Introduction
The Hon’ble Bombay High Court¹ in January, 2023 had to deal with the issue of a stay of the proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) in light of the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC), as against an Accused who is a Director of a Company. The primary contention raised by the Applicant was that the proceedings should be stayed under Section 96 of the IBC.

Background
The Applicant, Accused No. 5 in the Section 138 proceedings, had signed cheques as the Director of M/s. P.D. Agro Processors Private Limited (PDAPPL), which were issued to discharge the liability incurred by PDAPPL to NSEL. NSEL is a company incorporated under the Companies Act, 1956, operating as a spot exchange for commodities trading. Due to defaults in pay-ins on NSEL, cheques issued by PDAPPL were presented for encashment but were returned unpaid. Subsequently, NSEL initiated proceedings under Section 138 of the NI Act.

Arguments of the Parties
The Applicant argued that the proceedings under Section 138 of the NI Act should be deemed to be stayed due to the commencement of interim moratorium under Section 96 of the IBC. The Applicant relied on various judgments, including P. Mohanraj and Others vs. Shah Brothers Ispat Private Limited, which held that a Section 138 NI Act proceeding would be covered by the term "any legal action or proceeding pending in respect of any debt" mentioned in Section 96(1) of the IBC.

The Respondent-NSEL submitted that the proceeding in the NCLT under Section 95 of IBC were initiated by the State Bank of India (for short "SBI") against M/s. Dunar Foods Limited and Similar proceedings have also been initiated by the SBI against the Applicant herein. The Respondent-NSEL is not a party to those proceedings. The transactions between PDAPPL and Respondent-NSEL are an independent one. The Applicant is a signatory to the cheques, which have been bounced and the judgment in the Shah Brothers case was distinguishable.

Decision and Analysis
The court considered the arguments and reviewed the relevant provisions of the IBC. It noted that Section 96 of the IBC provides for an interim-moratorium, during which any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed. The court referred to Section 95, which allows a creditor to apply for initiating the insolvency resolution process, and Section 102, which requires the issuance of public notice and claims from creditors.

The court held that the term "any legal action or proceeding pending in respect of any debt" in Section 96(1)(b)(i) of the IBC would cover proceedings under Section 138 of the NI Act. It emphasized that the debt incurred by the applicant in the Section 138 proceedings would be covered by the term "any debt" in Section 96(1) of the IBC. The court also noted that the proceedings under Section 95 of the IBC initiated by the State Bank of India against PDAPPL and the applicant were relevant in this context.

Furthermore, the court rejected the argument that the proceedings under Section 95 of the IBC were party-specific, stating that the scheme of the Insolvency Resolution Process in Chapter III of the IBC indicated otherwise. The court concluded that the learned Magistrate should have allowed the application for stay of the proceedings, and therefore, it directed the stay of proceedings under Section 138 of the NI Act during the interim moratorium period.

Conclusion
This article highlights the issue of stay of proceedings under Section 138 of the NI Act in relation to the provisions of the IBC. The court's decision in this case clarifies that proceedings under Section 138 can be stayed during the interim moratorium period under Section 96 of the IBC if they are deemed to be pending in respect of a debt covered by the IBC. The order was thereafter challenged before the Hon’ble Supreme Court, who was reluctant to interfere with the Order and dismissed the challenge.

By - Lakshmi Raman