Moratorium U/S 14 IBC Applies Only To Corporate Debtor; Natural Persons Like Its Director Still Liable U/s 138 NI Act: Allahabad HC

The Allahabad High Court has observed that the moratorium provisions contained in Section 14 of the Insolvency and Bankruptcy Code, 2016 prohibit the proceeding u/s 138/141 NI Act only against the corporate debtor and not against the natural persons like the directors of the company for their vicarious liability.

A bench of Justice Arun Kumar Singh Deshwal observed thus while dismissing a plea moved by one Gurmeher Singh challenging the proceeding of a Complaint Case  u/s 138 NI Act pending before Addl. Civil Judge (J.D.), Gorakhpur.

"...on commencement of insolvency resolution process, the moratorium u/s 14 of I.B.C. prohibiting the proceeding u/s 138/141 N.I. The 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," the Court held.

For context, as per Section 14 IBC, moratorium refers to a specific timeframe during which legal actions such as debt recovery, enforcing security interests, selling or transferring assets, or terminating crucial contracts cannot be initiated or upheld against the Corporate Debtor. This provision seeks to preserve the assets of the corporate debtor during the resolution process.

The facts in brief

Opposite party No.2 applied u/s 138 N.I. Act against the applicant and his company (M/s Saraya Industries Ltd). The trial court, after perusal of the complaint and other evidence on record, issued a summon to the present applicant being the active director of the company.

That order was challenged by the applicant by way of Revision, but the said revision was also rejected. Feeling aggrieved by both orders, the applicant has filed the instant application.

Before the HC, the counsel for the applicant submitted that since the insolvency proceeding is going on against the company under the Insolvency and Bankruptcy Code, 2016, therefore, as per Section 14 of IBC, any proceeding including the proceeding u/s 138 N.I. The 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 the cheque in question.

On the other hand, the AGA submitted that Section 14 of IBC prohibits the execution only against the company and not against the natural person and hence, a director of the company will have no protection in a complaint under Section 138 NI Act.

High Court's order

Considering the submissions of counsel for the parties and on perusal of the record, the Court noted that the applicant, being director of the company, had 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.

Further, perusing the mandate of Section 14 of the IBC, the Court emphasized that a moratorium is applicable against the corporate debtor and not against the natural person like the applicant.

In this regard, the Court referred to the Supreme Court's ruling in the cases of P Mohanraj and others v M/s Shah Brothers Ispat Ltd and connected cases LL 2021 SC 120 and Narinder Garg vs Kotak Mahindra Bank 2022 LiveLaw (SC) 428.

Against this backdrop, noting that the complaint as well as the statement of opposite party No.2 shows that there are clear allegations against the applicant that he was involved in day to day business of the company in question, the court dismissed his plea.

Case title - Gurmeher Singh vs. State of U.P. and Another 2024 LiveLaw (AB) 238

Case citation: 2024 LiveLaw (AB) 238

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