Moratorium as envisaged in Section 14 of the IBC, 2016, refers to a period which prohibits initiation of new suits or continuation of existing ones against the corporate debtor. 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 period for moratorium begins with the admission of petition for proceedings under IBC, and continues to remain in force during Corporate insolvency resolution process.
Insolvency petition can be filed by the Operation creditors, financial creditors, or by the corporate debtor itself, against the corporate debtor as per the IBC. The amount of default which needs to be shown is minimum of one lakh rupees only.
Since CIRP is a time bound process, with strict timelines, thus any corporate debtor being hit by these sections would get benefit of moratorium period for the CIRP period. The maximum period for CIRP is of one eighty days, which may further be extended by ninety days. While if the committee of creditors within such time decides to choose to go for liquidation, they may do so and moratorium will cease. Thus IBC provides for very limited period during which revival of corporate debtor is possible, thus providing a calm period during the same time period by way of absolute moratorium where liability is that of corporate debtor.
Recently Bombay High Court, in Tayal Cotton v State of Maharashtra, clarified the scope of moratorium for the purposes of IBC. It clarified that the suits which are prohibited are to be suits of like nature only, and does not extend to include criminal suits. For the purposes of same it read down the section, and found absence of word “criminal” from being used by the legislation showing their intentions. Thus “suits” being followed by “proceedings”, “order”, and “in court of law”, coupled with absence of “criminal”, shows that only suits of like nature are being prohibited. Thus Barring the moratorium under the IBC, being applicable to criminal proceedings whole together.
The National Company Law Appellate Tribunal recently in Shah Brother Ispat Pvt Ltd. v. Mohanraj & Ors,[1] held that the proceedings under section 138 of the Negotiable Instruments Act, 1881 (NI Act) are not hit by the Moratorium provision. The reasoning behind the same was proceedings in the under S 138 of NI Act was penal in nature and court having matter sub-judice power to impose imprisonment or fine whatever it deems fit. Imprisonment or imposition of fine cannot be equated to recovery or money claim by the corporate debtor. And therefore cannot be classified as suit of like nature, for the purposes of application of moratorium under IBC.
Though while deciding that cheque bounce cases are not hit by the moratorium under IBC, as s 138 was wrong of criminal nature. It did fail to appreciate the scope and purpose S 138 of NI Act, and also various Supreme Court judgments in the same regards. There have been various judgments by Supreme Court, wherein they have held that the s 138 could be said to be civil wrong with criminal overtones to the same. And the object of such provision is just to make negotiable instruments, more acceptable in larger society. Thus honouring of the instrument by the person in default is the main intention behind the same. Thus could be broadly classified as suits of like nature.
Analysis
Supreme Court- Cheque bounce is civil wrong
Supreme Court of India on various occasions have commended on how the Negotiable Instrument Act cannot be compared to offences under Indian Penal Code, as gravity under S 138 is incomparable to those in IPC or any other criminal offences. This was said in Hon’ble Supreme Court in Kaushalya Devi Massand v. Roopkishore Khore,[2] “an offence under Section 138 NI act is almost in the nature of a civil wrong, which has been given criminal overtones.”
For elaborate discussion in regards with nature of S 138 NI Act, a recent case of Supreme Court M/s. Meters and Instruments Private Limited v. Kanchan Mehta[3]can be discussed. Wherein Supreme Court while delving into various evidentiary and procedural aspects of hte same section decided whether the S 138 is civil or criminal in nature. First consideration on evidentiary side was taken to be standard of proof. It was decided that the standard of proof is mere “preponderance of probabilities” as against “beyond all reasonable doubts”. Second consideration for evidentiary side was burden of proof, it was decided that the burden of proof lies on the accused as in contrast to criminal proceedings wherein prosecution needs to prove the same. Further court concluded that the primary objective of such provision is compensatory, yet it could not be compared to suit for recovery of money for the reason being, that punitive nature of the offence being associated. Though punitive element has been introduced only in order to further bolster and enforce the compensatory element of the same.
