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2025 (4) TMI 775 - SC - IBCSeeking stay of proceedings initiated against the Appellants/Petitioners Under Section 138 read with Section 141 of the N.I. Act 1881 in view of the interim moratorium Under Section 96 IBC having come into effect upon the Appellants/Petitioners filing applications Under Section 94 IBC - HELD THAT - Vide order in Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd. this Court granted an order of stay of further proceedings in COMA No. 1059 of 2019. Following the same an order of interim stay of further proceedings pending before the trial Court was subsequently granted in all other connected matters as well. The term Corporate Person includes a company as defined Under Section 2(20) of the Companies Act 2013 and a Limited Liability Partnership. However there is a subtle difference in the protection available to the Directors and the Partners. In case of a partnership firm the interim moratorium protects not only the firm but also the partners. But in case of a company such protection is available only to the company and not to its directors. That apart the object of interim moratorium can be no different from that of the moratorium specified Under Section 14. It is also clear from Section 14 that the protection from legal action during the period of moratorium is not available to the surety or in other words to a personal guarantor. The use of the words all the debts and in respect of any debt in Sub-section (1) of Section 96 is not without a purpose as the moratorium is intended to offer protection only against civil claim to recover the debt. Hence such period of moratorium prescribed Under Section 14 or 96 is restricted in its applicability only to protection against civil claims which are directed towards recovery and not from criminal action. Admittedly the Appellants/Petitioners are facing trial for the offence Under Section 138/141 of the N.I. Act 1881 at the instance of the Respondents/complainants. While so they initiated the personal insolvency proceedings under the IBC and sought exemption from the Section 138 proceedings before the trial Court referring to interim moratorium provided Under Section 96 IBC. It is to be noted that upon the application being admitted the moratorium provisions under the IBC offer protection only to the corporate debtor i.e. the company and do not extend protection against civil liability to personal guarantors by specific exclusion or to any individual who is prosecuted for committing a criminal act. The purpose of interim moratorium contemplated Under Section 96 is to be derived from the object of the act which is not to stall the proceedings unrelated to the recovery of the debt. The protection is not available against penal actions the object of which is to not recover any debt. This moratorium serves as a critical mechanism allowing the debtor to reorganize their financial affairs without the immediate threat of creditor actions. The clear and unequivocal language of this provision reflects the legislative intent to provide a protective shield for debtors during the insolvency process - The cause of action for prosecution Under Section 138 of NI Act commences on the dishonor of the cheque and the failure to pay the amount unpaid because of dishonour within 15 days from the date of receipt of notice demanding payment. It is pertinent to mention here that the prosecution can be only with respect to the amount unpaid by dishonour of the cheque irrespective of the actual debt. The distinction between the right to sue based on a dishonoured cheque by initiating a civil suit and launching a prosecution Under Section 138 of the Negotiable Instruments Act is significant. In case of former the interim moratorium can operate but not in case of later. Conclusion - The object of moratorium or for that purpose the provision enabling the debtor to approach the Tribunal Under Section 94 is not to stall the criminal prosecution but to only postpone any civil actions to recover any debt. The deterrent effect of Section 138 is critical to maintain the trust in the use of negotiable instruments like cheques in business dealings. Criminal liability for dishonoring cheques ensures that individuals who engage in commercial transactions are held accountable for their actions however subject to satisfaction of other conditions in the N.I. Act 1881. Therefore allowing the respective Appellants/Petitioners to evade prosecution Under Section 138 by invoking the moratorium would undermine the very purpose of the N.I. Act 1881 which is to preserve the integrity and credibility of commercial transactions and the personal responsibility persists regardless of the insolvency proceedings and its outcome. The prayer of the Appellants/Petitioners to stay the prosecution Under Section 138 of the N.I. Act 1881 relying on the interim moratorium Under Section 96 IBC cannot be entertained - Petition dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal question considered was whether the proceedings initiated against the Appellants/Petitioners under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (N.I. Act) should be stayed in view of the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC) that came into effect upon the Appellants/Petitioners filing applications under Section 94 IBC. 2. ISSUE-WISE DETAILED ANALYSIS The primary issue revolves around the applicability of the interim moratorium under Section 96 IBC to proceedings under Section 138/141 of the N.I. Act. Relevant Legal Framework and Precedents: The IBC provides for a moratorium under Section 14 for corporate insolvency resolution processes and under Sections 96 and 101 for personal insolvency resolution processes. The N.I. Act, 1881, particularly Section 138, criminalizes the dishonor of cheques due to insufficiency of funds or other similar reasons. Key precedents considered include P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., which held that the moratorium under Section 14 IBC applies to the corporate debtor and not to individuals involved. Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. reiterated that the IBC's moratorium does not bar criminal proceedings under Section 138 of the N.I. Act. Court's Interpretation and Reasoning: The Court interpreted that the interim moratorium under Section 96 IBC is intended to protect the debtor from civil actions related to debt recovery, not from criminal prosecutions under the N.I. Act. The Court emphasized that the moratorium aims to provide a breathing space for debtors to reorganize their financial affairs without the immediate threat of creditor actions but does not extend to shield individuals from personal criminal liabilities. Key Evidence and Findings: The Court found that the language of Section 96 IBC, which refers to "any legal action or proceeding in respect of any debt," is intended to stay civil actions related to debt recovery, not criminal proceedings. The Court also noted that the legislative intent of the IBC is to resolve financial distress, not to shield individuals from criminal liability for dishonored cheques. Application of Law to Facts: The Court applied the principles from relevant precedents to conclude that the moratorium under Section 96 IBC does not extend to criminal proceedings under Section 138 of the N.I. Act. The Court held that the statutory liability under Section 138 is personal and continues to bind individuals, irrespective of any moratorium applicable to the corporate debtor. Treatment of Competing Arguments: The Appellants argued that the moratorium under Section 96 IBC should stay the proceedings under the N.I. Act. The Court rejected this argument, stating that the moratorium is intended to protect against civil claims, not criminal proceedings. The Court distinguished between the protection afforded to corporate debtors and the personal liability of individuals under the N.I. Act. Conclusions: The Court concluded that the interim moratorium under Section 96 IBC does not stay criminal proceedings under Section 138 of the N.I. Act. The Court affirmed the decisions of the High Courts, which had refused to stay the Section 138 proceedings. 3. SIGNIFICANT HOLDINGS The Court held that the interim moratorium under Section 96 IBC is not intended to shield individuals from criminal liability under Section 138 of the N.I. Act. The Court emphasized that the IBC's objective is to address corporate financial distress and should not be misconstrued as a means to avoid personal criminal accountability. Significant quotes include: "The purpose of interim moratorium contemplated under Section 96 is to be derived from the object of the act, which is not to stall the proceedings unrelated to the recovery of the debt." The Court established that the deterrent effect of Section 138 is critical to maintaining trust in the use of negotiable instruments like cheques in business dealings, and allowing individuals to evade prosecution would undermine the purpose of the N.I. Act. The final determination was that the appeals and writ petition were dismissed, and the orders of the High Courts affirming the trial court's decisions were upheld.
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