SUMMARY
On March 1st, 2021, the three-judges bench of the Supreme Court comprising of Justice RF Nariman, Justice Navin Sinha and Justice K M Joseph stated in the case of P. Mohanraj vs. Shah Brother Ispat Pvt Ltd, 2021 SCC OnLine SC 152 that proceedings under section 138 are “quasi-criminal” in nature. The court held that “a section 138/141 proceeding against a corporate debtor is covered by section 14(1)(a) of the Insolvency and Bankruptcy Code”. To reach the conclusion, judges analysed the facts, logical arguments, and reasoning and therefore, delivered this judgment in 120 pages. The Supreme Court made it crystal clear that till the time, corporate entities are going through insolvency proceedings under the Code of Insolvency and Bankruptcy, no cases of cheque bounce can be instituted or continued against such firms. This benefit, however, was not extended towards safeguarding the directors or signatories of such firms against cheque bounce cases, Therefore, this benefit of moratorium is only available to artificial persons such as companies and no unnecessary shield is rendered to natural persons as they are distinct from their corporate entity. The Insolvency and Bankruptcy code says, as soon as the insolvency proceeding is started against a corporate entity, it attracts the protection of section 14 of the IBC leading to temporary encompassment of judicial proceedings against such entity. The Court focused on explaining the object of section 14 of IBC. It says main concern of section 14 is to ensure there is no further exhaustion of assets of a corporate debtor during the ongoing proceedings of insolvency, as it would safeguard and maximize the value for all stakeholders in that entity. The Bench disregarded and overruled the orders of the Bombay Court in Tayal cotton Pvt Ltd v State of Maharashtra and the Calcutta High Court in M/s MBL Infrastructure Ltd. v Manik Chand Somani on the issue in which they held that firms facing insolvency proceedings under the IBC would still attract cheque bounce cases against them under section 138 of Negotiable Instruments Act.
FACTS:
A company, Shah Brothers Ispat Pvt Ltd had supplied steel products to M/s Diamond Engineering Pvt Ltd (DEPL) from September 21, 2015 to November 11, 2016 and INR 24,20,91,054/- was supposed to be paid by the Diamond Engineering Pvt Ltd to Shah Brothers Ispat Pvt Ltd. Total of 51 cheques were issued, all of which were bounced and returned for the reason of “insufficient funds”. Afterwards, two demand notices under section 138 read with Section 141 of the Negotiable Instrument Act,1881 were issued in reply to which cheques were issued again but the same result arrived i.e., the reason for insufficient funds. Against it, two criminal complaints under Section 138 along with Section 141 of the Negotiable Instruments Act were filed on May 17,2017 and June 21, 2017 respectively, before the Additional Chief Metropolitan Magistrate.
ISSUES:
The significant issue that arises in this petition is whether the establishment or continuation of a proceeding under Section 138/141 of the Negotiable Instruments Act can be said to be covered by the moratorium i.e., section 14(1)(a) of the IBC.
ARGUMENTS AND JUDGMENT:
The learned counsel of the Appellant asserted that the focus of a moratorium provision such as Section 14 is to ensure that there is no exhaustion of a corporate debtor’s assets during the resolving process of insolvency so that it can be kept running as a going concern during this time, thus safeguarding and augmenting worth for all stakeholders.
The learned counsel for the defendants reasoned based on the maxim ejusdem generis/noscitur a sociis in which this principle had been formerly operated by the Bombay High Court to Section 14(1)(a) and stressed that such legal proceeding must essentially be civil in nature. The counsel further contended that Section 138 of the Negotiable Instruments Act talks about a criminal proceeding whose objective mainly focuses on two things, the chief being to perform variation as to what was once a ‘civil wrong’ punishable by a jail sentence and/or fine.
The Appellant further contended that any legal action in relation to debt would inevitably in its simple language, incorporate section 138 proceeding. Therefore, it can be inferred that section 14(1)(a) proceeding would inherently include proceedings under section 138 of the Negotiable Instruments Act. This is because a Section 138 proceeding would be a legal proceeding “in respect of” a debt. “In respect of” is an expression that is inclusive, means anything done directly or indirectly, this was restated in Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd.case.
By winding up the arguments, the Apex Court disagreed with the Bombay High Court and the Calcutta High Court judgments in Tayal Cotton Pvt Ltd. v. State of Maharashtra, and M/s MBL Infrastructure Ltd. v. Manik Chand Somani respectively and took a stance by declaring that a Section 138/141 proceeding against a ‘corporate debtor’ is shielded by Section 14(1)(a) of the IBC.
The Apex Court ordered that no similar proceedings under section 138 of the Negotiable Instruments Act can be carried out against corporate debtors if the order of moratorium has already been passed under the Insolvency and Bankruptcy code. Only single proceeding against the debtor will be allowed as the corporate debtor will be protected and enclosed with the help of section 14 of the IBC. The court also pointed out the difference between civil and criminal contempt and held that although the legal proceedings in bouncing of check are considered as “quasi-criminal”, but it can be interpreted as civil as only the people who are sufferers(victim) can file a private complaint, which is not exactly how criminal offence process works, and notably the courts cannot take ‘suo moto cognizance’ in such type of cases. Hence, to simply, criminal offences are offences against the public however, civil wrong is a personal wrong. Therefore, it is an established fact that “proceeding under section 138/141 of the Negotiable Instruments Act is a quasi-criminal & would amount to a “proceeding” within the meaning of section 14(1)(a) of IBC”
Article by Ms. Vartika Srivastava in April, 2021 while interning at the Chambers of Advocate Shankarlal Raheja.
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