S. 138 NI Act vis a vis S 14 IBC
Objective of S. 138 of Negotiable Instruments Act
Inculcating faith and efficacy in the banking system and operation thereof can be said to be main aim behind S 138 of NI Act, thus facilitating trust and faith in business transactions. As the dishonour of the same causes business to suffer as payee suffers loss, injury and inconvenience, and credibility business transaction suffers a setback.[4] The same sort of reasoning can also be seen in Supreme Court’s Judgment in Lafarge Aggregates and Concrete India P. Ld. v. Sukarsh Azad and Ors[5], further adding that the it inculcates faith by preventing negotiable instruments being drawn by drawer without sufficient bank balance for the same, thus preventing dishonesty. Further Supreme Court in separate case observed that this particular provision has been added in order to encourage settlement of liability through cheques.[6]
Further in Lafrage Aggregates and Concrete P. Ltd. case Supreme Court also observed that the objective of act was to make accused honour the instrument, but making penal overtones to the same.
Objective of S. 14 under IBC
Moratorium under IBC has been introduced to facilitate the orderly and timely completion of insolvency process, while keeping the assets of Corporate Debtor together, which could go on to maximize the value of the entity, and keep it as “going concern”. As any public announcement of IRP would only go on to put additional burden on the corporate debtor. Thus not only the Moratorium imposes shield for corporate debtor during IRP for new recovery claims, but also from existing claims which may be due before various authorities. [7]
Passing Note
This note is to highlight the contrast between the provisions of SICA (Sick Industrial Companies, Act) i.e S 22(1), which also dealt with moratorium. In landmark ruling in BSI Ltd & Anr v Gift Holdings Pvt Ltd & Anr,[8]s while clarifying the scope of applicability of moratorium with SICA the Hon’ble Supreme Court held that the provisions of Moratorium did not S 138 of NI Act. But in IBC envisages revival and rehabilitation of the Corporate Debtor, is seen with change in management of operations and also is highly time bound process, in sharp contrast. Thus interpretation cannot be made in the same manner.
Reading objectives in Conjecture
Reading the objectives of these two provisions in consonance, it is evident that the moratorium requires that the period of calmness be introduced so as to not introduce any additional burden on the corporate debtor. While at the same time it does not apply to offences of criminal nature, but at the same time reading it with interpretation of Supreme Court to say that s 138 of NI Act is primarily civil wrong and objective of introducing criminality to the same is to promote business and banking efficacy. Thus there does not seem to be any reason as to why moratorium cannot bar the proceedings under s 138.
Problem with Moratorium not being applicable to S 138 NI Act
Further there are few problems which might immediate attention in order to address the simultaneous proceedings under these two different provisions. As the proceedings under S 138 allows the petitioner and defaulter (corporate debtor) to settle the dispute amongst them. Such settlement of dispute would raise an outstanding amount on behalf corporate debtor, thus creating additional burden on the shoulders of corporate debtor even during the moratorium period. As such additional charge is specifically civil in nature, and thus defeating the objective of imposing moratorium at first place. Further if the cases needs to be compounded it would require consent of IRP/ CoC, which might have its own additional difficulties. Further once the problem is compounded and liability settled the payee of cheque might also want to become party to CoC, which might be difficult due to various reasons. And even in absence of moratorium to proceedings payee if being Financial/ Operational creditor can also become party to the CoC, thus there exist no bar in regards with the same.
Further the reading of s 138 of NI Act purely as of being criminal in nature fails to appreciate, would allow the trial of the proceedings to continue and negate the effect of calm period. Though this point researcher never intends to convey that the proceeding under s 138 are of recovery in nature, but only wants to convey that the judgment given by NCLAT(in Shah Brothers Ispat Pvt. Ltd. v. P. Mohanraj & Ors) is mechanical in nature fails to elucidate that point clearly.
Problems with applicability of Moratorium to s 138
This section has been made just in order to access the future premises of treating the cheque bounce case as a civil wrong. Based on the assessment of cheque bounce case as civil wrong, based on above section.
Shift in liability
Since the corporate person cannot sign the cheque itself, it generally employees the staff/ director to do the same. In cheque bounce cases, wherein it is dealing with corporate person, the primary liability remains that of corporate personality, as the person designated to sign the cheques signs on corporate’s behalf. Though primary liability remains that of corporate person, but at the same time it also attracts the liability of the person signing the same. Thus person signing the same also has personal liability over the bounced cheque.
