2023 (5) TMI 716 - HC - Indian Laws

Court rules personal insolvency no shield in Negotiable Instruments Act case

The court dismissed the petition, ruling that the provisions of Section 96 of the Insolvency and Bankruptcy Code do not shield the petitioner from ... Dishonour of Cheque - Liability of Director of company - Company is under CIRP proceedings under IBC and Director is personal guarantor to the loan - debt is of petitioner or not - present Petitioner in the subject proceedings (personal guarantor to the loan) is a natural person u/s 141 of NI Act or not - whether the section 96 of the IBC is applicable to the petitioner? - HELD THAT:- In the present case, the petitioner’s application for insolvency before NCLT related to the personal liability of the Petitioner in his capacity as a surety in contracts of guarantee to Respondent no. 2. However, the Petitioner in the proceedings pending before the Ld. MM, Patiala House Court was facing trial as a ‘Natural Person’ under Section 141 of the NI Act i.e., for liability of the Company of which the Petitioner was the Managing Director/ person in charge - the case would have been different if the personal liability of the petitioner was in question. In that case, the moratorium will apply to the petitioner. But in the present case, the proceedings pending before the MM were for bouncing of cheques issued by company where petitioner was the Managing Director. The debt of the Respondent No. 2 company is not the personal debt of the petitioner. The petitioner is arrayed as an accused in his capacity as a Managing Director. The case of P. Mohanraj vs M/S. Shah Brothers Ispat Pvt. Ltd. [2021 (3) TMI 94 - SUPREME COURT] has held that natural persons, as defined under Section 141 of the Negotiable Instruments Act (NI Act), who are also accused as being in charge of and responsible for the affairs of the corporate debtor, can continue to be tried under Section 138/141 of the Act despite the commencement of insolvency proceedings against the corporate debtor and the imposition of a moratorium under Section 14. The provisions of the NI Act, 1881 and the Insolvency and Bankruptcy Code (IBC) do not equate the independent statutory liability of a director/person in charge of and responsible for the business of a company, i.e., the liability of a 'Natural Person' under Section 141 of the 1881 Act, with the coextensive liability of the company under insolvency. The judgment of P. Mohanraj is clear in this regard. Admittedly, in the present case, the petitioner had signed the cheque as the Managing Director of Respondent No. 2. The judgment of P. Mohanraj categorically states that the moratorium provisions u/s 14 IBC would apply only to the corporate debtor and the natural persons would continue to be liable. The petitioner is the natural person and merely because he has filed personal insolvency proceedings, the same would not bring him under the ambit of Section 96 IBC vis-a-vis the pending complaint under section 138 NI Act. The debt in the present case is not of the petitioner but that of Respondent No. 2. Section 141 of the NI Act fastens liability on every officer of the company who was in management and control of the affairs of the company - the provisions of Section 96 of the IBC would not be applicable in the facts of the present case as the petitioner is arrayed as an accused in the complaint u/s 138 NI Act in his capacity of the Managing Director of Respondent No. 2. There are no illegality in the impugned order - petition dismissed. Issues Involved:1. Application of Section 96 of the Insolvency and Bankruptcy Code (IBC) to the petitioner.2. The liability of the petitioner under Section 138 of the Negotiable Instruments Act (NI Act) despite insolvency proceedings.Summary:Application of Section 96 of the Insolvency and Bankruptcy Code (IBC) to the petitioner:The petitioner sought to quash the impugned order dated 03.12.2021 by the Ld. Metropolitan Magistrate, which refused to stay the criminal complaint under Section 138 of the NI Act. The petitioner argued that upon filing an application under Section 94 of the IBC, an interim moratorium under Section 96 of the IBC came into effect, staying all legal proceedings concerning his debts. The petitioner contended that the cheque issued by Respondent No. 2, signed by him, constituted his debt under Section 141 of the NI Act, thus falling within the prohibition of Section 96 of the IBC.The liability of the petitioner under Section 138 of the Negotiable Instruments Act (NI Act) despite insolvency proceedings:The court analyzed whether Section 96 of the IBC applies to the petitioner. The petitioner was facing trial as a 'Natural Person' under Section 141 of the NI Act for the company's liability. The court noted that the moratorium under Section 14 IBC applies only to the corporate debtor, not to natural persons responsible for the company's affairs. The court referenced the Supreme Court's judgment in P. Mohanraj vs M/S. Shah Brothers Ispat Pvt. Ltd., which held that natural persons could continue to be tried under Sections 138/141 of the NI Act despite the corporate debtor's insolvency proceedings.The court concluded that the petitioner's personal insolvency proceedings do not stay the complaint under Section 138 NI Act against him. The debt in question was of Respondent No. 2, and the petitioner was liable as the Managing Director. The court emphasized that Section 138 NI Act prescribes punishment and compensation for cheque dishonor, not recovery proceedings. Therefore, the personal penal liability of the petitioner under Section 141 NI Act remains unaffected by the interim moratorium under Section 96 IBC.Conclusion:The court found no illegality in the impugned order dated 03.12.2021 and dismissed the petition, stating that the provisions of Section 96 of the IBC do not apply to the petitioner's liability under Section 138 NI Act. The petitioner's attempt to escape liability through personal insolvency proceedings was rejected.