India: The Effect Of Moratorium On Parallel Criminal Proceedings

I. Introduction

While the term moratorium has not been defined under the Insolvency and Bankruptcy Code, 2016 ("IBC"), it implies a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be initiated or proceeded against the corporate debtor.

The extent and applicability of moratorium has caused severe confusion amongst creditors regarding the admissibility of such proceedings against corporate debtors, especially in quasi-criminal proceedings such as cheque bounce cases. The permissibility of such proceedings during moratorium allows creditors to have two bites at the cherry to recover their dues (i.e., in the insolvency proceedings as well as by initiating cheque bounce proceedings).

This piece seeks to: (a) analyse the recent judgement of the Supreme Court of India ("SCI") in P. Mohanraj & Ors. v. Shah Brothers Ispat Pvt. Ltd.¹ ("P. Mohanraj") which finally settles the abovementioned issue; and (b) discuss the effect of moratorium on criminal proceedings having monetary implications on the corporate debtor.

II. Interpretation of the SCI

The issue of application of moratorium on proceedings under Section 138 (Dishonour of cheque for insufficiency, etc., of funds in the account) of the Negotiable Instruments Act, 1881 ("NI Act"), first arose before the High Court of Bombay ("BHC") in Tayal Cotton Pvt. Ltd. v. State of Maharashtra² ("Tayal Cotton"). Interestingly, the BHC in this case did not consider the quasi-criminal nature of cheque bounce proceedings. The BHC relying on the interpretation of another decision of the BHC in Indorama Synthetics India Limited Nagpur v. State of Maharashtra and Others³, held that the words "suits or proceedings" under Section 14 (Moratorium) of the IBC, did not include proceedings initiated under Section 138 of the NI Act.

Subsequently, the Calcutta High Court ("CHC") in MBL Infrastructure Ltd. v. Manik Chand Somani⁴ ("MBL Infrastructure"), interpreted the application of moratorium on cheque bounce proceedings under Section 138 of the NI Act in a similar manner. The CHC emphatically held that the declaration of moratorium does not prohibit continuation of criminal proceeding against the company or its directors.

A similar interpretation was also held by the National Company Law Appellate Tribunal ("NCLAT") in the Shah Brothers Ispat⁵ case. In this case, two cheques were returned dishonoured for insufficient funds. Subsequently, two criminal cases for the offence of cheque dishonour were instituted under the NI Act. However, while the cheque dishonour proceedings were ongoing, parallel proceedings under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the IBC, were initiated by the creditor. The National Company Law Tribunal ("NCLT") admitted the proceedings under Section 9 of the IBC and moratorium was ordered. Thereafter, the NCLT stayed the two cheque bounce cases initiated by the creditor. This stay order over the proceedings under Section 138 was challenged before the NCLAT. The NCLAT set aside the order passed by the NCLT and held that cheque bonce cases under the NI Act, are criminal in nature and therefore, cannot be held to be a proceeding under Section 14 of the IBC.

The NCLAT order in Shah Brothers Ispat was appealed before the SCI in P. Mohanraj.⁶ The SCI set aside the NCLAT order and held that the word "proceedings" under Section 14 of the IBC, covers proceedings instituted under Section 138 of the NI Act. The SCI, referring to the Insolvency Law Committee of February, 2020, observed that the object sought to be achieved by the IBC in imposing a moratorium was to ensure measures against depletion of a corporate debtor's assets during the insolvency resolution process. It was held that even quasi-criminal proceedings such as those under the NI Act, may result in the depletion of the assets of the corporate debtor, which is against the object and purpose of declaring a moratorium in the first place. The SCI therefore, set aside the decision of the NCLAT and held that the legal impediment contained under Section 14 of the IBC would make it impossible for cheque bounce cases under the NI Act "to continue or be instituted against the corporate debtor".

The SCI also overruled the contrary decisions passed by the BHC in Tayal Cotton and the decision of the CHC in MBL Infrastructure.

III. Analysis of the Judgement and Effect of Criminal Proceedings Post Declaration of Moratorium

An important aspect of SCI's ruling in P. Mohanraj was the interpretation and analysis of the word 'the institution of suits or continuation of pending suits or proceedings against the corporate debtor' under Section 14(1)(1)(a) of the IBC. The applicability of ejusdem generis and noscitur a socii rules of statutory interpretation were also discussed by SCI since these rules had been incorrectly applied in decisions of Tayal Cotton and MBL Infrastructure to hold that the word 'proceedings' under Section 14 of the IBC do not include criminal proceedings.

