2021 (7) TMI 234 - HC - Indian Laws

Dishonor of Cheque - stay on Trial - the Company of which the petitioners are the Directors is under moratorium under Section 14 of the IBC - Whether the order of moratorium under Section 14 of the IBC interdicts a criminal proceeding under Section 138 of the NI Act or not? - HELD THAT - The moratorium under Section 14 is intended to keep the corporate debtor's assets together for successful insolvency resolution and hence, a criminal proceeding which may result in the assets of the corporate debtor being depleted as a result of having to pay compensation, which can amount to twice the amount of the cheque that has bounced, would directly impact the corporate insolvency resolution process in the same manner as the institution, continuation or execution of a decree in such suit in a civil Court for the amount of debt or other liability. Section 141 of the NI Act speaks of persons in charge of and responsible to the company for the conduct of the business of the company as well as the company . The words as well as the company appearing in Section 141 of NI Act make it absolutely clear that when the company can be prosecuted, then only the persons mentioned in the other categories could be held vicariously liable for the offence. The legal impediment contained in Section 14 of the IBC would make it impossible for such proceeding to continue against the corporate debtor. Thus, during the period of moratorium, such proceeding can continue against the persons mentioned in Section 141(1) and (2) of the NI Act. The complaint under Section 138 of the NI Act was filed in 2015 against the company and the petitioners herein, who have been arraigned as original accused Nos.2 3, for being the Directors of the company - The petitioners, being the Directors of the company, could be dealt with vicariously under the NI Act. This Court is of the opinion that the trial Court has not committed any error in rejecting the applications filed by the petitioners - Petition dismissed.

Summary

Issues:
1. Whether the order of moratorium under Section 14 of the IBC interdicts a criminal proceeding under Section 138 of the NI Act?

The judgment by the High Court of Gujarat involved two petitions challenging orders passed by the Court of learned Additional Chief Judicial Magistrate. The petitions raised the common issue of whether the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) prohibits a criminal proceeding under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). The petitioners, who were Directors of a company, sought a stay of the trial based on the company being under moratorium. The Court considered the provisions of Section 14 of the IBC, which prohibit the institution of suits or continuation of pending suits against the corporate debtor during the moratorium. The Court analyzed the impact of a criminal proceeding on the assets of the corporate debtor and its insolvency resolution process.

In the judgment, the Court highlighted that the moratorium under Section 14 of the IBC aims to preserve the corporate debtor's assets for successful insolvency resolution. It noted that a criminal proceeding resulting in the depletion of the corporate debtor's assets could hinder the resolution process, similar to a civil suit seeking recovery of debts. The Court emphasized that the legal impediment under the IBC makes it impossible to continue such proceedings against the corporate debtor during the moratorium period.

Regarding the liability of individuals under Section 141 of the NI Act, the Court clarified that when the company can be prosecuted, only individuals responsible for the company's conduct can be held vicariously liable. The judgment concluded that the trial Court did not err in rejecting the applications filed by the petitioners, who were Directors of the company facing charges under the NI Act. The Court dismissed both petitions, discharged the rule, and vacated the interim relief granted earlier. Consequently, the Criminal Misc. Applications for vacation of interim relief were also disposed of.

In summary, the High Court of Gujarat held that the moratorium under Section 14 of the IBC restricts criminal proceedings under Section 138 of the NI Act against the corporate debtor, while individuals responsible for the company's conduct may still be held liable. The judgment provided a detailed analysis of the legal provisions and their implications on insolvency resolution processes and individual liabilities in cases involving corporate debtors under moratorium.