Applicability of Moratorium under IBC on Cheque Dishonour Proceedings

A moratorium as defined in Section 14 of the Insolvency and Bankruptcy Code 2016 (IBC), is a time during which no new suits or continuations of existing ones against a corporate debtor can be filed. The suits which are covered under the radar of IBC includes judicial proceedings for recovery, sale or transfer of assets, enforcement of security interest, and/or termination of essential contracts. The moratorium period begins when a petition for proceedings under the IBC is accepted and continues throughout the Corporate Insolvency Resolution Procedure (CIRP).

As CIRP is a time-bound process with strict deadlines, any corporate debtor affected by the provisions under the code will be granted a moratorium during the CIRP term. The maximum period for the CIRP is one hundred and eighty days, which can be extended by ninety days and if the committee of creditors votes to go ahead with liquidation within that time frame, the moratorium will cease. Thus, the IBC provides for a very short period during which a corporate debtor can be revived, while also giving a calm period during the same time period by way of an absolute moratorium where the corporate debtor's burden is considered.

The position in regards to the applicability of moratorium to cheque dishonour cases was that it isn’t applicable and the rationale is particularly troublesome as the tribunal did not dive into the nature of cheque bounce cases, where there is a greater debate about whether the matter is criminal or civil in character. There were also a number of practical issues with not executing the moratorium on cheque dishonour instances, particularly in terms of the rights of the payee of the cheque with the assumption that these challenges may jeopardize the goal of the moratorium's calm period.

There have been very 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 controversial issue. There have been dissenting opinions on this issue but the Supreme Court has now resolved all concerns and ambiguities as the court observed that the declaration of moratorium covers for cheque dishonour against a corporate debtor.

In this article, an in-depth analysis of what the provision says on this aspect is discussed and the landmark judgments for a better understanding of the issue has been mentioned as well. To begin with, on having a quick glance as to why this issue of moratorium on cheque dishonour had arose if seen, as per the Negotiable Instruments (Amendment) Act, 2018, we see that even with several attempts made through amendments right from the enactment of the code from time to time to ensure the timely, cost-effective, and easy disposal of cases involving cheque dishonour, the anticipated impact on case pendency was not achieved and all of the good intentions in enacting the numerous amendments came to nothing due to the use of delaying tactics by unscrupulous drawers in court proceedings and such delays compromised the sanctity of cheque transactions.

That’s when it was felt that there was a need to address the issue of undue delay in the ultimate resolution of cheque dishonour cases, as well as to prevent frivolous and unnecessary litigation, in order to save time and money. Accordingly, the Negotiable Instruments (Amendment) Act, 2018, was enacted and a new Section 143A was introduced to provide that the Court trying an offence under section 138 may order the drawer of the cheque to pay interim compensation to the complainant, in a summary trial or a summons case, where he pleads not guilty to the accusations made in the complaint and in any other case, upon framing of charge. The interim compensation payable shall be a sum equal to or less than 20% of the amount of the cheque and in addition, a new Section 148 was added to allow that the Appellate Court may order the appellant to deposit a sum equal to at least 20% of the fine or compensation issued by the trial court in an appeal by the drawer against a conviction under Section 138.

Briefly speaking, this was brought in to primarily to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case of dishonour of cheques due to insufficiency of funds in the accounts and provide for summary trial of the cases under the Act with a view to speeding up disposal of cases and to address the issue of undue delay in final resolution of cheque dishonour cases and discourage frivolous litigation by providing interim compensation to the complainant.

Having understood the intent of the Negotiable Instruments Act, it is now important to look at the Insolvency and Bankruptcy Code, 2016 to understand the object that it seeks to achieve, which is intended to keep “the corporate debtor's assets together during the insolvency resolution process and facilitating orderly completion of the processes envisaged during the insolvency resolution process and ensuring that the company may continue as a going concern while the creditors take a view on resolution of default”. To achieve this goal, the code contains Section 14, which allows the adjudicating authority to impose a moratorium to ensure that the corporate debtor's assets are not depleted during the insolvency resolution process and that it is kept afloat as a going concern during the process and maximizing value for all stakeholders.

On seeing the background of the act and what it says, we will now examine the landmark judgement in the case of P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REED 2021 SC 03526, where the question arose whether the institution or continuation of a procedure under section 138 read with section 141 of the Act can be deemed to be covered by section 14 of the Code and to say in a line what the court decided was that the moratorium under Section 14 of the IBC prevents concurrent actions under sections 138 and 141 of the NI Act against the corporate debtor. The Supreme Court in its decision undertook a thorough analysis on the ambit and the rationale of a moratorium envisaged under section 14 of the IBC which will be explained in detail below.

The Supreme court assessed the issue at length and highlighted that section 14 of the Insolvency and Bankruptcy Code is very wide and includes within its ambit a moratorium on institution, continuation, passing of judgment, and execution of suits and proceedings against a corporate debtor. The Supreme Court went on to say that the phrase "the institution of suits or continuation of pending suits" cannot be read in two ways and must be interpreted as a single category. Using the basic principles of statutory interpretation, such as ejusdem generis or noscitur a sociis, the Supreme Court highlighted that no rule of construction can be employed to reduce the clear sense of the terms used in section 14(1)(a) of the Code.

The Supreme Court 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 a result, it is evident that the goal pursued by the moratorium clause is at odds with the quasi-criminal proceedings under section 138 of the NI Act, which would result in the corporate debtor's assets being depleted.

