'Moratorium U/S 14(1) IBC Applies Only To Corporate Debtor; Non-Corporate Debtors U/S 141 NI Act Continue To Be Statutorily Liable': Kerala HC

The Kerala High Court on Thursday held that the moratorium provision enshrined in Section 14 (1) of the Insolvency and Bankruptcy Code would only apply to corporate debtors, and the non-corporate debtors under Section 141 of the Negotiable Instruments Act would continue to be statutorily liable under Chapter XVII of the Act. 

As regards the application of the principles of vicarious liability under criminal law as has been provided under Section 141 of the NI Act is concerned, the Single Judge bench of Justice A. Badharudeen observed that, the same could not be fastened due to civil liability.

"Vicarious liability under sub-Section (1) to S.141 of the NI Act can be pinned when the person is in overall control of the day-to-day business of the company or firm. Vicarious liability under sub-section (2) to S.141 of the NI Act can arise because of the director, manager, secretary, or other officer's personal conduct, functional or transactional role, notwithstanding that the person was not in overall control of the day-to-day business of the company when the offence was committed. Vicarious liability under sub-section (2) is attracted when the offence is committed with the consent, connivance, or is attributable to the neglect on the part of a director, manager, secretary, or other officer of the company", it was observed. 

In this case, the cheque had been executed and issued for and on behalf of the Hospital, by the 2nd accused (Managing Director), as per the directions and instructions given by the accused persons who are the Directors of the Hospital, thus indicating that the ingredients for the application of the principles of vicarious liability were satisfied. 

The complainant before the Judicial First Class Magistrates Court (NIA Cases), Ernakulam, Dr. Satheesh Iype, had filed a complaint under Section 142 of the Negotiable Instruments Act (N.I. Act), alleging dishonour of a cheque for the amount of Rs.37,20,000/-, and thereby committing offence under Section 138 of the Act against the seven accused persons in the present case. It is noted that the accused persons herein are the Managing Director and Directors of PVS Memorial Hospital. 

Thus, the petitioner/accused persons herein have filed the present Criminal Miscellaneous petition for quashment of the complaint under Section 482 of the Code of Criminal Procedure. 

The Court in this case delved upon the following issues: firstly, whether the moratorium issued under Section 14 (1) of the Insolvency and Bankruptcy Rules, 2016 would apply to non-corporate debtor(s) under Section 141 of the N.I. Act, and secondly, how the vicarious liability in criminal law would emerge as regards Section 141 of the NI Act. 

The counsels for the petitioner placed reliance on the Apex Court decision in P.Mohanraj & Ors. v. M/s Shah Brothers Ispat Pvt [LL 2021 SC 120] to contend that no prosecution against the corporate debtor and its Directors could be possible pursuant to the issuance of the Moratorium under Section 14 (1) of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016). 

Section 14(1) IBC stipulates that, "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; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor".

It was pointed out by the counsels on behalf of the petitioner that as per the NCLT Order, moratorium order under Section 14(1) had been specifically passed in relation to M/s PVS Memorial Hospital Private Ltd., and thus, no prosecution against the petitioners would be permissible. 

The Court found merit in this contention advanced by the counsel. It particularly took note of the observation made by the Apex Court in P. Mohanraj case that since the moratorium provision contained in Section 14 IBC imposes a legal impediment, which would make it impossible for such proceeding to continue or be instituted against the corporate debtor. It was thus observed therein that, "...for the period of moratorium, since no Sections 138/141 proceeding can continue or be initiated against the corporate debtor because of a statutory bar, such proceedings can be initiated or continued against the persons mentioned in Sections 141(1) and (2) of the Negotiable Instruments Act. This being the case, it is clear that the moratorium provision contained in Section 14 IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141 continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act". 

It is on this basis that the Court found that the moratorium in Section 14(1) IBC would only apply to the corporate debtor, and the non-corporate debtors in Section 141 NI Act would continue to be statutorily liable.  

It thus discerned that due to the same, the complaint against the petitioners could not be quashed, although the prosecution against the 1st petitioner PVS Memorial Hospital could be kept in abeyance till finalization of the moratorium proceedings, while allowing prosecution against the other petitioners who are natural persons. 

As regards the second question, the Court noted the argument of the counsel for the petitioners that in order to prosecute the Directors of a company, there ought to be narration in the complaint with respect to their specific roles in the affairs of the company and that otherwise the prosecution under the principles of vicarious liability cannot be proceeded.

The Court also took note of the settled position in Dilip Hariramani v. Bank of Baroda (2022) while arriving at its finding that the averments in the complaint revealed that the necessary ingredients for application of principles of vicarious liability is satisfied. 

It was thus discerned by the Court that the twin contentions raised by the counsels for the petitioners for quashing the complaint were not sustainable. However, the Court made it clear that the prosecution against the 1st petitioner PVS Memorial Hospital would stand deferred subject to the outcome of moratorium proceedings, while the prosecution against the non-corporate debtors/natural persons could continue. 

Advocates V. Krishna Menon, J. Surya, and Prinsun Philip appeared on behalf of the petitioners. The respondents were represented by Public Prosecutors G. Sudheer, and Advocate Thomas T. Varghese. 

Case Title: M/S PVS Memorial Hospital & Ors. v. Dr. Satheesh Iype & Anr. 

Citation: 2023 LiveLaw (Ker) 14 

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