2022 (6) TMI 783 - HC - Insolvency and Bankruptcy

Dishonor of Cheque - Validity of proceeding u/s 138 of NI act when CIRP proceedings has started and moratorium has been declared - applicability of moratorium to Directors or Corporate Debtors - HELD THAT - It is relevant to note that Section 17 (b) of the Insolvency and Bankruptcy Code, 2016, makes it very clear that once interim resolution professional is appointed, the powers of the Board of Directors or the partners of the corporate debtor shall stand suspended and be exercised by the interim resolution professional - Similarly, Section 33 particularly, sub-clause (7) of Section 33 of the Code makes it very clear that when the order of liquidation is passed, it is deemed to be notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator. The above provisions makes it clear that the powers of the Board of Directors shall be suspended on the appointment of the Interim Resolution Professionals by the liquidator. But the question herein is whether the prosecution initiated against the company and directors maintainable in view of the above moratorium. The Apex Court in a judgment reported in P. MOHANRAJ ORS. VERSUS M/S. SHAH BROTHERS ISPAT PVT. LTD. 2021 (3) TMI 94 - SUPREME COURT after dealing with various judgements of the Apex Court, it was held that for the period of moratorium, since no Section 138/141 proceeding can continue or be initiated against the corporate debtor because of a statutory bar, such proceedings can be initiated or continued against the persons mentioned in Section 141(1) and (2) of the Negotiable Instrument Act. This being the case, it is clear that the moratorium provision contained in Section 14 of the IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141 continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act. In such a view of the matter, the petitioners being the directors of the company, have to be prosecuted as per the above judgment. In such a view of the matter, when the petitioners themselves have admitted before this Court that the cheques were issued in the year 2016, merely because the different date is mentioned in the complaint, it is the matter of evidence. In such a view of the prosecution initiated by the respondent cannot be quashed - petition dismissed.

Summary

Issues:
Quashing of proceedings under Section 138 of the Negotiable Instruments Act due to Corporate Insolvency Resolution Process (CIRP) and moratorium.

Analysis:
1. Allegations and Contentions:
- The petitioners, as directors of a company, borrowed a sum in 2016 and issued cheques in 2018, leading to dishonor and subsequent complaint under Section 138.
- Petitioners argue that the company is under CIRP, with a moratorium declared in 2017, suspending powers of directors.
- Respondent contends that the cheques were issued in 2016, prior to CIRP, and moratorium applies only to the corporate debtor.

2. Legal Provisions and Precedents:
- Section 17 and Section 33 of the Insolvency and Bankruptcy Code, 2016 suspend powers of directors and provide for discharge upon liquidation.
- Citing the Supreme Court judgments in P. Mohanraj and Others vs. Shah Brothers Ispat Pvt. Ltd. and Bir Singh vs. Mukesh Kumar, liability under Section 138 persists for directors even during CIRP.

3. Court's Decision:
- The Court notes the admission by petitioners that cheques were issued in 2016, despite the complaint mentioning 2018.
- Relying on legal provisions and precedents, the Court dismisses the petition to quash proceedings, emphasizing the directors' continued liability under Section 138.

4. Conclusion:
- The Criminal Original Petition seeking to quash proceedings under Section 138 of the Negotiable Instruments Act due to CIRP and moratorium is dismissed, upholding the directors' liability for dishonored cheques issued before the initiation of CIRP.