The next aspect looked into by the Supreme court is how section 32A and section 14 of the Insolvency and Bankruptcy Code relate and delve into the matter. Section 32A of the IBC, which was added as a result of an amendment, emphasizes that a corporate debtor's culpability for an offence committed before the start of the resolution procedure terminates in certain circumstances. The Supreme Court, again citing the Insolvency Law Committee's February 2020 report, found that Section 32A had no bearing on the moratorium clause, and that it only eliminated the corporate debtor's criminal liability so that the new management could start again. The Supreme Court went even further, examining the nature of proceedings under Chapter XVII of the NI Act and determined that Section 138 of the Negotiable Instrument Act is a hybrid provision for the enforcement of a civil remedy, with the real goal of compensating the victim rather than punishing the wrongdoer.

According to the Supreme Court, it held that section 138 proceeding is a "civil sheep" in "criminal wolf's clothes" since it is the victim's interest that is sought to be safeguarded, with the State's broader interest being subsumed in the victim alone petitioning the court in check dishonouring cases. The Supreme Court also specified that the moratorium clause will only apply to the corporate debtor, and that the statutory liability of the natural people stated in section 141 of the NI Act, i.e., the persons in control of the corporate debtor's business, will remain in effect. The implication of this decision is 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. But 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.

With this landmark case, we can come to a conclusion on the issue of the applicability of moratorium that the proceedings under Section 138 of the Act, would be covered and thus have to follow section 14 of the Code with rigour and that a moratorium would apply against the corporate debtor in respect of such proceedings as well, the Supreme Court then proceeded to evaluate whether the Section 138 proceedings against the Directors or the persons in management or control of the corporate debtor can be initiated or continued in view of the law laid down by the Hon’ble Supreme Court in the case of Aneeta Hada v. Godfather Travels and Tours Private Limited, REED 2008 SC 05001, wherein, it has been inter alia held that the for maintaining a proceeding under section 141 of the Act, it is imperative to arraign the company as an accused. Thus, reference, in particular was made from the case of Aneeta Hada wherein after analysis of various decisions from other cases too, the court concluded that Director or any other officer can be prosecuted without impleadment of the company provided there is some legal impediment in impleading the company in which case the doctrine of lex non cogit ad impossibilia would get attracted.

The court also placed reliance on another landmark decision by the Supreme Court in Swiss Ribbons Private Limited v. Union of India, REED 2019 SC 01504 ,wherein the court, while discussing the object of the moratorium under the IBC held that section 14 aims to preserve the assets of the corporate debtor during the resolution process and the provision protects the assets from further dilution. The Supreme Court held that there would essentially be no difference between a quasi-judicial proceeding of a cheque dishonour case under the NI Act and a civil suit as both will result in the assets of the corporate debtor being depleted since the corporate debtor would have to pay compensation which can extend to twice the amount of the bounced cheque. Thus, the object of the moratorium provision will not be attained, if proceedings under the section 138 of the NI Act is allowed to continue during the pendency of a insolvency resolution process.

The Hon'ble Supreme Court with reference to the earlier cases decided held that the legal barrier included in Section 14 of the Code would make it difficult for the proceedings under Section 138 of the Act to be continued or launched against the corporate debtor, based on the aforementioned observations in the case of Aneeta Hada and like said the proceedings against the corporate debtor's Directors or persons in management or control can be started or continued, but the Directors or persons in management or control of the corporate debtor are still liable under the law.

Therefore, the case of P. Mohanraj and Others v. Shah Brothers Ispat Private Limited being a recent case is the apt one to discuss as of this topic is concerned because the Supreme Court has analyzed the provision in detail and had come to a decision. As a result, the Hon'ble Supreme Court's observations can be summed as follows:

1. Proceedings under Sections 138 and 141 of the Act are considered "proceedings" under section 14(1)(a) of the Code.

2. An order of moratorium issued by the NCLT would apply equally to actions brought by the corporate debtor alone under Chapter XVII, section 138 of the Act. The case may be continued once the moratorium period (330 days) ends.

3. Regardless of whether the corporate debtor is subject to a moratorium, proceedings under section 138 of the Negotiable Instruments Act, 1881, against the corporate debtor's directors/persons in management can be continued or begun, and they will be statutorily liable.

This judgment has overruled all previous judgments on this issue such as the case of MBL Infrastructure Limited v. Manik Chand Somani, REED 2019 Cal 04006, before the Calcutta High Court wherein it was held that the scope of the moratorium in winding up proceedings initiated under the Companies Act, 2013 would not cover proceedings under Section 138 of the Negotiable Instruments Act. And secondly, even in the case of Tayal Cotton Private Limited v State of Maharashtra, [2018 SCC OnLine Bom 2069], which was before the Bombay High court wherein it was held that a criminal proceeding would be an exception to an application for moratorium under section 14 of the Insolvency and Bankruptcy Code.

To conclude, by now we can understand that the case decided by the apex court has settled the law on whether the institution or continuation of a proceeding under section 138/141 of the Negotiable Instruments act would be covered by the moratorium provision under the bankruptcy code. And, moreover, the moratorium provision was included in the IBC as well to ensure that the interests of creditors and other stakeholders in a bankruptcy proceeding are not jeopardized and thus the Supreme Court's decision no doubt settles a long-running debate over the extent of the moratorium provisions and aligns with the objective of the law.