Introduction
The Bombay High Court (‘Court’) in the case of K & K Foundry (P.) Ltd. v. Goyal Iron and Steel (Nagpur) (P.) Ltd.[i] ruled that the moratorium under s. 14 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) suspends, but does not extinguish, liabilities in criminal proceedings under s. 138 of the Negotiable Instruments Act, 1881 (‘NI Act’). The Court also clarified that the protections of s. 32A of the IBC does not extend to individuals or erstwhile management. This protection applies if the new management is taken over by someone not previously involved with the company’s promotion, management, or control. Moreover, the new management must be unrelated to such persons and must not have assisted in or planned any wrongdoing.
Brief Facts
Goyal Iron and Stell (Nagpur) (P.) Ltd. (‘Respondent-Company’) supplied pig iron to K & K Foundry (P.) Ltd. (‘Petitioner-Company’). The Petitioner-Company issued cheques for payment, signed by its directors, but they were dishonoured due to insufficient funds. As a result, a criminal complaint was filed under s. 138 of the NI Act against the Petitioner Company.
Meanwhile, the Petitioner-Company initiated insolvency resolution proceedings under the IBC and a moratorium under s. 14 of the IBC was declared.
The Petitioner-Company sought to quash the criminal complaint under s. 482 of the Code of Criminal Procedure, citing the moratorium and protections under s. 32A of the IBC. The Petitioner-Company argued that due to the moratorium, the proceedings under s. 138 of the NI Act cannot continue against them.
The Respondent-Company argued that the Petitioner-Company issued dishonoured cheques and failed to comply with statutory notice, making the directors liable under s. 138 read with s. 141 of the NI Act. They contended that insolvency proceedings do not protect directors under s. 14 of the IBC, and even with an approved resolution plan under s. 31, directors responsible for the company’s business remain liable for prosecution. The Respondent-Company cited the case of Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Ltd.[ii] to support their argument and sought dismissal of the application.
The Court’s Observation
The Court observed that the moratorium aims to prevent the depletion of a corporate debtor’s ('CD') assets during the insolvency resolution process. Proceedings under s. 138 of the NI Act are included within the scope of the moratorium. However, the moratorium does not extinguish liability but merely suspends the proceedings.
The Court also noted that a CD’s liability for prior offences is extinguished if an adjudicating authority-approved resolution plan results in management change. However, this safeguard is not extended to natural persons implicated in the offence.
In the present scenario, since the resolution plan did not bring about a change in management, with the director of the Petitioner-Company retaining control of the company, the protection under s. 32A does not apply to the Petitioner Company.
The Court relied on the Supreme Court’s decision of P. Mohanraj and others v. Shah Brothers Ispat Private Ltd.[iii] and Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Ltd. (Supra), where it was held that while proceedings against the CD are halted, those against natural persons (directors) responsible for the company’s actions can continue.
Therefore, the Court dismissed the application to quash the criminal complaint and held that
The moratorium under s. 14 of the IBC does not bar the continuation of proceedings under s. 138 of the NI Act against the directors.
The protection under s. 32-A of the IBC does not apply, as there was no change in management.
Both the company and its directors remain liable for prosecution under s. 138 of the NI Act.
Conclusion
The Court ruled that the protection under s. 32A of the IBC is limited to CDs with a change in management and does not extend to natural persons involved in the company's management or to companies where management remains unchanged. Hence, the criminal proceedings under ss. 138 and 141 of the NI Act against the directors and the company can continue despite the moratorium.
End Notes
[i] [2024] 162 taxmann.com 808 (Bombay).
[ii] 2023 LiveLaw (SC) 195.
[iii] [2021] 6 SCC 258.
Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.