Hence, till a decision is taken by the Adjudicating Authority in terms of Sections 100 and 101 of the Code, on the application filed by the petitioner under Section 94(1) thereof, the proceedings before the learned trial court under Section 138 of the Act, would remain stayed.
Blogger’s Comments; A personal guarantor of a CD can effectively avoid criminal proceedings under section 138 of N.I. Act., by filing an application under section 94(1). Further after resolution of personal insolvency, the criminal proceedings under section 138 of N.I. Act. will stand abated, due to extinguishment of debt qua dishonored cheque, under resolution of personal insolvency.
Excerpts of the order;
# 1. Vide this petition, the petitioner challenges by way of invoking jurisdiction of this court under Section 482 of the Cr.P.C., the order passed by the learned JMIC, Jalandhar, dated 25.05.2021 (copy Annexure P-23), by which his application seeking a stay on the proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881, was dismissed; with that court holding that simply because the petitioner had filed an application under Section 94 of the Insolvency and Bankruptcy Code, 2016 (in short “the IBC” or the “Code”), that would not mean that the proceedings under Section 138 would get automatically stayed even in terms of Section 96 of the said Code, in view of the fact that the cheque in question was issued by the petitioner in his personal capacity and was not in any manner in discharge of any corporate debt in respect of ‘his company’.
Thus the entire controversy is as to whether criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881, (hereinafter referred to as the “NI Act” or the “Act”), would also remain stayed in terms of Section 96 of the Code, even where the cheque in question was not issued to discharge a ‘corporate debt’, though issued by a personal guarantor qua a corporate debtor, but is not a cheque qua parties as are adversaries or litigants in any proceedings before the National Company Law Tribunal/Resolution Professional/Interim Resolution Professional.
# 2. Before going further, a very brief reference to the complaint under the NI Act, filed by the respondent, needs to be made.
As per the respondent herein, the petitioner had requested him for a loan of Rs.1,00,000/- for his business requirements, with an offer made to repay the same with interest; and keeping in view their friendly relations, the complainant is stated to have given him a loan, vide a demand draft for an amount of Rs.11,00,000/-, issued by the State Bank of Patiala on 05.03.2008.
The petitioner is stated to have been paying interest @ Rs.24,700/- per quarter and eventually, to discharge his financial obligation to the respondent-complainant, he issued a cheque dated 20.02.2012 for an amount of Rs.11,00,000/- drawn on the State Bank of India, which cheque however is stated to have been returned by the bank on account of deficiency of funds in the petitioners’ account, vide a memo issued by the bank on 24.02.2012.
A legal notice was got issued by the respondent to the petitioner on 02.03.2012 in terms of Section 138 of the Act, but with the amount still not having been paid, the complaint under the same provision was filed by the respondent herein on 21.03.2012, with summons having been issued to the petitioner by the JMIC, Jalandhar, vide an order dated 28.05.2012.
The application under Section 94(1) of the Code (copy Annexure P-17) filed by the petitioner, is seen to be dated 04.02.2021, though with the written communication to the National Company Law Tribunal, Chandigarh Bench, by the proposed Interim Resolution Professional (in terms of Rule 9 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016), is shown to be dated 14.12.2020.
24. The question before this court therefore is as to whether in the aforesaid circumstances the interim moratorium under Section 96 of the Code would apply to the complaint filed by the respondent herein under Section 138 of the NI Act, or not.
As already noticed, learned counsel for the petitioner referred to Sections 78 to 115 of the Code and specifically to the Sections already referred to in this judgment, to submit that once the provisions of the Code are applicable to even individuals, then upon an application under Section 94 having been filed, the interim moratorium stipulated in Section 96(1) of the Code would operate qua all legal proceedings pending in respect of any debt incurred by the applicant, i.e. the petitioner herein.
Per contra, learned counsel for the respondent essentially submitted that the respondent in no way being even remotely connected to the liability of the petitioner or his company, i.e. M/s Priknit Retails Ltd., and the cheque issued by the petitioner in favour of the respondent being in respect of a transaction/loan entered into wholly in their own individual capacities, from the personal account of the petitioner, no provision of the Code would apply to any proceedings arising out of such liability of the petitioner, including proceedings under Section 138 of the NI Act.
# 26. Therefore, as regards the applicability of the Code, it would cover even individuals in terms of clause (g) of Section 2. Though the said clause itself excludes personal guarantors to corporate debtors, that category of debtors has been specifically referred to in clause (e) of Section 2.
