Directors Can't Escape Section 138 Liability Despite IBC Proceedings: Bombay High Court

Directors Can't Escape Section 138 Liability Despite IBC Proceedings: Bombay High Court

Introduction

The High Court of Bombay, Nagpur Bench, has held that the prior initiation of Insolvency and Bankruptcy Code (IBC) proceedings does not bar criminal prosecution of directors under Section 138 of the Negotiable Instruments Act.

Factual Background

The petitioner extended a short-term loan of Rs. 15 lakhs to the respondent through its directors. A post-dated cheque was issued as a security by the director. The NCLT admitted the respondent company into the Corporate Insolvency Resolution Process (CIRP), and its failure resulted in the liquidation order. The petitioner lodged its claim with the interim resolution professional.

Procedural Background

The petitioner deposited the cheque after the moratorium date; however, the same was dishonored due to insufficient funds. Therefore, the petitioner filed a complaint under Section 138 of the NI Act. The trial court dismissed the complaint, holding that the complaint is non-maintainable due to prior insolvency proceedings. Therefore, the petitioner approached the High Court under writ jurisdiction.

Issues

1.  Whether the prior initiation of IBC proceedings bars criminal prosecution of directors under Section 138 of the Negotiable Instruments Act?
2.  Whether the moratorium under Section 14 of the IBC applies to natural persons mentioned under Section 141 of the NI Act?

Contentions of the Parties

Petitioner's Contention: The petitioner contended that the proceedings under the IBC and NI Act are distinct and operate in different spheres. It highlighted that the provision of the NI Act is penal in nature, which is distinct from recovery.

Respondent's Contention: The respondent submitted that the cause of action arose after the imposition of the moratorium; therefore, the NI Act proceedings would not be tenable against the directors.

Reasoning and Analysis

The bench of Justice M.M. Nerlikar discussed Section 32A of the IBC and observed that the provision bars prosecution of the corporate debtor for offenses committed prior to the commencement of the CIRP. However, the provision allows prosecution against natural persons to continue. The Court relied on Supreme Court decisions, which clarified that the moratorium under Section 14 IBC would apply only to the corporate debtor, and the natural person mentioned under Section 141 would still be liable to prosecution.

Decision

The High Court held that the prior initiation of IBC proceedings does not bar criminal prosecution of directors under Section 138 of the NI Act. The Court clarified that the proceedings under Section 138 NI Act are not a recovery proceeding, and it makes no difference whether the proceedings are initiated prior to or after the initiation of IBC proceedings.

Implications

The judgment highlights the distinction between the IBC and NI Act proceedings and clarifies that the moratorium under Section 14 IBC does not apply to natural persons. It also underscores the liability of directors under Section 138 of the NI Act.

In this case the petitioner was represented by Mr. S.S. Dewani, Advocate. Meanwhile the respondent was represented by Mr. S.D. Khati, Advocate.