MORATORIUM IS APPLICABLE ONLY TO CORPORATE DEBTORS NOT TO INDIVIDUALS

Cheque dishonour

Section 138 of the Negotiable Instruments Act, 1881 (‘Act’ for short) provides for initiation of criminal proceedings against the issue of cheque for payment of a debt which is dishonoured for insufficiency of fund in the bank account.  The ingredients of the Section 138 are enumerated by the Supreme Court in JUGESH SEHGAL VERSUS SHAMSHER SINGH GOGI - 2009 (7) TMI 1143 - SUPREME COURT as below-

• a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account;
• the cheque should have been issued for the discharge, in whole or in part, of any debt or other liability;
• that cheque has been presented to the bank within a period of 6 months from the date on which it is drawn or within the period of its validity whichever is earlier;
• that cheque is returned by the bank unpaid, either because of the amount of money standing to the credit of the account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank;
• the payee or the holder in due course of the cheque makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 15 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;
• the drawer of such cheque fails to make payment of the said amount of money to the payee or the holder in due course of the cheque within 15 days of the receipt of the said notice.

The Supreme Court held that only when all the aforementioned ingredients are satisfied that the person who had drawn the cheque can be deemed to have committed an offence under Section 138 of the Act.

Moratorium

The provisions of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides for initiation of Corporate Insolvency Resolution Process (‘CIRP’ for short) by a financial creditor under Section 7 of the Code or by the operational creditor under section 9 of the Code or by the corporate applicant itself under section 10 of the Code.  The Adjudicating Authority, once approve the application, declared moratorium under Section 14 of the Code.  The moratorium prohibits any existing legal proceedings or future against the corporate debtor till the moratorium is lifted. 

Issue

The issue to be discussed in this article is as to whether the criminal proceedings under Section 138 of the Act may be initiated against the Director of the Corporate Debtor in the presence of moratorium with reference to decided case laws.

Case laws

In P. MOHANRAJ & ORS. VERSUS M/S. SHAH BROTHERS ISPAT PVT. LTD. - 2021 (3) TMI 94 - SUPREME COURT, the Supreme Court held that the immunity granted by the moratorium order issued under Section 14 of the Code can only be obtained by a Corporate Debtor and not by a natural person such as the present appellant, who was the Director of the Corporate Debtor.  The Supreme Court further held that the moratorium provision contained in Section 14 of the Code would apply only to the corporate debtor, the natural persons mentioned in Section 141 continuing to be statutorily liable under Chapter XVII of the Act.

In VISHNOO MITTAL VERSUS M/S SHAKTI TRADING COMPANY - 2025 (3) TMI 839 - SUPREME COURT, the appellant was the Director of Xalta Food and Beverages Private Limited (Corporate Debtor).  The Corporate debtor entered into a contract with Shakthi Trading Company (respondent) in which the respondent was to function as a super stockist of the corporate debtor.  The appellant, in the capacity of Director of the Corporate Debtor has drawn 11 cheques in favour of the respondent to the tune of Rs.11.17 lakhs.  These cheques were dishonoured on 07.07.2018.  The respondent, therefore, issued a legal notice on the appellant for non-payment and also for dishonour of cheques.   

The respondent filed a complaint against the appellant for the offences under Section 138 of the Act in September 2018.  In the meantime, CIRP was initiated against the corporate debtor on 25.07.2018 under Section 7 of the Code.   The Adjudicating Authority appointed Interim Resolution Professional (‘IRP’ for short).

On 07.09.2018 the Trial Court issued summons to the appellant to appear before the Court in the proceedings under Section 138 of the Act.  Against this the appellant filed the present writ petition before the High Court.  The appellant prayed the High Cour to quash the case initiated against him under Section 138 of the Act since there was a moratorium imposed by the Adjudicating Authority in CIRP case.  The High Court dismissed the writ petition on 21.12.2021.  The appellant filed the present appeal before the Supreme Court challenging the order of the High Court. 

The appellant submitted the following before the Supreme Court-

• The corporate debtor was facing CIRP process before Adjudicating Authority and a moratorium order was issued by the Adjudicating Authority on 25.07.2018 under Section 14 of the Code. 
• Due to moratorium the respondent could not initiate criminal proceedings against the appellant.
• The impugned cheques were dishonoured prior to 25.07.2018 on which CIRP was initiated against the corporate debtor.
• The notices for the offences under Section 138 of the Act was issued only on 06.08.2018. 
• Hence, the cause of action for the offence under Section 138 of the Act would commence after a period of 15 days calculated from 06.08.2018 and it would be 21.08.2018, but by this time moratorium had already been imposed on 25.07.2018.

The High Court considered the submissions of the appellant.  Further it analysed the provisions of Section 138 of the Act and Section 14, 17 (management of the affairs of corporate debtor by the IRP) of the Code.  The High Court observed that the bare reading of the above provisions show that the appellant did not have the capacity to fulfil the demand raised by the respondent by way of the notice issued under clause (c) of the proviso to Section 138 of the Act.  The Director of the Corporate Debtor was suspended as soon as the IRP is appointed by the Adjudicating Authority.  The powers vested with the board of directors were to be exercised by the IRP in accordance with the provisions of Code.  Since all the bank accounts are being operated by the IRP the appellant could not able to repay the amount to the respondent.  The High Court further observed that the respondent made a claim with the IRP on the dues. 

In view of the above the Supreme Court quashed the order of the High Court.