Also, at least in the context of Section 14 of the Code, the Supreme Court in P. Mohanraj (supra) has specifically held that there would be a moratorium even on proceedings under Section 138 of the Act, once the adjudicating authority, on the insolvency commencement date, has ordered that such moratorium be declared.
# 27. In that context it needs to be observed that the term “insolvency commencement date” has been defined in Section 5 (12) of the Code to be the date of admission of an application for initiating a corporate insolvency resolution process under Section 7/9/10 as the case may be.
(The said provisions, i.e. Sections 7, 9 and 10, refer to initiation of such process by a financial creditor, operational creditor and a corporate applicant respectively).
Section 5(11) of the Code defines an “initiation date” to be the date on which the applicant makes an application to the adjudicating authority for initiating the corporate insolvency resolution process etc.
# 28. What is important to again notice here is that Sections 5, 7, 10 and 14 of the Code all fall within Part-II thereof, with the heading of that Part reading as follows:-
“Insolvency Resolution and Liquidation for corporate persons”
The said Part-II commences with Section 4 of the Code and continues till Section 77-A thereof, after which Part-III of the Code commences from Section 78 and continues till Section 187 thereof.
The heading of Part-III reads as follows:-
“Insolvency Resolution and Bankruptcy for individuals and partnership firms.”
It is also necessary to notice at this stage that the petitioner having filed the application before learned NCLT as a personal guarantor to a corporate debtor, the term ‘personal guarantor’ is defined only in Section 5(22) of the Code which is again reproduced here:-
“5. Definitions
In this Part, unless the context otherwise requires,-
(22) “personal guarantor” means an individual who is the surety in contract of guarantee to a corporate debtor;”
Thus, the said provision is defined only in Part-II of the Code relating to insolvency resolution and liquidation proceedings in respect of corporate persons and is not seen to be defined anywhere in Section 79 of the Code, which comes within the ambit of Part III and which pertains to such process for individuals and partnership firms.
Section 79 thus contains the definitions as would seem to be relevant to Part-III whereas Section 5 contains definitions as would be relevant to Part-II.
# 29. Having thus looked at the aforesaid provisions of the Code, let us now examine the other parts of the judgment of the Supreme Court in P. Mohanraj (supra) as have not been already reproduced hereinabove but would have specific significance qua the issue in question.
Though paragraph 26 thereof would also have some relevance, that paragraph is not being reproduced as it essentially reproduces Sections 81 and 85 of the Code, after referring to them in the context of Section 14. Thereafter the relevant part of paragraph 27 of that judgment (without reproducing Sections 96 and 101 again), reads as follows:-
“27. When the language of Section 14 and Section 85 are contrasted, it becomes clear that though the language of Section 85 is only in respect of debts, the moratorium contained in Section 14 is not subject specific. The only light thrown on the subject is by the exception provision contained in Section 14(3) (a) which is that “transactions” are the subject matter of Section 14(1). “Transaction” is, as we have seen, a much wider expression than “debt”, and subsumes it. Also, the expression “proceedings” used by the legislature in Section 14(1)(a) is not trammelled by the word “legal” as a prefix that is contained in the moratorium provisions qua individuals and firms. Likewise, the provisions of Section 96 and Section 101 are moratorium provisions in Chapter III of Part III dealing with the insolvency resolution process of individuals and firms, the same expression, namely, “debts” is used as is used in Section 85. Sections 96 and 101 read as follows:
xxxxx xxxxx xxxxx
A legal action or proceeding in respect of any debt would, on its plain language, include a Section 138 proceedings.
xxxxx xxxxx xxxxx” (Emphasis applied in this judgment only)
Paragraph 28 thereafter reads as follows:-
“28. When the language of these Sections is juxtaposed against the language of Section 14, it is clear that the width of Section 14 is even greater, given that Section 14 declares a moratorium prohibiting what is mentioned in clauses (a) to (d) thereof in respect of transactions entered into by the corporate debtor, inclusive of transactions relating to debts, as is contained in Sections 81, 85, 96 and 101. Also, Section 14(1)(d) is conspicuous by its absence in any of these sections. Thus, where individuals or firms are concerned, the recovery of any property by an owner or lessor, where such property is occupied by or in possession of the individual or firm can be recovered during the moratorium period, unlike the property of a corporate debtor. For all these reasons, therefore, given the object and context of Section 14, the expression “proceedings” cannot be cut down by any rule of construction and must be given a fair meaning consonant with the object and context. It is conceded before us that criminal proceedings which are not directly related to transactions evidencing debt or liability of the corporate debtor would be outside the scope of this expression.”
