The Allahabad High Court while dismissing an application observed that on commencement of insolvency resolution process, the moratorium u/s 14 of I.B.C prohibiting the proceeding u/s 138/141 N.I Act will be applicable only against the corporate debtor and not against the natural persons like the directors of the company for their vicarious liability.

A Single Bench of Justice Arun Kumar Singh Deshwal passed this order while hearing an application under section 482 filed by Gurmeher Singh.

The application has been filed seeking quashing of the order dated 12.1.2024 passed by Additional District & Sessions Judge/Special Judge (NDPS Act), Gorakhpur in Criminal Revision No 107 of 2023 (Gurmeher Singh Majithia vs State of U.P & others) as well as the order dated 23.3.2023 passed by Addl Civil Judge (J.D), Gorakhpur and stay the further proceeding of Complaint Case u/s 138 N.I Act, P.S Kotwali, District Gorakhpur, pending before Addl Civil Judge (J.D), Gorakhpur.

The facts of the case are that opposite party No 2 had filed an application u/s 138 N.I Act against the applicant and his company, namely, M/s Saraya Industries Ltd the trial court, after perusal of the complaint and other evidences on record, issued summon to the applicant being the active director of the company by order dated 8.2.2021.

That order was challenged by the applicant by way of Revision before Addl District & Sessions Judge, Gorakhpur, but the said revision was also rejected by order dated 12.1.2024. Feeling aggrieved by both the orders, the applicant has filed the application.

The contention of the counsel for the applicant is that the applicant is the director of the company on whose behalf the cheque in question was issued. As the insolvency proceeding is going on against the company under Insolvency and Bankruptcy Code, 2016 (I.B.C), therefore, as per Section 14 of I.B.C any proceeding including the proceeding u/s 138 N.I Act cannot be executed or proceeded further against the company and the applicant, being the director, has not given any guarantee for any amount payable under cheque in question.

It is also submitted that no finding was recorded that the applicant being the director has an active role in day to day business.

In support of her submission counsel for the applicant has relied upon the judgement of the Apex Court in the case of P Mohanraj and others vs M/s Shah Brothers Ispat Pvt Ltd; (2021) 6 SCC 258 in which the Apex Court observed that once the insolvency proceeding is pending against the company, then no proceeding including the proceeding u/s 138 N.I Act can be executed against the company.

Per contra, A.G.A has submitted that Section 14 of I.B.C prohibits the execution only against the company and not against the natural person.

It is further submitted that specific allegations were made against the applicant who actively played a role in persuading opposite party No 2 to invest money in the company of the applicant.

The Court observed that,

Considering the submissions of the counsel for the parties and on perusal of record, it is clear that the applicant, being director of the company, has played an active role in day to day business of the company and also persuaded opposite party No 2 to invest money in the liquor business.

The Apex Court in the case of P Mohanraj and others vs M/s Shah Brothers (supra) already considered this issue in detail and observed that moratorium u/s 14 of I.B.C is applicable against the corporate debtor and not against the natural person like the applicant. The above judgement was again reiterated by the Apex Court in the case of Narindar Garg and others vs Kotak Mahindra Bank Ltd and others; 2022 SCC OnLine SC 517.

“From the perusal of the above quoted judgement, it is clear that on commencement of insolvency resolution process, the moratorium u/s 14 of I.B.C prohibiting the proceeding u/s 138/141 N.I Act will be applicable only against the corporate debtor and not against the natural persons like the directors of the company for their vicarious liability. Therefore, this judgement does not help the applicant.

From the perusal of the complaint as well as the statement of opposite party No 2, it is clear that there are clear allegations against the applicant that he was actually involved in day to day business of the company in question, therefore, he is also liable as per Section 141 of N.I Act.

In view of the above, the Court does not find any good ground to quash the impugned proceeding”, the Court further observed while dismissing the application.

There will not be initiation of corporate insolvency resolution process of a corporate debtor filed for any default arising on or after 25^th March, 2020 for a period of six months, not exceeding one year from such date, according to the ordinance. 

The Amendment has added Section 10 A. which states, Notwithstanding anything contained in Section 7, 9, and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of Six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of corporate debtor for the said default occurring during the said period.

The Amendment of Section 66 was also made according to which after sub section (2), the following sub-section will be inserted, namely; –

(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A”.

It was said that the entire ecosystem for implementation of the Insolvency and Bankruptcy Code, 2016 is in place and provisions relating to corporate insolvency resolution process and liquidation process for corporate persons under the Code are in operation, whereas COVID-19 pandemic has impactedbusiness, financial markets and economy all over the world, including India and created uncertainty and stress for business for reasons beyond their control, whereas a nationwide lockdown is in force since 25^th March, 2020 to combat the spread of COVID-19 which has added to disruption of normal business operations.

“Whereas, it is difficult to find adequate number of resolution applicants to rescue the corporate person who may default in discharge of their debt obligation, and whereas it is considered expedient to suspend under section 7,9 and 10 of the Insolvency and Bankruptcy Code, 2016 to prevent corporate persons which are experiencing distress on accountof unprecedented situation, being pushed into insolvency proceedings under the said Code for some time.

Whereas, it is considered expedient to exclude the defaults arising on account of unprecedented situation for the purposes of Insolvency proceedings under this Code, whereas the parliament is not in session and the President is satisfied that circumstances exist which render it necessary for him to take immediate action”, said in the notification.

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-India Legal Bureau