2022 (12) TMI 1565 - HC - Indian Laws

Directors remain liable for cheque dishonour despite corporate insolvency moratorium under Section 14 IBC

JACOB SAMSON, JOHN JACOB, SAMUEL JACOB Versus STATE OF KERALA, SAJEEV C.S.

Kerala HC dismissed petition under Section 482 CrPC challenging proceedings for cheque dishonour under Section 138 NI Act. Corporate debtor and individual ... Petition filed under Section 482 of the CrPC - dishonour of the cheques due to “funds insufficient” -offence under Section 138 of the Negotiable Instruments Act - National Company Law Tribunal issued a moratorium prohibiting, inter alia, the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority - Whether moratorium would apply only to a corporate debtor - HELD THAT:- The law is well declared by the Apex Court in P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd.'s [2021 (3) TMI 94 - SUPREME COURT], that moratorium provision contained in Sec.14 of IBC would apply only to a corporate debtor, the natural persons mentioned in Section 141, continuing to be statutorily liable under Chapter XVII of the N.I Act. In view of the above legal position settled by the 3 Bench of the Apex Court, the argument advanced by the learned counsel for the petitioners cannot be accepted. Then it has to be held that the learned Magistrate rightly dismissed the application in so far as accused 2 to 4/petitioners herein, while staying the further proceedings against the corporate debtor. Therefore, the order impugned does not suffer from any legal infirmity to revisit the same by this Court. Accordingly, this petition is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court are:Whether the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) on a corporate debtor bars the continuation of criminal proceedings under Section 138 of the Negotiable Instruments Act (N.I. Act) against the corporate debtor and its officers.The scope and applicability of Section 141 of the Negotiable Instruments Act, which imposes vicarious liability on officers of a company for offences committed by the company.Whether criminal proceedings under Sections 138 and 141 of the N.I. Act can be continued against the officers of the company during the moratorium period imposed by the National Company Law Tribunal (NCLT) on the corporate debtor.The correctness of the trial court's order dismissing the petitioners' application to stay proceedings against the officers while staying proceedings against the corporate debtor.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Applicability of Moratorium under Section 14 IBC to Criminal Proceedings under Section 138 N.I. ActRelevant legal framework and precedents: Section 14 of the IBC imposes a moratorium prohibiting the institution or continuation of suits or proceedings against the corporate debtor during the insolvency resolution process. The question is whether this moratorium extends to criminal proceedings under Section 138 of the N.I. Act.The Apex Court's three-judge bench decision in P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd. clarified that the moratorium applies only to the corporate debtor and does not bar proceedings against the individuals covered under Section 141 of the N.I. Act.Court's interpretation and reasoning: The Court upheld the trial court's reliance on the above precedent, holding that the moratorium under Section 14 IBC prohibits continuation of proceedings only against the corporate debtor. The moratorium does not extend to the officers of the company who are personally liable under Section 141 of the N.I. Act.Application of law to facts: Since the moratorium was declared by the NCLT against the corporate debtor, the trial court rightly stayed proceedings against the company but allowed continuation of prosecution against the Chairman, Managing Director, and Director.Treatment of competing arguments: The petitioners argued that since the company is the principal debtor and the officers are vicariously liable, no proceedings should continue against the officers during the moratorium. The Court rejected this argument relying on the Apex Court's authoritative ruling.Conclusion: The moratorium under Section 14 IBC applies only to the corporate debtor, not to its officers who remain liable under the N.I. Act.Issue 2: Scope of Vicarious Liability under Section 141 of the Negotiable Instruments ActRelevant legal framework and precedents: Section 141 imposes vicarious criminal liability on persons in charge of and responsible for the conduct of the company's business for offences committed by the company under Section 138. The Supreme Court decisions in Ahuja K.K v. V.K.Vora and Dilip Hariramani v. Bank of Baroda were cited to clarify the strict and literal interpretation required for imposing such liability.Court's interpretation and reasoning: The Court reiterated that criminal liability under Section 138 is fastened on the company as the principal offender and vicariously on officers only if the company commits the offence. The imposition of vicarious liability requires strict compliance with the conditions prescribed in Section 141.Key evidence and findings: The dishonoured cheques were issued by the company and signed by two directors. The complainant had issued a demand notice and initiated prosecution under Section 138 N.I. Act against the company and its officers.Application of law to facts: The Court found that the officers named were rightly proceeded against under Section 141 as they were in charge of the company and responsible for its business conduct, satisfying the statutory requirements.Treatment of competing arguments: The petitioners contended that since the company was under moratorium, the officers could not be prosecuted vicariously. The Court rejected this, emphasizing that vicarious liability arises only if the company commits the offence and that the moratorium does not protect officers.Conclusion: Vicarious liability under Section 141 arises only when the company commits the offence, and officers can be prosecuted independently notwithstanding the corporate debtor's moratorium.Issue 3: Necessity of Impleading the Corporate Debtor to Proceed against Officers under Section 141Relevant legal framework and precedents: The Apex Court in Aneeta Hada v. Godfather Travels & Tours (P) Ltd. held that for maintaining prosecution under Section 141, arraignment of the company as accused is imperative. The officers can be prosecuted only on the touchstone of vicarious liability.Court's interpretation and reasoning: The Court referred to paragraphs 101 and 102 of P. Mohanraj & Ors. which clarify that during moratorium, the corporate debtor cannot be proceeded against, but proceedings against officers under Section 141 can continue. The legal impediment to proceed against the company does not affect proceedings against officers.Application of law to facts: The trial court's order staying proceedings against the corporate debtor but allowing prosecution against officers aligns with this principle.Treatment of competing arguments: Petitioners argued that since the company is the principal debtor, no prosecution against officers can proceed without the company being proceeded against. The Court rejected this, relying on the moratorium's statutory bar on the company alone.Conclusion: The moratorium bars proceedings against the corporate debtor but not against officers under Section 141, who remain liable and prosecutable during the moratorium.3. SIGNIFICANT HOLDINGS'The moratorium provision contained in Section 14 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.''For maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative. The other categories of offenders can only be brought in the dragnet on the touchstone of vicarious liability as the same has been stipulated in the provision itself.''Since the corporate debtor would be covered by the moratorium provision contained in Section 14 IBC, by which continuation of Sections 138/141 proceedings against the corporate debtor and initiation of Sections 138/141 proceedings against the said debtor during the corporate insolvency resolution process are interdicted... such proceedings can be initiated or continued against the persons mentioned in Sections 141(1) and (2) of the Negotiable Instruments Act.'The Court conclusively held that the trial court's order dismissing the petitioners' application to stay proceedings against the officers while staying the proceedings against the corporate debtor was legally sound and did not suffer from any infirmity warranting interference.