# 30. Thereafter in paragraph 29 of P. Mohanraj, their Lordships referred to paragraphs 26 and 26.1 of an earlier judgment of the Supreme Court in State Bank of India versus V. Ramakrishnan and another (2018) 17 SCC 394. Those paragraphs read as follows and are extremely significant in the context of Sections 96 and 101 when juxtaposed with Section 14 of the Code:-
“26. We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due. First and foremost, this is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolution processes may be initiated under Part III. Secondly, the protection of the moratorium under these sections is far greater than that of Section 14 in that pending legal proceedings in respect of the debt and not the debtor are stayed. The difference in language between Sections 14 and 101 is for a reason.
26.1 Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor — often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor” (Emphasis applied in this judgment only)
# 31. Having referred to the aforesaid paragraphs in V. Ramakrishnan, in P. Mohanraj their Lordships held as follows by way of a comment on the significance of the context of the judgment in V. Ramakrishnan:-
“These observations, when viewed in context, are correct. However, this case is distinguishable in that the difference between these provisions and Section 14 was not examined qua moratorium provisions as a whole in relation to corporate debtors vis-a-vis individuals/firms.”
# 32. In the context of the present case before this court, what is to be observed is that in paragraph 26.1 of V. Ramakrishnan, the Supreme Court has specifically observed that in a vast majority of cases personal guarantees are given by the Directors of the companies (as are in debt), which is the admitted position in the present case as already noticed earlier also. Thus the petitioner herein is a personal guarantor to a corporate debtor, such corporate debtor being the company of which he is a Director.
In the aforesaid background the only judgment of the Supreme Court as has been referred to by learned counsel for the parties (actually for the petitioner), as has been pronounced on the subject after the amendment of the Code in 2018, is that in Lalit Kumar Jains‘ case (supra).
From that judgment, other than the paragraphs specifically referred to by learned counsel for the petitioner, what needs to be referred to by this court is that part of paragraph 86 as reproduces sub-section (2) of Section 60 of the Code, with that provision again being reproduced here, by highlighting what is considered necessary by this court for the purpose of the present petition:-
“86. XXXXX XXXXX XXXXX
The amended Section 60(2) reads as follows:-
“(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor shall be filed before the National Company Law Tribunal.”
# 33. Thus, even after the amendment of 2018 in the Code, sub-section (2) of Section 60 effectively states (even in terms of sub-section (1) thereof) that an application relating to the insolvency resolution or bankruptcy of a corporate guarantor or a personal guarantor, shall be filed before the NCLT.
Further, any application filed by a personal guarantor to a corporate debtor can only be filed if a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before the NCLT.
In other words, a plain reading of the aforesaid provision would show that a personal guarantor to a corporate debtor cannot independently seek initiation of insolvency or bankruptcy etc. proceedings even before the NCLT in terms of sub-section (1) of Section 60, unless the corporate debtor itself is already subject to such pending proceedings before the Tribunal.
In the present case, as already noticed (in paragraph 23 (iii) of this judgment, supra), the application filed by the present petitioner (copy Annexure P-17), under the provisions of Section 94(1) of the Code read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for personal Guarantors to corporate Debtors) Rules, 2019 (hereinafter referred to as the Rules of 2019), is to initiate “an insolvency resolution process in respect of VIJAY KUMAR GHAI”, which would only be possible, on a bare reading of Section 60 (2), if the company of which he is a Director and stands as a personal guarantor to, i.e. M/s Priknit Retails Ltd., is already in proceedings before the NCLT for insolvency resolution/liquidation, either initiated by itself or initiated by the two banks or the company as have been made respondents by the petitioner in his application, i.e. M/s ICICI Bank, State Bank of India and ASREC (India) Ltd.
It is not denied that in fact proceedings under Section 7 of the Code were initiated by the State Bank of India against the petitioners’ company, i.e. M/s Priknit Retails Ltd., upon which an order was initially passed on 11.09.2019 by the learned Tribunal, after which IA no.138 of 2020 was filed by the Resolution Professional appointed by that forum, under the provisions of Sections 23(1) and 34 of the Code, seeking that the corporate debtor (Priknit) be liquidated as per the procedure laid down in the Code, with that application having been allowed and with the Resolution Professional himself having been appointed as the Liquidator on 18.05.2020.
Subsequently, Mr. Jagga also produced an order dated 11.05.2022, (after the matter had been put up for rehearing by this court), also passed by the Tribunal, taking on record the progress report in the liquidation proceedings and with the next date of hearing in those proceedings before the Tribunal now being 19.07.2022.
Hence, as regards the basic maintainability of the application of the petitioner in view of the already pending proceedings initiated against the corporate debtor, the application would be maintainable (though of course with no comment made by this court as to whether the application under Section 94 (1) should be accepted on merits or rejected, by the Tribunal).
