. In short, to resolve the corporate insolvency of a debtor, financial creditor, or operational creditor. Any corporate debtor who has been impacted by the insolvency rules given under the IBC will be given a moratorium during the CIRP tenure, as it is a time-bound process with stringent deadlines.
The committee of creditors may decide to go ahead with the process of liquidation within the moratorium period and as soon as they decide the moratorium period will be ceased. The maximum duration of the Corporate Insolvency Resolution Process (CIRP) is one hundred and eighty days which can be extended to an additional ninety days.
However, there have been many cases on whether the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) imposes a moratorium on proceedings against the corporate debtor including those brought under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), which deals with Cheque dishonour.
Therefore, the subject of whether the commencement or continuation of a proceeding under section 138/141 of the Negotiable Instruments Act is covered by the moratorium provision of the Insolvency and Bankruptcy Code, particularly Section 14, has been a controversial issue. Although there have been various differing views on this matter, the Supreme Court has recently cleared up lingering questions and concerns by declaring that the moratorium includes Cheque dishonour against a corporate debtor.
Analysing in-depth the landmark judgment of P. Mohanraj. & Others v. Shah Brothers Ispat Private Ltd., (2021) 6 SCC.
According to the Supreme Court, it held that the Section 138 proceeding is a “civil sheep” in “criminal wolf’s clothes” since it is the victim who can alone file a petition in the court to check dishonouring proceedings, seeking to protect the one’s interest while subsuming the state’s larger interest.
The Supreme Court further clarified that the statutory liability of the natural people mentioned in Section 141 of the NI Act—that is, the individuals in charge of the corporate debtor’s business—would endure and that the moratorium clause would only apply to the corporate debtor. This decision implies that any criminal actions brought against the corporation for cheque dishonouring under Section 138 of the NI Act will be deferred during the period of moratorium relevant to insolvency proceedings. It is important to emphasize, however, that the actions against the company’s directors and other officials who have been charged with cheque dishonouring the proceedings would continue.
The Supreme Court also cited the Insolvency Law Committee’s February 2020 report, which states that “the object of a moratorium provision such as Section 14 is to see that there is no depletion of a corporate debtor’s assets during the insolvency resolution process so that it can be kept running as a going concern during this time, thus maximizing value for all stakeholders.” As an outcome, the objective of the moratorium provision seems to be at odds with the quasi-criminal proceedings under Section 138 of the NI Act, which would lead to the depletion of the corporate debtor’s assets.
The Supreme Court provided a thorough analysis of the matter and emphasized the scope of Section 14 of the Insolvency and Bankruptcy Code is, incorporating a ban on the filing, continuation, awarding of a judgment, and execution of cases and other processes against a corporate debtor. However, due to this important case, we can now conclude that a moratorium would also apply to the proceedings under Section 138 of the Negotiable Instruments Act against the corporate debtor and that those proceedings would be subject to strict adherence to Section 14 of the Code.
The Supreme Court ruled in a significant decision that if the NCLT has already issued an order of moratorium under the Insolvency and Bankruptcy Code, criminal proceedings against a corporate debtor under the cheque bounce statute cannot be started.
The Supreme Court also cited another significant ruling in Swiss Ribbons Private Limited v. Union of India, wherein the court discussed the purpose of the moratorium under the IBC and stated that section 14 safeguards the corporate debtor’s assets from further dilution and strives to preserve them during the resolution process.
The Supreme Court decided that, since the corporate debtor would have to pay compensation that might exceed twice the amount of the bounced check, there would essentially be no difference between a quasi-judicial proceeding of a cheque dishonour case under the NI Act and a civil suit. Both would result in the corporate debtor’s assets being depleted. Consequently, allowing actions under Section 138 of the NI Act to continue while an insolvency resolution procedure is ongoing would defeat the purpose of the moratorium clause.
In conclusion, the Supreme Court’s landmark judgment in P. Mohanraj & Others v. Shah Brothers Ispat Private Ltd. (2021) has definitively settled the controversial issue regarding the applicability of the moratorium period provision of the Insolvency and Bankruptcy Code (IBC) to the proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act (NI Act). The Court clarified that the moratorium extends to cheque dishonour actions against the corporate debtor, categorizing Section 138 proceedings as “civil sheep” and emphasizing on the protection of the victim’s interest.
This decision aligns with the broader purpose of the IBC’s moratorium, which is to shield the corporate debtor’s assets during the insolvency resolution process. The judgment provides crucial clarity on the interplay between insolvency proceedings and cheque dishonour cases, ensuring a streamlined and comprehensive approach to corporate debt resolution under the IBC.
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This article was written and submitted by Khushi Bhavsar during her course of internship at B&B Associates LLP. Khushi is a 2nd year B.A.LL.B student at National Law University, Jabalpur.