Moratorium Shields Personal Guarantor from Proceedings u/s 138 of NI Act Amid Individual Insolvency Case | HC

Case Details: Mukund Ajay Kumar Choudhary v. K. B. Board Mills LLP - [2024] 158 taxmann.com 30 (Bombay)

Judiciary and Counsel Details

• • G.A. Sanap, J.
  • Prafulla S. Khubalkar, Adv. & Arvind Gupta, Advs. for the Applicant.
  • Amit R. Agrawal, Adv. for the Respondent.

Facts of the Case

In the instant case, the respondent-complainant supplied credit paper cones to the corporate debtor company from time-to-time. The amount of Rs. 25 lakhs was due and payable by the corporate debtor and, in order to clear outstanding dues, the other accused, in their capacity as Authorized Signatories of the corporate debtor issued a cheque for Rs. 25 lakhs to the complainant.

However, the cheque was dishonoured on its presentation for the reason, “Drawers Signature Differs”. Consequently, the complainant sent a demand notice and, filed the complaint under section 138 of the Negotiable Instruments Act, 1881 against the corporate debtor before the Magistrate. The Magistrate based on the material, issued a process against the corporate debtor for an offence punishable under section 138 of the N.I. Act 1881.

The applicants, who had been personal guarantors of the corporate debtor, and director of the corporate debtor had filed an instant application before the High Court for quashing the criminal complaint against them on the ground that all the Directors of the corporate debtor had been made accused in the criminal case without any specific averments against each of them.

The applicants further stated that the CIRP against the corporate debtor had been initiated and the NCLT had already appointed RP, since a moratorium had been imposed on the corporate debtor and, during the continuation of the insolvency proceeding, the complaint under section 138 of the N.I. Act could not be proceeded against him.

The High Court noted that accused No. 2 initiated an insolvency proceeding seeking interim moratorium under section 96 and, the same was admitted by NCLT

High Court Held

The Court held that in view of section 96(1)(b)(i) of the Insolvency and Bankruptcy Code, 2016 in case of imposition of the interim moratorium, by deeming fiction, during the interim moratorium period, any legal action or proceeding pending in respect of any debt shall remain stayed.

And, therefore, the corporate debtor would also be entitled to exercise the rights and benefits conferred under section 96 and, during the pendency of insolvency proceeding complaint could not be prosecuted against the corporate debtor.

The Court observed that the facts pleaded in the complaint were sufficient to make out the basic ingredients of an offence punishable under section 138 of the NI Act and it could not be said that pleading was lacking in any manner.

The High Court concluded that, during the continuation of the insolvency proceeding and particularly the moratorium, the complaint filed by the complainant could not be continued against the corporate debtor and, therefore, the complaint would remain in abeyance against the corporate debtor.

List of Cases Reviewed

• • P. Mohanraj v. Shah Brothers Ispat (P.) Ltd. [2021] 125 taxmann.com 39/167 SCL 327 (SC) (para 15)
  • SP Mani and Mohan Dairy v. Dr. Snehalatha Elangovan [2022] 142 taxmann.com 317/175 SCL 242 (SC) (para 23) followed.

List of Cases Referred to

• • Mohanraj v. Shah Brothers Ispat (P.) Ltd. [2021] 125 taxmann.com 39/167 SCL 327 (SC) (para 14)
  • Sunita Palita v. Panchami Stone Quarry [2022] 141 taxmann.com 31/173 SCL 699 (SC) (para 21)
  • S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla [2005] 148 Taxman 128/63 SCL 93 (SC) (para 21)
  • Ashoke Mal Bafna v. Upper India Steel Mfg. & Engg. Co. Ltd. [2018] 14 SCC 202 (para 21)
  • Standard Chartered Bank v. State of Maharashtra [2016] 68 taxmann.com 159/135 SCL 194 (SC) (para 21)
  • N. Rangachari v. Bharat Sanchar Nigam Ltd. [2007] 5 SCC 108 (para 22)
  • S.P. Mani and Mohan Dairy v. Dr. Snehalatha Elangovan [2022] 142 taxmann.com 317/[2023] 175 SCL 242 (SC) (para 22).