# 34. Consequently, the two questions now before this court are:-
(1) Whether in such circumstances the complaint under Section 138 of the Act of 1881 would also fall within the ambit of the phrases “all the debts” and “any legal actions or proceedings pending in respect of any debt” as occur in clauses (a) and (b)(i) of sub-section (1) respectively of Section 96, or would the aforesaid expressions be limited to any debt as is concerned or linked in any manner to the corporate debtor for whom the petitioner stands as a personal guarantor, with the respondent herein not being in any manner concerned with the debt of either the corporate debtor or the personal guarantee furnished by the petitioner in respect of the corporate debtor;
(2) If the answer to the aforesaid question is in the affirmative, whether proceedings under Section 138 of the Act would be deemed to have been stayed in terms of Section 96 of the Code in view of the fact that the complaint against the petitioner was filed 8 to 9 years prior to the petitioners’ application under Section 94 and even about 6 years before the initiation of proceedings against the corporate debtor by the State Bank of India under Section 7 of the Code.
# 35. As regards the first question, there are two ways of interpreting the phrases “all the debts” and “any legal actions or proceedings pending in respect of any debt” as are referred to in Section 96 of the Code.
First, that as per a plain reading of the aforesaid phrases in the provision, once a personal guarantor to a corporate debtor has filed an application under Section 94(1) before the Adjudicating Authority, all legal proceedings in respect of any debt that the personal guarantor is facing, would be covered by the interim moratorium and consequently the proceedings in the complaint filed by the respondent herein under Section 138 of the Act also would remain stayed, such proceedings being in respect of a debt alleged to have been incurred by the petitioner qua the respondent, (with such interim moratorium to continue till the application under Section 94 is either rejected or accepted by the Adjudicating Authority. If the application is admitted, proceedings under Section 138 would remain stayed till the proceedings before the Tribunal are taken to their logical conclusion, in terms of Sections 100 and 101 of the Code).
The other interpretation that can be given is that the phrases “all legal proceedings” and “any debt”, only pertain to debts as are relatable to the corporate debtor in any manner; and any other personal debt incurred by the guarantor to a corporate debtor, as has nothing to do with such corporate debtor or corporate debt, would not be affected in any manner by the application filed under Section 94 by the personal guarantor to a corporate debtor and consequently the complaint filed by the respondent herein under Section 138 of the Act can continue wholly independently of the proceedings before the Adjudicating Authority/NCLT.
# 36. To further try and understand as to which of the aforesaid two interpretations would apply, the following part of the judgment of the Supreme Court (in paragraph 26.1) of V. Ramakrishnans’ case (supra) would need to be looked at again:-
“………. and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor — often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor.”
Further, the judgment in Lalit Kumar Jains‘ case (supra) may also be again referred to wherein, while upholding the distinction created between other individuals and personal guarantors to corporate debtors vide sub-section (2) of Section 60 of the Code (as regards the forum before which a personal guarantor would be required to apply under Section 94), it was thereafter held in paragraph 100 (Law Finder edition = para 113 SCC edition) as follows:-
“100. It is clear from the above analysis that Parliamentary intent was to treat personal guarantors differently from other categories of individuals. The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the Adjudicating Authority was common with the corporate debtor to whom they had stood guarantee. The fact that the process of insolvency in Part III is to be applied to individuals, whereas the process in relation to corporate debtors, set out in Part II is to be applied to such corporate persons, does not lead to incongruity. On the other hand, there appear to be sound reasons why the forum for adjudicating insolvency processes – the provisions of which are disparate- is to be common, i.e. through the NCLT. As was emphasized during the hearing, the NCLT would be able to consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor’s insolvency process, or even later; this would facilitate the CoC in framing realistic plans, keeping in mind the prospect of realizing some part of the creditors’ dues from personal guarantors.” (Emphasis applied in this judgment only).
# 37. Hence, it is obviously clear from a reading of the aforesaid part of the said judgment as also from the relevant provisions of the Code as have been reproduced hereinabove, that personal guarantors to corporate debtors are to be treated differently from other categories of individuals who would be covered by Part III of the Code, with it to be again observed that personal guarantors have however only been defined in Section 5(22) falling in Part II thereof and not in Part III.
Yet, the rule making authority under Section 239 of the Code (the Central Government) promulgated the Rules of 2019 by invoking jurisdiction under the said provision as also under the other provisions referred to in the preamble to the rules, and stipulated in Rule 6 therein that an application to be made by such a guarantor under the provisions of Section 94(1) would be submitted in terms of the procedure laid down under that Rule.
