Former Directors Challenge Liability under Negotiable Instruments Act Amidst Insolvency Proceedings

The former Directors of a company contested being proceeded against under the Negotiable Instruments Act despite insolvency proceedings being initiated under the Insolvency and Bankruptcy Code. Citing a precedent, it was argued that the statutory bar against a Corporate Debtor extends to individuals. The High Court was instructed to issue notice for the case and halt further action based on the impugned judgment until further orders.

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Issues involved: Erroneous proceedings u/s 138 of Negotiable Instruments Act against former Directors despite initiation of proceedings u/s 7 of Insolvency and Bankruptcy Code, 2016.

The petitioners, former Directors of respondent No. 3 - C & C Towers Ltd., are contesting being erroneously proceeded against u/s 138 of the Negotiable Instruments Act, 1881, despite proceedings u/s 7 of the Insolvency and Bankruptcy Code, 2016 being initiated and an Interim Resolution Professional appointed for the Company on 10.10.2019. The senior counsel argues that the dishonoring of the company's cheque after the appointment of the IRP and the commencement of moratorium under the IBC should not form the basis for proceedings against the former Directors post the moratorium process initiation.

Referring to the precedent in P. Mohanraj & Ors. v. Shah Brothers Ispat Private Limited, (2021) 6 SCC 258, it is contended that the statutory bar against a Corporate Debtor extends to individuals as well. The counsel asserts that since proceedings u/s 95 of the IBC were initiated against the petitioners on 28.07.2021, the interim moratorium u/s 96 of the IBC becomes effective on the date of the application. Therefore, the proceedings against the petitioners were deemed not maintainable and should have been halted by the High Court in the impugned judgment.

Note: Issue notice for the case and instructed that no further action be taken pursuant to the impugned judgment until further orders.

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