The SCI held that such rules of statutory interpretation cannot be used to nullify or restrict the plain meaning of the words used in a statute. The SCI further examined the nature of proceedings under Section 138 of the NI Act and held that such proceedings are instituted with the intention to recover monetary dues and impose penalties on the corporate debtor arising out of a civil debt.

The SCI further concluded that the term 'proceedings' under Section 14 of the Act cannot be limited to include only civil proceedings and which would affect the assets of the company and prejudice other stakeholders from realizing their claims against the company. Considering Section 14 of the IBC was aimed to give breathing space to the corporate debtor while it recovers, the SCI ultimately held that the word 'proceedings' cannot be limited to only civil proceedings. The SCI held that any matter that can create any debt or encumbrance on assets of corporate debtor including criminal proceedings were liable to be prohibited by an order of moratorium.

While the judgement in P. Mohanraj also examined the nature of Section 138 proceedings as being quasi-criminal in nature, the SCI did not bar the effect of moratorium on only quasi-criminal proceedings. Any proceedings which are to affect the assets of a corporate debtor were liable to be prohibited from proceeding by an order of moratorium. One other example where the effects of moratorium could affect the continuation of criminal proceedings would be proceedings instituted under the Prevention of Money-Laundering Act, 2002 ("PMLA"). Though the effect of moratorium on proceedings against a corporate debtor under PMLA have not been discussed by the SCI, the Delhi High Court ("DHC") in Deputy Director Directorate of Enforcement of Delhi v. Axis Bank & Ors. ("Axis Bank case"),⁷ has held that since the objective of PMLA is distinct from the purpose of IBC, the latter legislation does not prevail over the former.

The DHC reasoned that Section 14 of IBC cannot come in the way of a statutory powers conferred by PMLA on the enforcement officers for depriving a person (who may also be a debtor) of the proceeds of a crime. A view to the contrary, if taken, would defeat the objective of PMLA by opening an escape route. After all, a person indulging in money laundering cannot be permitted to avail of the proceeds of crime to get a discharge for his civil liability towards his creditors. The interpretation of the DHC is in furtherance of the understanding that a statute like PMLA, seeks to attain a public interest remedy as compared to IBC, which protects a private interest of identified creditors of a Company. As a result, PMLA proceedings should not to be stayed/prohibited during the period of moratorium.

Harmonising the interpretation of the DHC and that of the SCI may prove to be difficult. While criminal proceedings instituted to avail the proceeds of a crime may permit attachment of properties of the corporate debtor, they may be restricted to only the extent ascertained to have been transacted or received as proceeds from the commission of such crime. The practical implications of such an understanding may be infinitely more complicated. The law thus far remains concrete that criminal proceedings to recover a civil debt can be prohibited by the effects of moratorium under the IBC.

IV. Conclusion

That moratorium as provided for under the IBC is applicable to all "proceedings" which have a civil nature or seek to enforce a civil remedy. These may also include criminal or quasi criminal proceedings instituted for the recovery of a civil debt such as proceedings under Section 138 of the NI Act. The basis for the application of moratorium is the nature of such proceedings and the object and purpose of such enactment.

It is now clear that once moratorium has been declared, any proceeding which may affect the liquidity or assets of the company cannot be permitted to continue in the event moratorium has been declared. While the SCI has clearly laid down the effects of moratorium on proceedings instituted to recover a civil debt, question marks remain over the effects of moratorium for recovery of "proceeds of a crime" once moratorium has been declared.

While such criminal proceedings are likely to be unaffected, question marks may arise as to how such criminal proceedings may affect parties whose dues are not recoverable owing to the effects of moratorium.

Footnotes

1. Civil Appeal No. 10355 of 2018 (SC).

2. Tayal Cotton Pvt. Ltd. v. State of Maharashtra, 2018 SCC OnLine Bom 2069.

3. Indorama Synthetics India Limited Nagpur v. State of Maharashtra and Others, 2016 (4) Mah LJ 249.

4. CRR 3456/2018 (CHC; decided on 16.04.2019).

5. Shah Brothers Ispat Pvt. Ltd. v. P. Mohanraj & Ors., Company Appeal (AT), Insolvency No. 306 of 2018 (NCLAT).

6. P. Mohanraj & Ors. v. Shah Brothers Ispat Pvt. Ltd., Civil Appeal No. 10355 of 2018 (SCI).

7. CRL.A. 143/2018 & Crl.M.A. 2262/2018, (DHC; decided on 02.04.2019)

Originally Published 12 May, 2021

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