IBC | Case Law Alert | Criminal proceedings are not covered under moratorium

The National Company Law Appellate Tribunal (“NCLAT”) in the matter of Shah Brothers Ispat Private Limited vs. P. Mohanraj & Ors., vide order dated July 31, 2018 (available here), has held that no criminal proceedings are covered under Section 14 of the Insolvency & Bankruptcy Code, 2016 (“Code”), which section provides for moratorium once an application against the corporate debtor is admitted by the National Company Law Tribunal (“NCLT”). The NCLAT specifically in the instant case, allowed the court of competent jurisdiction to proceed with the proceeding under Section 138 of the Negotiable Instrument Act, 1881 (“NI Act”) even during the period of moratorium.

Factual Matrix:

1. Shah Brothers Ispat Private Limited (“Appellant”) had initiated corporate insolvency resolution process (“CIRP”) against Diamond Engineering Chennai Private Limited (“Corporate Debtor”) before the NCLT, Chennai Bench.
2. The Appellant had, before and after the initiation of CIRP, filed complaints against the Corporate Debtor and its directors, under Section 138 of the NI Act after the date of commencement of moratorium i.e. June 6, 2017.
3. The directors of the Corporate Debtor moved before the NCLT, Chennai Bench against the aforesaid complaints on the ground that during the period of moratorium, complaints under Section 138 of the NI Act is not maintainable as they are hit by section 14 of the Code.
4. The NCLT, Chennai Bench, allowed the directors’ petition vide its order dated May 24, 2018 and stayed the proceedings before the Metropolitan Magistrate, and held that the Appellant had violated the order of moratorium issued by the NCLT, Chennai Bench, which is deliberate attempt on the part of the Appellant and sheer misuse of the process of law. It also directed the Appellant to seek withdrawal of the complaints.
5. The Appellant challenged the aforementioned NCLT order before the NCLAT.

Observations of NCLAT:

The NCLAT framed the following question for consideration: “Whether the order of moratorium will cover a criminal proceeding under Section 138 of NI Act, which provides punishment of imprisonment for a term which may extend to three years or with fine which may extend to twice the amount of cheque or with both?”

The NCLAT while allowing the appeal set aside the order of the NCLT, Chennai Bench and observed that:

1. The Company cannot be imprisoned, therefore punishment under Section 138 of the NI Act cannot be imposed against the Corporate Debtor. However, fine can be imposed by a court of competent jurisdiction on the Corporate Debtor, if found guilty. The Directors of the Corporate Debtor being parties so can be imprisoned or fine may be imposed on them.
2. Section 138 of NI Act is a penal provision, which empowers the court of competent jurisdiction to pass order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim.
3. Imposition of fine cannot held to be a money claim or recovery against the corporate debtor nor order of imprisonment, if passed by the court of competent jurisdiction on the directors, they cannot come within the purview of Section 14 of the Code.
4. No criminal proceeding is covered under Section 14 of the Code.
5. The court of competent jurisdiction may proceed with the proceeding under Section 138 of NI Act, even during the period of moratorium.

ELP Comment:

The aforesaid ruling of the NCLAT will pave the way for the aggrieved parties to continue with the criminal proceedings initiated/pending before the court of competent jurisdictions against the corporate debtors undergoing CIRP. Further, the ruling clears the air that no criminal proceedings are covered under Section 14 of the Code and it will prohibit those suits or proceedings which involve money claims.

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