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Interplay between Additional Criminal Proceedings and Moratorium Under IBC

The author is Divyanshu Kumar, a third year student at Chanakya National Law University, Patna.

Section 238 of the Insolvency and Bankruptcy Code, 2016 (IBC) allows the provisions of the IBC to prevail over any other law. The Supreme Court has, on multiple occasions reiterated the same. However, there still remains the Gordian knot of determining the mechanism of interplay between IBC and other quasi-criminal parallel proceedings. This problem has been encountered for two quasi-criminal legislations till-date. Firstly, with the Negotiable Instruments Act, 1881 (NI Act); secondly, with the Prevention of Money Laundering Act, 2002 (PMLA).

The issue of limited interaction of the IBC with criminal proceedings comes with its own drawbacks, the prominent one being the scope of confusion among different judicial and quasi-judicial bodies regarding the issue of the determination of primacy of IBC vis-à-vis the conflicting criminal proceedings. The High courts have at times ignored section 238 altogether and have tried to maintain a balance of proceedings under IBC with the additional criminal proceeding. The legality of such a balancing approach however is questionable.

Therefore, it becomes important to determine and understand the extent of the moratorium under section 14 in order to solve the conundrum regarding primacy to create a robust insolvency regime in India and prevent a future cluster of misinterpretations and arbitrariness.

Section 138, Negotiable Instruments Act, 1881- A ‘Civil Sheep’ in ‘Criminal Wolf’s clothing’

Section 138 of NI Act provides for Cheque Bounce. Several times, the corporate debtor have, in order to buy some time for the repayment after being served the demand notice, have issued such cheques that drew the proceedings under NI Act too. This created the issue of two proceedings existing side by side to each other, one being under IBC and the other under the NI Act. The two proceedings were both intending to strike at the wallet of the corporate debtor.

The issue arose before the Supreme Court in P. Mohanraj v. Shah Brothers Ispat Private Limited, where it was posed with the question ‘whether a corporate entity in respect of which moratorium had become effective could be proceeded against in terms of Sections 138 and 141 of the NI Act, 1881’.

The Bombay and the Calcutta High Courts, when they encountered similar scenarios in the past, had held that the word ‘proceedings’ under section 14(1) doesn’t incorporate criminal proceedings.

The court in P. Mohanraj held that the moratorium as provided under section 14 of IBC does cover the scenario of Dishonour of Cheque, even though it has been made a criminal offence. The court went into the intricacy of the Cheque bounce scenario and held it to be a civil-natured offence. This overruled the judgements pronounced by the High Courts of Bombay and the Calcutta.

The Supreme Court held that any proceeding, regardless of its nature (civil or criminal), which can create a debt or encumbrance on CD’s assets does fall within the restraint placed through moratorium.

The court, to reach at the conclusion delved into the object of section 14. The object of section 14 was discussed in Swiss Ribbons, wherein the Court stated that section 14 of IBC intends to protect the assets of the CD during the CIRP and the moratorium, upon its imposition, preserves the assets from further dilution. The court was of the view that allowing NI Act to prevail would defeat the objective that the moratorium seeks to achieve since NI Act can attract a compensation that can be double the amount of the Dishonoured cheque. This certainly will adversely affect the protectionist nature that the moratorium incorporates for the preservation of debtor’s assets.

The raison d’etre of the judgement also partly owes to the fact that now there is a reluctancy among the courts to continue with the criminal nature of Cheque bounce cases. The SC in 2020, a year prior to P. Mohanraj, in Makwana Mangaldas Tulsidas v. State of Gujarat, had expressed its desire that cheque bounce cases that involve small monetary sums may be left out for civil jurisdiction, hinting at decriminalisation.

In March 2022, the Supreme Court in Narinder Garg v. Kotak Mahindra Bank Ltd., reiterated its position it held previously in P. Mohanraj and dismissed the writ petition seeking writ of mandamus for quashing of the charges (sec. 138, NI Act) against the corporate debtors and the director of the petitioner company.

Different interpretations of the Prevention of Money Laundering Act, 2002- The conflict between the High Courts and the NCLAT

It is still a conundrum to analyze the impact of the moratorium on PMLA as the Supreme Court hasn’t dealt with the same yet. However, the HCs at Delhi and Calcutta, and recently, the principal bench of NCLAT at New Delhi have provided conflicting yet valuable insights into the issue.

The Delhi HC in the Axis Bank case has held that since the objective of PMLA is totally different from the objective that the IBC intends to serve, the latter legislation does not prevail over the former by stating that “the moratorium enforced in terms of Section 14 of Insolvency Code cannot come in the way of the statutory authority conferred by PMLA on the enforcement officers for depriving a person (may be also a debtor) of the proceeds of crime”.

The Madras HC too recently in Deputy Director, Office of the Joint Director, Directorate of Enforcement v. Asset Reconstruction Company India Ltd. has held that the moratorium doesn’t cover offences committed under PMLA and that the NCLT has no jurisdiction to go into the matters governed under PMLA.

In April 2021, the NCLAT re-affirmed the over-riding effect of IBC on PMLA. In Directorate of Enforcement vs. Manoj Kumar Agarwal & Ors., the NCLAT (Principal Bench, New Delhi) held that provisions of IBC would have a primacy over the attachment of assets of the debtor under PMLA. In the very judgement, the appellate tribunal was of the view that if the Adjudicating Authority for PMLA orders a provisional attachment, the same would be in conflict with the moratorium of IBC. The appellate tribunal justified the applicability of section 14 by considering attachments made under PMLA as civil-natured by stating: “it appears to us that after the attachment when matter goes before the Adjudicating Authority under PMLA, proceeding before Adjudicating Authority for confirmation would be civil in nature”.

Here, the High Courts, on one hand, have differentiated IBC and PMLA by making a macro analysis between the two i.e., by assessing the two vis-à-vis each other in entirety of the legislations concerned. The NCLAT, on the other hand has adopted a micro analysis for deciding on their interplay and made its assessment on the specific element of the nature of attachment of assets under the PMLA. The NCLAT approach seems similar to the approach employed by the Supreme Court in P. Mohanraj as there too, the court delved into the particularities of the Dishonour of cheques under NI Act. However, what is really the matter of concern is the sheer ignorance of section 238 of IBC by all the judicial bodies for arriving at their conclusions.


One thing that can be inferred is that the Courts, on both the occasions of the conflict of section 14 (with NI Act and PMLA respectively), made efforts to harmoniously construct the legislations with IBC, by keeping in mind the legislative intent of the concerned legislations.

It is clear from the position taken by the court in various judgements that it finally trickled down to the determination of the nature of the additional parallel proceeding, whether civil or criminal and any additional non-criminal parallel proceeding was rendered subsidiary to the CIRP. That is, the hinge joint for determination of primacy lied at the specific element in assessment (dishonour of cheques for NI Act and the attachment of assets for PMLA) of the quasi-criminal statute.

However, the Supreme Court has through P Mohanraj made it clear that the primacy of IBC remains intact over any other proceeding and it seems that the approach by the High Courts and NCLAT of delving into the nature of additional proceeding has become obsolete as it wouldn’t matter to the primacy of IBC anyway.

IBC seeks maximization of the value of assets of the CD. Any civil or criminal proceeding against the corporate debtor can harm efforts to such maximization. The Supreme Court through P Mohanraj, has put an end to the civil-criminal debate by simply holding the equal applicability of moratorium on both civil as well as criminal proceedings.

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