Negotiable Instruments Proceeding Under Section 138 Does Not Abate On Initiation Of Insolvency Proceeding: Himachal Pradesh High Court

In a significant judgement delivered by the Himachal Pradesh High Court, the personal liability of the accused under the Negotiable Instruments Act was upheld in spite of the insolvency proceedings initiated under the Insolvency and Bankruptcy Code (IBC). Brief Facts Tushar Sharma (accused) and his wife Smt. Shaveta Sharma applied for a house loan to the tune of Rs. 2 crores which was approved and granted on January 24, 2015. The loan amount was secured by mortgaging a property with the State of Bank of India (SBI) situated in Chandigarh which is owned by Smt. Shaveta Sharma. The accused defaulted in paying the loaned amount. Later, a cheque of Rs. 5.90,000 was issued by the accused to discharge a part of the liability. However, the cheque was dishonoured due to insufficiency of funds on February 14, 2019. A complaint under section 138 of the Negotiable Instrument Act (Act) was filed before the Judicial Magistrate First Class, Una by the SBI for initiating criminal proceedings against the accused for the cheque dishonour. When the proceedings were going on under the Act, the accused filed an application under section 94 of the IBC before the National Company Law Tribunal (NCLT) Chandigarh to seek insolvency protection. Once an insolvency proceeding is initiated, section 96 comes into operation which puts a moratorium on all the actions sought to be taken against the corporate debtor. However the said application of the accused seeking to stay the proceedings under section 138 of the Negotiable Instruments Act was dismissed against which the accused approached the High Court under section 482 of the Criminal Procedure Code. Contentions of the Parties The accused argued that interim moratorium under section 96(1) (a) of the IBC kicks in from the date of the application and remains in operation till the application is admitted. It was further submitted that all pending legal action or proceedings with respect to any debt shall be deemed to have been stayed during the interim moratorium period as per section 96(1) (b) (i) of the IBC. It was further stated that creditors of the corporate debtor are prohibited from initiating any legal action or proceedings in relation to the debt as per section 96(1) (b) (ii) of the IBC. Complainant bank argued that property against whom the complaint is pending is owned by the Smt. Shaveta Sharma and the said property has been mortgaged with the Basal Branch of the complainant bank in Chandigarh. The bank further argued that the bank is a secured creditor as the loan was advanced against the said property. This property has no other charge whatsoever only the bank has the primary charge over the property for the loan advanced to the tune of Rs. 2 crores to Smt. Shaveta Sharma. Issue Before High Court The primary question before the High Court was whether the proceedings under section 138 could be stopped when the insolvency proceeding was initiated under the IBC. Court's Analysis The High Court relied on the Supreme Court judgement in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd (2023) 10 SCC 545 in which it was held that while section 14 of the IBC imposes a moratorium on all the proceedings against the corporate debtor once the corporate debtor is admitted into insolvency. However, this does not absolve the directors and signatories to the dishonoured cheque from their personal liability under section 138 of the Negotiable Instrument Act. The Supreme Court observed as under: “52 Thus, where the proceedings under Section 138 of the NI Act had already commenced and during the pendency the plan is approved or the company gets dissolved, the directors and the other accused cannot escape from their liability by citing its dissolution. What is dissolved is only the company, not the personal penal liability of the accused covered under Section 141 of the NI Act. They will have to continue to face the prosecution in view of the law laid down in Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661. Where the company continues to remain even at the end of the resolution process, the only consequence is that the erstwhile directors can no longer represent it”. The High Court also relied the Supreme Court judgement in P. Mohanraj and Ors.v.Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC In which it was observed that the moratorium under section 14 of the IBC is applicable only on corporate debtor and not on natural persons responsible for conducting the business of the company. The Supreme Court observed as under: “77 Thus, for the period of moratorium, since no Section 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 Section 141(1) and (2) of the Negotiable Instruments Act. This being the case, it is clear that ...

Negotiable Instruments Proceeding Under Section 138 Does Not Abate On Initiation Of Insolvency Proceeding: Himachal Pradesh High Court

Mohd Malik Chauhan

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