The law regarding moratoriums imposed under Section 14 of the Insolvency and Bankruptcy Code1 (hereinafter referred to as the IBC 2016) has been often explained and clarified by various judicial pronouncements, which aptly interpret the multitudes contained in Section 14 of the IBC.
Recently, the Hon'ble Kerala High Court held that the corporate debtors who have a moratorium issued against them are momentarily safeguarded from any further prosecution under the Negotiable Instruments Act of 18812 (hereinafter referred to as the NI Act, 1881), and prosecution would thus stand deferred. However, the benefits of moratorium against prosecution under Section 141 of the NI Act shall not be available to non-corporate debtors/natural persons, possibly on account of the fact that Non-Corporate debtors/natural persons are presently not covered by IBC proceedings, and the said non-corporate debtors/natural persons shall not cease to be statutory liable under Chapter XVII of the Act.
Moratoriums imposed under Section 14 of the Insolvency and Bankruptcy Code
Moratorium refers to the temporary prohibition of fresh or existing proceedings against a corporate debtor, in order to ensure appropriate repayment of existing creditors (as listed in the CoC) and to facilitate the formulation of a resolution plan that may be beneficial to all. Under the IBC, a corporate debtor is liable to the financial and operational creditors for the payment of such debts that have been previously incurred by the corporate debtors against such creditors.
Defined under Section 14 (1) of IBC, a moratorium is thus a temporary protection accorded to corporate debtors from any new legal proceedings and against present proceedings, including proceedings under the aforementioned Negotiable Instruments Act, 1881.
In the case titled M/s PYS Memorial Hospital & Ors. Vs. Dr. Sathsesh Ivpe & Anr.3 , a complaint was filed under Section 142 of the NI Act by the Respondent before the Judicial First Class Magistrate Court/JFCM Court (NI cases), stating that the accused had committed an offence under Section 138 of the NI Act as the cheque that they had issued was dishonoured when it was presented for collection.
Subsequently, the accused preferred a quashing petition under Section 482 of the Criminal Procedure Code, 1973 and the Court had formulated the following questions therein:
- Would moratorium under Section 14 (1) of the IBC 2016 apply to non-corporate debtors under Section 141 of the NI Act?
- How vicarious liability in criminal law, in terms of Section 141 of the NI Act would emerge? For the first issue, the counsel for the Petitioner/accused relied on the Hon'ble Supreme Court's judgment titled as P. Mohanrai & Ors. v. M's Shah Brothers Ispat Pvt. Ltd4, that categorically held that since the directors are merely the representatives of the company, all the decisions undertaken by them are for the company, and thus no prosecution could be initiated against them, in congruence with the corporate debtor, which had a moratorium issued under Section 14 (1) of IBC.
For the second issue, the Petitioner argued that under the principles of vicarious liability, in order to prosecute the directors/representatives of a company, there needed to be a proper narration of their specific roles in the affairs of the company. They relied on the judgment of Dilip Hariramani Vs. Bank of Baroda5 and argued that the complaint did not specify the roles in a proper manner and the persons mentioned in the complaint were not handling the day-to-day tasks of the company.
Upon hearing the Petitioner at some length, the Hon'ble court held that protection of moratorium would only be available to a corporate debtor i.e., the company, and the complaint would not be liable to be quashed completely as the natural persons/directors mentioned under Section 141 would continue to be statutorily liable, in tandem with the concept of vicarious liability as discussed vide the said judgment. However, the prosecution of the first petitioner i.e., the corporate debtor, would be postponed and kept in abeyance due to the moratorium proceedings.
This judgment has balanced the liability of the hospital and its directors by giving due importance to the provision of moratoriums applicable to the hospital (corporate debtor), and has ensured that the proverbial corporate veil is duly pierced, and any illegality committed by the directors/representatives (non-corporate debtors/natural persons) of the company are not shielded by the company they represent. This judgement has helped the interpreters get a better understanding of the concept of Lifting of Corporate Veil under the Companies Act, 2013 which disregards the corporate personality and enables us to accuse the people who are in the real control of the company, while also protecting the provisions enshrined under the IBC.
1 Act No. 31 of 2016 .
2 Act No. 26 of 1881.
3 CRL.MC NO. 8157 OF 2022.
4 [(2021) 6 SCC 258].
5 [2022 (3) KLT 373 (SC)].
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