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IBC Moratorium to Apply to Cheque Bouncing Cases

The Hon’ble Supreme Court of India on March 1, 2021 held that the criminal proceedings against cheque bouncing under Section 138 of the Negotiable Instrument Act, 1881 (‘NI Act’) shall remain stayed against the company during the period of moratorium applicable to insolvency proceedings of any company. The proceedings would however continue against the directors and other officials of the company who are made accused in cheque bouncing proceedings.

 

Section 14 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) specifies that when an order declaring moratorium is passed, the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, or arbitration panel would be prohibited.

The Supreme Court passed the above directions in P. Mohanraj & Ors. v. M/S. Shah Brothers Ispat Pvt. Ltd., modifying the legal position prevailing till now that the proceedings under Section 138 NI Act, being penal in nature, were considered to fall outside the ambit of IBC moratorium both for the company as also for its directors and officials.

The Supreme Court held that “………….it is clear that the moratorium provision contained in Section 14 of the 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”.

The present judgment is set to accord relief and facilitate revival of the companies undergoing insolvency proceedings, while letting the individuals (i.e., the directors and officers of the company) remain liable for cheque bouncing.