Moratorium Under Insolvency Code Covers Cheque Bounce Cases: Supreme Court

Provisions of the insolvency law that protect a corporate debtor from other proceedings will also cover dishonoured cheques, the supreme court ruled, taking a view contrary to two earlier high court verdicts.

Moratorium allowed under Section 14 of the Insolvency and Bankruptcy Code will apply to proceedings under Section 138 of the Negotiable Instruments Act used to recover an amount for a bounced cheque, the top court ruled. The top court, however, said the protection will be available only to the corporate debtor and not its management personnel.

Section 14 allows a moratorium till the completion of insolvency proceedings on:

• An institution or continuation of any suits or proceedings against the corporate debtor including execution of any order, decree or judgment.

• Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets.

• Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property.

• The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

Earlier, the Bombay High Court in Tayal Cotton Pvt. vs State of Maharashtra said the moratorium under Section 14 does not include any criminal proceeding. The Calcutta High Court in MBL Infrastructure Ltd. vs Manik Chand Somani had held that moratorium during winding-up proceedings under the companies act will not cover Section 138 proceedings.

The question before the Supreme Court was whether the moratorium intends to cover proceedings in cheque bounce cases. The bench, comprising Justice RF Nariman, Justice Navin Sinha and Justice KM Joseph, said the object of Section 14 and the provision of a moratorium is to ensure that there is no depletion of a corporate debtor's assets during the insolvency resolution process.

In such a situation, the court held, a quasi-criminal proceeding would result in the corporate debtor having to pay twice the amount of the cheque as compensation, impacting the insolvency process.

‘'The impact of this judgment is that the corporate debtor no longer gets entwined with a proceeding under Section 138 of the NI Act during the corporate insolvency process,'' said Ajay Shaw, partner, DSK Legal. "Once the corporate debtor's stress is resolved under a resolution plan, the new acquirer would not be liable for criminal prosecution under Section 138 of the NI Act by virtue of Section 32A of the IBC.''

In the instant case, while handing the victory on the question of law to the corporate debtor, the top court allowed the Section 138 proceedings against it to continue. The reason, among others, being that the insolvency resolution process did not involve new management taking over as well as that the moratorium period had come to an end in the instant case.