Thus, the application to be made by a personal guarantor to a corporate debtor, even though such a person/individual is referred to in Section 5(22) and Section 60, both falling in Part II of the Code and not in Part III thereof, is to be made under Section 94(1) falling within Part III and with the said application to be made before the NCLT, in terms of Section 60(1) which falls under Part II of the Code.
Now in the aforesaid background, if one is to consider Mr. Jaggas’ argument that the petitioner having sought his own insolvency under Section 94, all his debts would necessarily have to be considered by the Tribunal, that would seem to be in consonance with what has been observed in paragraph 100 of Lalit Kumar Jains‘ case (reproduced earlier also, supra), to the effect that:-
“As was emphasized during the hearing, the NCLT would be able to consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor’s insolvency process, or even later; this would facilitate the CoC in framing realistic plans, keeping in mind the prospect of realizing some part of the creditors’ dues from personal guarantors.” (Emphasis applied in this judgment only).
# 38. Hence, though in the opinion of this court otherwise a proceeding under Section 138 of the Act, qua a debt as is wholly incurred qua an individual who is not in any manner connected to the corporate debtor that the petitioner stood a personal guarantor for, nor to the corporate debt itself, would need to proceed independently so as not to make the complainant in such proceedings under Section 138 suffer further delays, especially when in the present case he has already suffered a delay of about 10 years since his complaint was initially filed, however, in the light of the aforesaid observations as also the fact that Section 96 of the Code does not specifically carve out any exception qua such a debt as is subject matter of an instrument in the context of which a complaint under Section 138 of the Act has been filed, this court would have to interpret the terms “all the debts” and “any legal action or proceedings pending in respect of any debt” as occur in Section 96 of the Code, to mean that it would cover all such debts including any debt not pertaining to a corporate debtor for whom the accused in such a complaint under Section 138 stood as a personal guarantor to, even in his capacity as a Director of such corporate debtor.
This would be further so in the opinion of this court, because a “debt” has been defined in the absolutely generic meaning of the word, in Section 3 (11) of the Code (falling in the preliminary Part-I thereof); and further, as admitted by learned counsel for the respondent, a debt as is subject matter of proceedings under Section 138 of the Act, has not been prescribed to be an “excluded debt” in terms of Section 79(e) of the Code.
In this regard, it also needs to be observed here that unless the wordings of a statute are “unworkable” or wholly impractical, nothing extra can be read into a statute or taken away therefrom.
# 39. As regards the second question posed to itself by this court in paragraph 34 (supra), it would have to be held that by virtue of the term “any legal action or proceedings pending in respect of any debt (as per Section 96), proceedings under Section 138 of the Act, would be deemed to be stayed irrespective of the fact that such proceedings were initiated far before the application under Section 94 of the Code was filed by the personal guarantor to a corporate debtor.
In that very context, as regards the dismissal by the Supreme Court of other appeals and writ petitions as were heard with P. Mohanrajs’ case (as have been pointed to by Mr. Mehta, learned counsel for the respondent), the dismissal would seem to be on account of the fact that the proceedings under Section 138 against the Dire7ctors of the companies as were corporate debtors in those cases, were firstly held to be independent of the proceedings under the Code against the corporate debtor itself and further, there is no interim moratorium referred to in Section 14, with the moratorium mentioned in that provision, being one as has to be declared by the Adjudicating Authority; and consequently the Supreme Court held that such declaration having come at a stage far after the proceedings were initiated under Section 138 of the Act, the moratorium would not apply (obviously also because the Directors were treated different to the corporate debtor itself); which is a wholly different situation to that as is postulated in Section 96, wherein it is an interim moratorium that comes into effect, by which all proceedings qua any debt of the individual/partnership firm etc. would be deemed to have been stayed.
# 40. Consequently, even though the respondent herein may suffer longer delays due to the stay that would be deemed to be operating on the proceedings in the complaint filed by him under Section 138 of the Act, by virtue of the interim moratorium stipulated in Section 96 of the Code, there would seem to be no option with this court but to allow the petition and set aside the impugned order passed by the learned JMIC, Jalandhar, dated 25.05.2021. It is therefore ordered accordingly.
Hence, till a decision is taken by the Adjudicating Authority in terms of Sections 100 and 101 of the Code, on the application filed by the petitioner under Section 94(1) thereof, the proceedings before the learned trial court under Section 138 of the Act, would remain stayed.
# 41. The Adjudicating Authority however is requested to expedite such a decision in view of the fact that the respondent has already suffered a delay of 10 years qua his complaint filed under the Act.
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