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Moratorium under IBC applies only to CD, not directors, Natural persons would still be liable under Chapter XVII of NI Act

FEMA, BANKING & INSURANCE : Moratorium provision contained under section 14 (1) of IBC would apply only to a corporate debtor and natural persons i.e. directors of corporate debtor mentioned in section 141 of N.I. Act would continue to be statutorily liable under Chapter XVII of N.I. Act
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HIGH COURT OF KERALA
PVS Memorial Hospital
v.
Dr. Satheesh Iype
A. BADHARUDEEN, J.
CRL. MC NO. 8157 OF 2022
JANUARY 5, 2023

Section 141, read with section 138, of the Negotiable Instruments Act, 1881 and section 14 of the Insolvency and Bankruptcy Code, 2016 – Offence by Companies – Whether moratorium provision contained under section 14(1) of IBC would apply only to a corporate debtor, natural persons mentioned in section 141 would continue to be statutorily liable under Chapter XVII of N.I. Act – Held, yes – Whether vicarious liability under sub-section (2) to section 141 can arise because of director, manager, secretary, or other officer’s personal conduct, functional or transactional role, notwithstanding that person was not in overall control of day-to-day business of company when offence was committed – Held, yes – Whether thus, prosecution against corporate debtor for offence punishable under section 138 would stand deferred subject to outcome of moratorium proceedings, under section 14 of IBC, while allowing continuance of prosecution against directors/natural persons – Held, yes [Paras 10 and 13]

FACTS

■ The complainant lodged complaint under section 142 before the Magistrate Court alleging that the accused company and its directors committed offence punishable under section 138 since the cheque jointly issued by accused of Rs. 37,20,000/- got dishonoured for want of funds, when the cheque was presented for collection.
■ While seeking quashment of complaint, accused corporate debtor and its directors in instant petition placed reliance on a three Bench decision of the Apex Court [(2021) 6 SCC 258], P.Mohanraj v. Shah Brothers Ispat (P.) Ltd. [2021] 125 taxmann.com 39/167 SCL 327 to contend that, no prosecution against the accused and its Directors could be possible after moratorium issued in terms of section 14(1). It was specifically pointed out that, moratorium order under section 14(1) had been passed in relation to accused. Therefore, no prosecution against the accused was permissible.
■ Secondly, it was argued that, in order to prosecute the Directors of a company, there would be narration in the complaint with regard to their specific roles in the affairs of the company and otherwise the prosecution under the principles of vicarious liability could not be proceeded.

HELD

■ The legal position emerges is that moratorium provision contained in sec.14 (1) would apply only to corporate debtor and the non-corporate debtor/debtors mentioned in section 141, continuing to be statutorily liable under Chapter XVII of the N.I Act [Para 9].
■ In view of the legal position settled by the Three Bench of the Apex Court, in P.Mohanraj v. Shah Brothers Ispat (P.) Ltd. [2021] 125 taxmann.com 39/167 SCL 327, holding the view that, moratorium provision contained under section 14(1) would apply only to a corporate debtor and the natural persons mentioned in section 141 continuing to be statutorily liable under Chapter XVII of the N.I.Act. Therefore, the complaint against the accused cannot be quashed, simply on the ground of moratorium order. However, the prosecution against the accused being corporate debtor can be kept in abeyance till finalization of the moratorium proceedings, while allowing prosecution against natural person i.e. petitioners-directors of accused company. [Para 10]
■ The legal position is not in dispute and the same is as held in Dilip Hariramani v. Bank of Baroda [2022] 138 taxmann.com 186/172 SCL 281 (SC). Thus, as regards to the application of vicarious liability in terms of criminal law as provided under section 141 of the N.I. Act is concerned, the same cannot be fastened because of the civil liability. Vicarious liability under sub-section (1) to section 141 can be pinned when the person is in overall control of the day-to-day business of the company or firm. Vicarious liability under sub-section (2) to section 141 can arise because of the director, manager, secretary, or other officer’s personal conduct, functional or transactional role, notwithstanding that the person was not in overall control of the day-to-day business of the company when the offence was committed. Vicarious liability under sub-section (2) is attracted when the offence is committed with the consent, connivance, or is attributable to the neglect on the part of a director, manager, secretary, or other officer of the company. [Para 13]
■ Thus, the necessary ingredients as has been held in Dilip Hariramani’s case could be gathered from the averments in the complaint and the rest of the contentions raised by the accused shall be matter of evidence, during trial. [Para 16]
■ To upshot, it is held that, the twin contentions raised by the petitioners to quash complaint, found to be not sustainable. However, the prosecution against the accused company the corporate debtor shall stand deferred subject to the outcome of moratorium proceedings, while allowing continuance of prosecution against director of accused the non-corporate debtors/natural persons. Accordingly, instant petition stands disposed of. [Para 17]

CASE REVIEW

Dilip Hariramani v. Bank of Baroda [2022] 138 186/172 SCL 281 (SC) (para 16) and P.Mohanraj v. Shah Brothers Ispat (P.) Ltd. [2021] 125 39/167 SCL 327 (SC) (para 10) followed.

CASES REFERRED TO

P.Mohanraj v. Shah Brothers Ispat (P.) Ltd. [2021] 39/167 SCL 327 (SC) (para 6), Lalankumar Singh v. State of Maharashtra 2022 SCC OnLine SC 1383 (para 8), Dilip Hariramani v. Bank of Baroda [2022] 186/172 SCL 281 (SC) (para 8) and Ashoke Mal Bafna v. Upper India Steel Mfg. & Engg. Co. Ltd. [Criminal Appeal No. 529 of 2017, dated 6-3-2017] (para 12).
V. Krishna Menon, J. Surya and Prinsun Philip for the Petitioner. Thomas T. Varghese and G. Sudheer for the Respondent.