Kerala High Court: Moratorium under Section 14 (1) of IBC only applicable on Corporate Debtors

Kerala High Court: Moratorium under Section 14 (1) of IBC only applicable on Corporate Debtors

The Kerala High Court ruled that the provision of moratorium contained under Section 14 of the Insolvency Bankruptcy Code, 2016 (in short IBC) is only applicable on Corporate Debtors, while the non-corporate debtors classified under Section 141 of the Negotiable Instruments Act, 1881 (in short NI Act) continue to be statutorily liable under Chapter XVII of the NI Act.

In the present case, the respondents/complainant- Dr. Sateesh Iype had lodged a complaint under Section 142 of the NI Act, before the Magistrate Court alleging that the accused's/petitioners- M/s PVS Memorial Hospital and others committed offence punishable under Section 138 of the NI Act, since the cheque was jointly issued by accused Nos. 2 to 7 representing the 1st accused for Rs. 37,20,000 which got dishonored for want of funds, when the cheque was presented for collection. The accused persons were the Directors of the Hospital, and were collectively charged under the ambit of principles of vicarious liability.

Subsequently, the petitioner/accused persons filed the present Criminal Miscellaneous petition for quashment of the complaint under Section 482 of the Code of Criminal Procedure (in short Cr.P.C).

The Single Judge, Justice A. Badharudeen determined two primary issues:

(i) Is moratorium under Section 14 (1) of the Insolvency and Bankruptcy Rules, 2016 would apply to non-corporate debtor/debtors dealt under Section 141 of the NI Act?

(ii) How vicarious liability in criminal law, in terms of Section 141 of the NI Act would emerge and what are the essentials to be stated in the complaint to fasten vicarious liability?

The counsel for petitioner relied on the Supreme Court's decision in the case of P.Mohanraj & Ors. vs. M/s Shah Brothers Ispat Pvt and contended that no prosecution against the corporate debtor and its Directors could be possible pursuant to the issuance of the Moratorium under Section 14 (1) of the IBC, 2016. Further it was highlighted by the petitioner that as per the NCLT order, moratorium order under Section 14(1) of IBC, 2016 passed in relation to this case, it was not possible to prosecute the petitioners.

The Court agreed with the contentions raised by the petitioner and concurred with the decision passed by the Apex Court which held that since the moratorium provision contained in Section 14 IBC imposed a legal impediment, thus it makes it impossible for such proceeding to continue or be instituted against the corporate debtor. It was thus observed therein that, "...for the period of moratorium, since no Sections 138/141 proceeding can continue or be initiated against the corporate debtor because of a statutory bar, such proceedings can be initiated or continued against the persons mentioned in Sections 141(1) and (2) of the Negotiable Instruments Act. This being the case, it is clear that the moratorium provision contained in Section 14 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 Court was of the view that moratorium in Section 14(1) IBC would only apply to the corporate debtor, and the non-corporate debtors in Section 141 NI Act would continue to be statutorily liable.

With respect to the second issue, the Court opined that in order to prosecute the Directors of the Hospital, a mandatory narration in the complaint regarding their specific roles in the affairs of the company must have been done and otherwise the prosecution under the principles of vicarious liability cannot be proceeded.

The Court relied on the decision passed by Supreme Court in the case of Dilip Hariramani vs. Bank of Baroda which stipulated the necessary ingredients for application of principles of vicarious liability.

The Court quashed the twin contentions raised by the counsels for the petitioners for as the complaint were not sustainable. However, the Court clarified that the prosecution against the petitioner PVS Memorial Hospital would stand deferred subject to the outcome of moratorium proceedings, and allowed the continuance of prosecution against the non-corporate debtors/natural persons.