► Head notes :

Appellants were the directors – Respondents supplied steel – 51 cheques given by Appellants got bounced – Notice provided by Respondents – Two cheques provided later on got bounced too – Proceedings initiated u/s 138 of NI Act – before the Additional Chief Metropolitan Magistrate, Kurla, Mumbai – Demand Notice issued u/s 8 which got admitted in NCLT - NCLT stayed the criminal
proceedings under NI Act considering the moratorium – NCLAT set aside the order of NCLT – NCLAT considered the proceedings as criminal proceedings - hence will not be covered under the ambit of a moratorium under section 14 of the IBC – Supreme Court considered the underlying objective of Section 14 of IBC – The moratorium intends that there should not be any depletion of corporate debtor’s assets – In the present case Section 138 had civil liability i.e. a penal offence – hence not considered as a criminal liability – Supreme Court ordered the that the same shall be stayed taking into consideration the moratorium u/s 14 of IBC – However, the personal liability of directors and officers in charge continued under the NI Act.

► Order:

Brief/Facts of the case: The Respondents had supplied steel to the Company of which appellants were the directors. While making payment the company provided 51 cheques which were eventually bounced due to insufficient funds. The Respondents took recourse of Section 138 of NI Act before the Additional Chief Metropolitan Magistrate (hereinafter “ACMM”), Kurla, Mumbai.

The Respondent had applied under Section 9 of IBC which got admitted. NCLT stayed the ongoing proceedings under the NI Act considering the moratorium. However, NCLAT set aside the order of NCLT by adjudging that, proceedings under the NI Act for cheque bounce are criminal proceedings and hence will not be covered under the ambit of a moratorium under section 14 of the IBC.

Supreme Court took a deeper look at the intend of Section 14 which was to preserve the assets of the Corporate Debtor and to prevent it’s depletion. It further analyzed the primary nature of proceedings under the NI Act which essentially was a civil liability. The real object of the provision is not to punish the wrongdoer but to compensate the victim. Hence, if the proceedings would not be stayed it would deplete the Corporate Debtor’s resources by payment of exorbitant penalties as high as double the amount of the cheques bounced which would defeat the purpose of moratorium u/s 14 of the Code.

Meanwhile, there is no bar of Section 14 on the natural persons. Hence, the liability under the NI Act for the directors and the officers in charge would still be ongoing under the NI Act as there is no moratorium on their act.

Supreme Court’s Judgement: The proceedings under the NI act against the Corporate Debtor shall stay taking into consideration Section 14 of the Code. However, this relief will not apply to the “natural persons “ in charge of the affairs of the Company but will only apply to the corporate entity or the artificial juristic person the natural persons manage.