Financial & Insolvency Law

Bombay HC: Criminal Proceedings not Precluded by Moratorium Under IBC

The Hon’ble High Court of Bombay in the case of Tayal Cotton (Pvt.) Ltd. Vs. State of Maharashtra has held that the moratorium stipulated under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“Code”) does not bar the initiation or continuance of any criminal proceedings against the Corporate Debtor. This Article seeks to analyze the decision and set out the reasoning of the Hon’ble Court behind the same.

 

Moratorium Order Explained

Under the Code, where an application for the initiation of Corporate Insolvency Resolution Process (“CIRP”) is admitted by the NCLT, a moratorium order is affected with regard to the Corporate Debtor under Section 13 of the Code. Moreover, under Section 14 of the Code, an order for moratorium is a legal authorization for the Corporate Debtor to postpone the determination of claims and their recovery that have a bearing on the financial position of the Corporate Debtor where it is undergoing a Corporate Insolvency Resolution Process. Further, the Corporate Debtor is also debarred from disposing off or alienating any of its assets, legal rights or beneficial interests. The relevant portion of Section 14 of the Code is reproduced hereunder:

14. Moratorium. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: –

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;

 

Facts of The Case

M/s Tayal Cotton Pvt. Ltd. (“TCPL”) had filed for cheque dishonour proceedings under Section 138 of the Negotiable Instruments Act, 1881 against Aegan Industries Private Limited (“AIPL”) along with its Directors. The Court in that matter had decided against AIPL and its Directors and held them guilty of an offence under Section 138 of the NI Act. Being aggrieved by the Order, AIPL and its Directors sought a criminal revision application against this order before the Court of Sessions.

In the mean-time, the AIPL filed for the initiation of insolvency resolution process with regard to itself under Section 10 of the Code. The Bengaluru Bench of the National Company Law Tribunal, by its order admitting the application, put in place a moratorium under Section 14 of the Code barring the institution or continuation of suits or proceedings against the Respondents including the execution of any decree, judgment or order in any court of law, tribunal, arbitration panel or other authority. With regard to this order of moratorium, AIPL filed an application before the Court of Sessions praying for a stay on Criminal Revision proceedings before it. This application was objected to by the Applicant by placing reliance on the case of Indorama Synthetics India Limited Nagpur V/s State of Maharashtra and Ors.. While interpreting Sub-Section (1) of Section 446 of the Companies Act, 1956, the Hon’ble High Court of Bombay in Indorama had held that the words “suits or other proceedings”  excludes a criminal complaint filed under Section 138 of the NI Act. However, the Ld. Additional Sessions Judge ordered for the criminal revision proceedings to be stayed before it till further relevant orders in the insolvency proceedings.

Aggrieved by the decision of the Additional Sessions Judge, TCPL filed a writ petition under Articles 226 & 227 of the Constitution before the Hon’ble High Court of Bombay.

 

Issue Before the Court

Whether the moratorium period stipulated under Section 14 of the Code bar criminal proceedings against the Corporate Debtor?

 

Decision of the Court

The Hon’ble Court in the present matter concluded that the moratorium period stipulated under Section 14 of the Code does not bar criminal proceedings being initiated or continued against the Corporate Debtor. Therefore, proceedings against Section 138 of the NI Act would not be precluded against AIPL even though a moratorium is in effect. The reasons for this decision are as follows:

The primary point of analysis for the Court was the use of the words ‘suits or proceedings’ within Section 14 of the Code. To this effect, the Court relied upon the principle of ejusdem generis, i.e., the words present latter in the provision would take colour from the words preceding thereto. Therefore, the latter parts of Section 14 are coloured by the words ‘suits or proceedings’ which comprehend of a civil nature in them and excludes criminal proceedings from the ambit of Section 14 of the Code.

The Court further held that the legislature had omitted the use of the words ‘criminal’ as an adjective to the word ‘proceedings’ and as an adjective to the noun ‘Court of law’, it must be assumed that the Legislature in its wisdom has consciously omitted to use such adjectives since it must have intended to prohibit only the suits and execution of the judgments and decrees or a proceeding of the like nature. Therefore, applying principles of interpretation, one cannot put any other interpretation on this provision contained in Section 14 of the Code except that it only prohibits a suit or a proceeding of a like nature and does not include any criminal proceeding.

Finally, the Court relied on the case of Indorama (Supra) where the Hon’ble High Court of Bombay while interpreting Sub-Section (1) of Section 446 of the Companies Act, 1956, had held that the words “suits or other proceedings”  excludes a criminal complaint filed under Section 138 of the NI Act. The Court did note that though the provisions are different, and this decision cannot be straight away applied to the matter at hand, but, the reasonings and the logic in interpreting the provision contained in Section 446(1) of the  Companies Act, 1956 laid down therein can easily be pressed into service even in the matter in hand.

The Hon’ble Court therefore, set aside the order of stay on proceedings by the Court of the Additional Sessions Judge and meaning thereby that the proceedings under Section 138 of the NI Act would continue.

 

Conclusion

The Hon’ble High Court of Bombay has rightly held that the order of moratorium with regard to firms undergoing CIRP does not comprehend of any bar upon criminal proceedings against the Corporate Debtor. While the holding in the present judgement was manifest in the implications of Section 14 of the Code, it was still a necessary to buttress attempts by corporate debtors to evade the due process of law under criminal proceedings that form outside the ambit of the moratorium, in the latter’s garb. What this decision does also go to show is that the implementation of the stipulations of the IBC still suffer from substantial hits and misses as to the interpretation of the law outside of the NCLT and the NCLAT. This disparity must be corrected for the holistic and successful implementation of the Code.


 

Siddharth is the Founder of CorpLexia and serves as its Editor. He is a student of BBA LL.B (Hons.) and has a special focus on corporate, commercial, insolvency, arbitration, securities and competition laws. He can be reached at siddharth@corplexia.com

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