Moratorium Period and Criminal Proceedings Under the Insolvency & Bankruptcy Code (IBC)

The term ‘moratorium’ has not been defined under the provisions of the Insolvency & Bankruptcy Code, 2016 (IBC), however the same can be understood to mean a period during which no legal proceedings could be instituted/continued against the entity in respect of which the moratorium is in force.

Black’s Law Dictionary defined ‘moratorium’ as the “delay in performing an obligation or taking an action legally authorized or simply agreed to be temporary.”

It has been observed that the purpose of a moratorium is preservation of the assets of the company while possibilities of its resurrection are explored and ensuring that its various creditors do not initiate individual actions which may hamper or impede the resolution process.

MORATORIUM UNDER THE IBC

The moratorium provisions under the IBC are covered in various sections of the said code. Section 14 of IBC contains provisions with respect to moratorium against the corporate debtor for the purposes of corporate insolvency resolution process.

Section 33(5) of IBC provides for moratorium pursuant to an order of liquidation passed against the corporate debtor.

Section 54(E) of IBC provides for moratorium with respect to pre-packaged insolvency resolution process (which is applicable only for MSMEs).

Section 96 of IBC provides for interim moratorium the moment an application for insolvency of an individual is filed.

Section 101 provides for moratorium when the abovesaid application is admitted by the NCLT.

Section 14 of the IBC provides that during the moratorium period, the following would be prohibited:


a.    Institution of suits or continuation of pending suits or proceedings against the corporate debtor before any court of law, tribunal, arbitration panel, etc.

b.    Creation of third-party rights by the corporate debtor on any of its assets.

c.    Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property.

d.    Recovery of any property by an owner or lessor where such property is occupied by or in possession of the corporate debtor.

It has been clarified that the above order of moratorium would not continue indefinitely but would come to an end on the completion of the corporate insolvency resolution process.

WHETHER CRIMINAL PROCEEDINGS AGAINST THE CORPORATE DEBTOR WOULD BE COVERED BY THE MORATORIUM UNDER SECTION 14 OF THE IBC

As can be seen above from the actions prohibited during the subsistence of the moratorium period, it is evident that the institution/continuation of suits or other proceedings is prohibited. However, the question which arises is whether criminal proceedings would be covered under the “other proceedings” as mentioned in Section 14 of IBC.

1. The Hon’ble Supreme Court in the case of P. Mohanraj & Ors vs Shah Brothers Ispat Pvt. Ltd. [AIR 2021 SC 1308] was concerned with the question whether the institution or continuation of a proceeding under Section 138 of Negotiable Instruments Act, 1881 for dishonor of cheque can be said to be covered by the moratorium provision under Section 14 of the IBC.

• The Supreme Court after exhaustively dealing with various provisions of the IBC and the judicial precedents, authoritatively held that the proceedings under Section 138 of NI Act against the corporate debtor were covered by Section 14(1)(a) of the IBC.
• In essence, the Supreme Court held that during the subsistence of the moratorium period as envisaged under Section 14 of the IBC, the proceedings for cheque dishonor, which are quasi-criminal in nature, would be liable to be stayed. One of the reasons for such a finding was that in a proceeding for dishonor of cheques, the corporate debtor, if convicted, may be directed to pay compensation which can amount to twice the amount of the cheque which has bounced.
• Accordingly, payment of such compensation would in fact lead to depletion of the assets of the corporate debtor thereby directly impacting the corporate insolvency resolution process.
• One clarification provided by the Supreme Court in the above case was that though the moratorium would be applicable to the corporate debtor but that would not absolve the directors/persons in charge of and responsible for the conduct of the business of the corporate debtor from being prosecuted for the offence of dishonor of cheque.

2. The Hon’ble Supreme Court in the matter of Ajay Kumar Radheyshyam Goenka vs tourism Finance Corporation of India [MANU/SC/0244/2023] was concerned with a case where the managing director of a company (for which the resolution plan was approved by the NCLT) sought to seek his discharge from the proceedings under section 138 of the Negotiable Instruments Act.

• The seminal question of law framed by the Supreme Court was whether after the approval of the resolution plan of the corporate debtor, the managing director who signed the cheque, would stand discharged from the penal liability under Section 138 of the NI Act.
• The Supreme Court answered the question in the negative and held that the person who signed the cheque would continue to remain liable for the offence.

Another pertinent observation made by the Court was as under-

“…16.. In fact, a bare reading of Section 14 of IBC would make it clear that the nature of proceedings which have to be kept in abeyance do not include criminal proceedings, which is the nature of proceedings under Section 138 of the N.I. Act…”


3. The Hon’ble Delhi High Court in the matter of Rajiv Chakraborty Resolution Professional of EIEL vs Directorate of Enforcement [MANU/DE/4428/2022] was faced with the question of the impact that a moratorium under Section 14 of IBC would have on the powers of the Enforcement Directorate to enforce an attachment under the provisions of the Prevention of Money Laundering Act, 2002 (PMLA).

• After thoroughly examining the provisions of the IBC & PMLA along with the judicial precedents, the Delhi High Court concluded that the Enforcement Directorate’s power of attachment of property under the PMLA would not be affected by the moratorium provisions contained in Section 14 of IBC.  

CONCLUSION

It is evident that the object of the moratorium under the provisions of the IBC is to preserve the assets of the corporate debtor so that the same may be available throughout the resolution process. Any proceeding, be it civil or criminal, which would have the impact of depleting the assets of the corporate debtor in any manner, would be covered under the provisions of the moratorium and hence may be liable to be kept in abeyance.

However, it is to be noted that while such criminal proceedings may be kept in abeyance against the corporate debtor, the persons in charge of and responsible for the affairs of the company would not be entitled to take shelter of such a moratorium and the criminal proceedings against them may continue unhindered.

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