Thus, if moratorium is held applicable to corporate debtor in s 138 of NI Act, it will result in shifting of primary liability from corporate debtor to that of person signing the cheques. Since generally directors are the one’s signing the cheques, it will only result in directors taking up the responsibility for bouncing of cheque.
Further in light of State of Bank of India v V. Ramakrishnan & Anr [9] wherein Hon’ble Supreme Court of India decided that the provisions of the Moratorium are only applicable for Corporate Debtor, and does not extend to provide protection of the same to any other person, including personal guarantor. As the statute specifically does not make reference to any other person other than personal guarantor, thus as a logical extension protection of the same is only given to the corporate debtor alone. Thus it seems highly unlikely that the protection of the same is likely to extend to the director or someone else.
One of the objective contemplated for Moratorium period is bring about calm period in order for time bound revival of corporate debtor. Further imposing moratorium without extending the protection of the same to directors, would only divert the attention of the creditor for recovery from Corporate Debtor to Director. Thus the objective of the act might as well fail.
But even with all these caution there remains a slight chance that the person signing the document on behalf corporate debtor might as well be granted extension. As Supreme Court differentiated the identity of personal guarantor from that of corporate debtor and thus refused to extend moratorium to personal guarantor. But in s 138 NI Act, the person signs the same on behalf of corporate debtor, thus identifying himself/ herself as corporate debtor while signing the same. (only for restricted sense of applicability of moratorium)
Thus if moratorium is held applicable against corporate debtor, it would also be very necessary to check whether the same would be applicable against the person signing the same on behalf of corporate debtor, Specially keeping in mind the objective of the act. Thus the applicability of moratorium against directors in cases of S 138 NI Act would need to be checked in future.
Conclusion
Current position in regards with applicability of moratorium to cheque bounce cases as decided by NCLAT is that the same is not applicable. This reasoning is particularly problematic in the scenario in the NCLAT did not delve into nature of cheque bounce cases, wherein a larger debate exists in regards with the nature of the cheque bounce case being criminal or civil in nature.
Further there also exist various practical problems of not implementing the moratorium on cheque bounce cases, in regards with rights of payee of cheque. And also these difficulties might result in defeating the purpose of calm period under moratorium.
The objective of both the provisions do not conflict and cheque bounce can be also be treated as civil wrong, it is possible that in future moratorium might apply to the Cheque bounce cases as well. There might be additional difficulty which might arise in those scenario, contemplating the same another section has been dedicated to this paper.
Researcher contemplates that the director/ signor of the cheque might be the person against whom the proceedings could be continued in absence of ability to continue the same against the company/ corporate debtor. If moratorium is extended to corporate debtor, there are various strong reason to extend the same to Director/ person signing cheque on its behalf. Going through judicial precedent it might be difficult to get shield of moratorium available to anyone except the corporate debtor itself. But in the scenario of Cheque bounce cases a special provision can be made in regards due to special circumstances of the same.
[1] Shah Brother Isapat Pvt Ltd. v. P Mohanraj & Ors, Company Appeal (AT)(Insolvency) no. 306/2018.
[2] Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593
[3] M/s. Meters and Instruments Private Limited v. Kanchan Mehta, (2018) 1 SCC 560.
[4] Goa Plast (P) Ltd. v. Chico Ursula D’Souza, (2004) 2 SCC 235.
[5] Lafarge Aggregates and Concrete India P. Ld. v. Sukarsh Azad and Ors., (2014) 13 SCC 779
[6] M/s. Meters and Instruments Private Limited v. Kanchan Mehta, (2018) 1 SCC 560.
[7] Bankruptcy Law Reforms Committee Volume I: Rationale and Design (November, 2015) Para 5.3.1
[8] BSI Ltd & Anr v Gift Holdings Pvt Ltd & Anr (2000), Case no.: Appeal (crl.) 847 of 1999 (Supreme Court)
[9] State of Bank of India v V. Ramakrishnan & Anr (Civil Appeal No. 3595 of 2018) Supreme Court.