Section 14 of IBC covers proceeding under Section138/141 against a corporate debtor but not against natural persons

The Apex Court vide its order dated 01.03.2021 in P Mohanraj v. M/S Shah Brothers Ispat Pvt Ltd ruled that the institution or continuation of a proceeding under Section 138/141 of the Negotiable Instruments Act (NI Act) will be covered by the bar under Section 14 of the Insolvency and Bankruptcy Code (IBC). It means when an order of moratorium is passed under the IBC, parallel proceedings under Section 138 of the NI Act against the Corporate Debtor cannot be allowed to continue as the same will be covered by the bar under Section 14 of the IBC.

Further, the Apex Court also mentioned that such a bar will apply only to the Corporate Debtor and not the natural persons responsible for management of the company.

This judgment was delivered by a Bench of Justices Rohinton Nariman, Navin Sinha and KM Joseph in an appeal against a July 2018 judgment of the National Company Law Appellate Tribunal (NCLAT). The important question that arises in this appeal is whether the institution or continuation of a proceeding under Section 138/141 of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of the IBC.

Section 14(1)(a) of IBC provides that when an order declaring moratorium is passed, the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel will be prohibited.

In the aforesaid matter, the Respondent relied strongly upon judgments under Section 22(1) of the SICA and under Section 446(2) of the Companies Act, 1956. He relied upon BSI Ltd. v. Gift Holdings (P) Ltd., (2000) 2 SCC 737, which judgment held that the expression “suit” in Section 22(1) of the SICA would not include a Section 138 proceeding. He also relied upon other judgments also. However, the Apex Court held in Para No. 73 of its order that “as the language, object, and context of Section 22(1) of the SICA and Section 446(2) of the Companies Act are far removed from Section 14(1) of the IBC, none of the aforesaid judgments have any application to Section 14 of the IBC and are therefore distinguishable.”

There was another question before the Apex Court that whether natural persons are covered by Section 14 of IBC. The Apex Court cleared 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.

As far as the Directors/persons in management or control of the corporate debtor are concerned, a Section 138/141 proceeding against them cannot be initiated or continued without the corporate debtor (see Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661). This is because Section 141 of the Negotiable Instruments 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.

Since the corporate debtor would be covered by the moratorium provision contained in Section 14 of the IBC, by which continuation of Section 138/141 proceedings against the corporate debtor and initiation of Section 138/141 proceedings against the said debtor during the corporate insolvency resolution process are interdicted, what is stated in paragraphs 51 and 59 in Aneeta Hada (supra) would then become applicable. The legal impediment contained in Section 14 of the IBC would make it impossible for such proceeding to continue or be instituted against the corporate debtor. Thus, 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 Instruments 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.

Conclusion: The Apex Court held in Para No. 78 that “….we hold that a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC”.  However, 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.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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