WHETHER A DIRECTOR CAN BE ARRESTED UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881 (NI ACT) WHEN A MORATORIUM ORDER WAS ISSUED UNDER IBC 2016?

WHETHER A DIRECTOR CAN BE ARRESTED UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881 (NI ACT) WHEN A MORATORIUM ORDER WAS ISSUED UNDER IBC 2016?

CHEQUE BOUNCING CASE

Recently, I received a call from one of the director of the company. He informed me that his creditors have filed an insolvency proceedings under IBC, 2016 and NCLT has approved their plan and initiated an insolvency proceeding and declared a moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016.

He is receiving arrest threat from a police officer as an action under section 138 of the Negotiable Instrument, 1881 which was ordered by a court against him and other directors.

When he informed the police official that already a moratorium has been issued under IBC 2016 and hence, proceedings under section 138 of the Negotiable Instrument, 1881 is to be kept pending till the insolvency proceedings are over.

However, the police official is not accepting the same and he is threatening to initiate action under the Negotiable Instrument, 1881.

Is the Police official is right or does not aware the recent development under IBC 2016. This issue is faced by many directors of the various companies in India who have bounced their cheques and is undergoing the process of Insolvency proceedings.

WHAT IS MORATORIUM ORDER UNDER SECTION 14 OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016?

Moratorium order under section 14 of the Insolvency and Bankruptcy Code, 2016	It refers to a period when no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the corporate debtor or its director

WHO CAN CLAIM AN ACTION UNDER IBC 2016?

If a creditor claim is Rs 100,000 or more and the corporate debtor is unable to pay

A petition for insolvency against a corporate debtor can be triggered by a financial creditor, an operational creditor or by the corporate debtor itself.

WHAT IS MEANT BY CORPORATE INSOLVENCY RESOLUTION PROCESS? (CIRP)

CIRP	It is time bound and the relief of moratorium is available to the corporate debtor

			Insolvency process is to be completed within
CIRP- Normal Process	180 days	Plus maximum 90 days	270 days
CIRP-Fast Track Process	90 days	45 days (one time)	135 days

WHAT SECTION 14 OF IBC CODE SAYS ABOUT MORATORIUM?

14. (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 judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

When section 14 of IBC code clearly states that no proceeding against any corporate debtor can be taken due to any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority, how an arrest under section 138 of the Negotiable instrument Act can be initiated.  This is the main question still to be clarified.

STRICT CALM PERIOD

The IBC offers that after the initiation of insolvency proceedings for revival of the corporate debtor, there should prevail a stern calm period and complete moratorium in all cases where the primary liability is that of the corporate debtor.

Thus, even proceedings against the guarantors or the directors of the corporate debtor should be stayed until the committee of creditors delivers its verdict on whether revival of the corporate debtor is possible or not.

WHETHER MORATORIUM COVERS DIRECTORS WHO HAVE BEEN FOUND GUILD UNDER SECTION 138 OF THE NI ACT?

In the insolvency proceedings, the major accountability is that of the corporate debtor and when there is a stay of proceedings (moratorium) against the corporate debtor, it will mechanically end in transferring the chief liability to the director of the corporate debtor.

This ultimately will result in the opening of floodgates and will mean that the creditors will chase the directors during what is supposed to be a period of calm. The intent to provide a calm period during which the focus of the creditors is on revival of the corporate debtor will result in a futile exercise.

ULTRATECH ENGINEERING LIMITED CASE

In the above case, NCLT, Mumbai held that an order of Moratorium issued under IBC Code supersedes any other Act in force. That means no action can be initiated against directors of company under insolvency for an offence under section 138 of the NI.

Whether Insolvency and Bankruptcy Code, 2016 (Code) supersedes any State Law ?

Held yes by Mumbai NCLT in ICICI Bank Ltd vs. Innoventive Industries Ltd.

CONCLUSION

It may be concluded that the IBC has not defined what acts will preclude if moratorium order is issued, and whether the proceedings under the ambit of section 14 of the IBC can be enacted against a corporate debtor or its director or not. 

However, the morphological of section 14 is extensive and the purpose of the legislature was to offer a period of complete calm period to a corporate debtor under CIRP. 

Suitable circular or clarification should be issued under IBC 2016 so that the directors who have defaulted payment and has been indicted under section 138 of NI Act are safeguarded until the moratorium period under IBC 2016.