Does moratorium apply to action for bounced cheque?

By Alok Dhir, Dhir & Dhir Associates
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Moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), means a period when no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the corporate debtor. Once a petition under the IBC is admitted against the corporate debtor, the moratorium kicks in on the insolvency commencement date and remains in force during the corporate insolvency resolution process (CIRP) period. An interesting question is whether the moratorium applies to the proceedings under section 138 of the Negotiable Instruments Act, 1881 (NI Act).

Alok DhirManaging partnerDhir & Dhir Associates
Alok Dhir
Managing partner
Dhir & Dhir Associates

As per the IBC, a petition for insolvency against a corporate debtor can be triggered by a financial creditor, an operational creditor or by the corporate debtor itself in cases where the default amount is more than ₹100,000 (US$1,500).

The CIRP is time bound and the relief of moratorium is available to the corporate debtor only during the CIRP period, i.e. for 180 days, which can be extended by 90 days. Even the period of 180 days is not absolute because the committee of creditors, at any time within such period, may decide to liquidate the corporate debtor and the moratorium will cease.

The IBC, based on the Bankruptcy Law Report, provides that during the limited window for revival of the corporate debtor there should be a strict calm period and absolute moratorium in all cases where the primary liability is that of the corporate debtor. Thus, even proceedings against the guarantors or the directors of the corporate debtor should be stayed until the committee of creditors delivers its verdict on revival of the corporate debtor.

There has been no judicial pronouncement on the issue of whether the moratorium will also cover proceedings pending against the corporate debtor under section 138 of the NI Act. The moratorium is to apply to all proceedings where the primary liability is that of the corporate debtor and in a case of cheque bouncing, the primary liability is of the corporate debtor as the director signs a cheque only on behalf of the corporate debtor. Clearly, the personal liability of the director is also attracted but what remains untouched is that the primary liability is only of the corporate debtor and not of the director of the corporate debtor.

However, whether the moratorium will cover proceedings against the directors of the corporate debtor under section 138 of the NI Act is in doubt. This is because the primary liability is that of the corporate debtor and if there is a stay of proceedings against the corporate debtor, it will automatically result in shifting the primary liability to the director of the corporate debtor. This ultimately will result in the opening of floodgates and will mean that the creditors will chase the directors during what is supposed to be a period of calm. The intent to provide a calm period during which the focus of the creditors is on revival of the corporate debtor will result in a futile exercise.

Further, in a cheque bouncing case, the remedy to compound (reach a settlement) is always available to the directors. However, if there is a moratorium only in favour of the corporate debtor there will be an embargo on the right to compound during the moratorium period because all such decisions require the approval or assent of the resolution professional or the interim resolution professional.

One may also draw an analogy from section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). In BSI Ltd & Anr v Gift Holdings Pvt Ltd & Anr (2000), the Supreme Court held that proceedings under section 138 of the NI Act were not covered within the ambit of section 22(1) of the SICA. However, in the SICA the period for rehabilitation or revival of the corporate debtor was neither time bound nor was there a shift in the management of the operations of the corporate debtor as envisaged under the IBC.

In conclusion, the IBC is silent on the definition of moratorium, and what proceedings will fall under the ambit of section 14 of the IBC will require judicial assessment. Nonetheless, the language of section 14 is wide and the intention of the legislature was to provide a period of complete calm. Therefore, the issue of whether proceedings under section 138 of the NI Act will be covered under the umbrella of moratorium and to what extent can be resolved only after judicial examination in times to come.

Alok Dhir is the managing partner at Dhir & Dhir Associates.

D-55, Defence Colony
New Delhi – 110 024
India

Contact details:
Tel: +91 11 4241 0000
Fax: +91 11 4241 0091
Email: alok.dhir@dhirassociates.com
Website: www.dhirassociates.com