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Interplay between Section 96 of the Insolvency and Bankruptcy Code, 2016 and Section 138 of the Negotiable Instruments Act, 1881

Interplay between Section 96 of the Insolvency and Bankruptcy Code, 2016 and Section 138 of the Negotiable Instruments Act, 1881

Introduction to IBC 2016 and Negotiable Instruments Act

The Insolvency and Bankruptcy Code, 2016 (IBC) and the Negotiable Instruments Act, 1881 (NI Act) are two significant legislations in India that deal with financial transactions. The IBC provides a framework for insolvency resolution, while the NI Act governs the use of negotiable instruments like cheques. There has been a lot of debate on the interplay between these two laws, particularly between Section 96 of the IBC and Section 138 of the Negotiable Instruments Act.

Relevant Provisions

Section 96 of the IBC1

Section 96 of the IBC deals with interim-moratorium. It states that when an application is filed under section 94 or section 95:

  • An interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application.
  • During the interim-moratorium period:
    • Any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed.
    • The creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.

Section 138 of the Negotiable Instruments Act

Section 138 of the Negotiable Instruments provides that in case of dishonour of cheque for insufficiency of funds or for any prescribed reasons, the defaulter can be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or both.

Interplay between Section 96 of IBC and Section 138 of Negotiable Instruments act

The interplay between these two sections has been a subject matter in various court cases. The key question is whether an interim moratorium under Section 96 of IBC would stay a complaint under Section 138 of NI Act.

Case: Sandeep Gupta vs. Ram Steel Traders and Ors2

In this case, it was held that provisions of Section 96 would not be applicable as the Petitioner is arrayed as an accused in the complaint under Section 138 in his capacity as Managing Director2. The court clarified that Section 138 prescribes punishment and compensation for bouncing a cheque and is not a recovery proceeding2.

Case: Axis Trustee Services Limited vs Brij Bhushan Singal & Anr2

The Delhi High Court held that interim moratorium under section 96 cannot include all co-guarantors within its ambit2.

Case: Vijay Kumar Ghai vs Pritpal Singh Babbar3

The Punjab and Haryana High Court held that simply because an application had been filed under Section 94, proceedings under Section 138 would not get automatically stayed even in terms of Section 963.

Case: Ashok Mahindru and Another v. Vivek Parti1

The NCLAT held that Section 96 (1) (b) does not stay any future liability or obligation1.

The P Mohan Raj Case

In the P Mohan Raj case1, it was held that the declaration of a moratorium under Section 14 of the IBC covers criminal proceedings for dishonour of cheque under Section 138 of the NI Act2The court reasoned that proceedings under Section 138 are more like “civil sheep in a criminal wolf’s clothing” and hence, for civil recovery, moratorium should apply2.

The Controversy

Despite this ruling, various courts have held that an interim moratorium under Section 96 does not stay proceedings under Section 138 3 4 5 6 7. These judgments seem to be in disagreement with the logic applied in the P Mohan Raj case. If P Mohan Raj protects corporate debtors under Section 14, then by the same logic, Section 96 should protect individuals from proceedings under the Negotiable Instruments act.

Critical Analysis and View

While it might seem logical to apply the same reasoning from P Mohan Raj’s case regarding moratorium under S.14 on corporate insolvency to S.96 in individual insolvency context, it’s important to note that these are two distinct provisions dealing with different types of insolvency – corporate and personal respectively.

In P Mohan Raj’s case, it was held that moratorium under S.14 applies to proceedings under S.138 because both provisions deal with corporate entities1. However, S.96 deals with individual insolvency and thus its scope is different from S.14.

Moreover, S.138 proceedings are penal in nature aimed at punishing an individual (like a director or signatory) for their failure to honor their obligations under a cheque. This is different from recovery proceedings which are typically stayed during a moratorium period.

Therefore, while at first glance it might seem inconsistent, upon closer examination it becomes clear why courts have held that S.96 moratorium does not stay S.138 proceedings.

Conclusion of interplay between IBC and Negotiable Instruments Act:

In conclusion, there seems to be a need for a relook at this issue by higher courts. It is hoped that future judgments will settle this controversy and perhaps take a different view, one that upholds the spirit and objectives of the IBC. Until then, this remains a grey area in law with significant implications for individuals invoking insolvency proceedings. Additionally, it’s important to note that while corporate debtors are protected by moratorium, signatories and directors cannot escape their penal liability under Section 138 by filing personal insolvency proceedings. This consensus among various courts underscores the complex interplay between the IBC and the NI Act, particularly Sections 96 and 138, and the need for a balanced approach that considers the rights of both creditors and individuals facing insolvency.


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