NCLAT Settles the Fate of Proceedings under Section 138 of the NI Act during Bankruptcy

[Aayush Mitruka is a lawyer based in Delhi]

The National Company Law Appellate Tribunal (the NCLAT) settled a very important question of law under the Insolvency and Bankruptcy Code, 2016 (the Code) which has been troubling practitioners. The question whether proceedings filed under section 138 of the Negotiable Instruments Act, 1881 (the NI Act) against the corporate debtor will be stalled pursuant to a moratorium imposed under section 14 of the Code has been lingering for some time without any authoritative pronouncement. The question has now been answered by the NCLAT in Shah Brothers Ispat Private Limitedv.P Mohanraj & Others.

On the facts of the case, the appellant who had initiated a corporate insolvency resolution process against the corporate debtor (viz. Diamond Engineering Chennai Private Limited) had also filed a complaint against the corporate debtor and its directors under section 138 of the NI Act. The corporate debtor and its directors moved the National Company Law Tribunal, Chennai (NCLT) and prayed that appellants be ordered to withdraw the case in light of the pending corporate insolvency resolution process. The NCLT ordered in favour of the respondents and directed the appellants to withdraw the compliant case, treating it as a proceeding filed after the order of moratorium. The NCLT in its short order observed that such action amounts to a deliberate attempt to violate the order of moratorium on the part of the appellants and a sheer misuse of the process of law. Notably, the NCLT did not discuss the rationale and contours of section 14 of the Code while arriving at its decision.

On appeal, the NCLAT overturned the NCLT’s order and observed the following:

“6. We do not agree with such submission as Section 138 is a penal provision, which empowers the court of competent jurisdiction to pass order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim. Imposition of fine cannot held to be a money claim or recovery against the Corporate Debtor nor order of imprisonment, if passed by the court of competent jurisdiction on the Directors, they cannot come within the purview of Section 14. Infact no criminal proceeding is covered under Section 14 of I&B Code.

7. The Adjudicating Authority having failed to appreciate law, we have no option but to set aside the impugned order dated 24th May, 2018 passed in MA/102/IB/2018 in CP/507/IB/2017. The court of competent jurisdiction may proceed with the proceeding under Section 138 of NI Act, even during the period of moratorium.”

In a post written on this Blog in September last year, I had discussed this question of law and had argued that such proceedings ought to be kept outside the purview of section 14 (i.e. moratorium) of the Code in light of its legislative intent. Whilst the NCLAT has put to rest an important question, there are several other looming issues and questions which are of concern to the legal community and other stakeholders. It can only be hoped that such issues will be ironed out in the days to come.

– Aayush Mitruka