Moratorium Under Section 14 IBC Covers Section 138 NI Act Proceedings Against Corporate Debtor For Cheque Dishonour : Supreme Court

The Supreme Court on  Monday held that the declaration of moratorium under Section 14 of the Insolvency and Bankruptcy Code(IBC) covers criminal proceedings for dishonour of cheque under Section 138 of the Negotiable Instruments Act against the corporate debtor.

"We hold that a Section 138/141 NI Act  proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC", Justice RF Nariman said reading out the operative portion of the judgment.

"...for the period of moratorium, since no Section138/141 proceeding can continue or be initiated against the corporate debtor because of a statutory bar, such proceedings can be initiated or continued against the persons mentioned in Section 141(1) and (2) of the Negotiable Instruments Act. This being the case, it is clear that the moratorium provision contained in Section 14 of the IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act"

The top court also held that it was disagreeing with the views taken by Bombay and Calcutta High Courts. The Court observed that Section 138 NI Act was a "quasi criminal proceeding" which is meant to enforce a civil remedy and therefore it amounts to a "proceeding" within the meaning of Section14(1)(a) of the IBC attracting the moratorium.

The issue considered by the Court was "whether the institution or continuation of a proceeding under Section 138/141 of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of the IBC".

Some significant observations from the judgment are as follows :

Sweep of the Section 14 IBC very wide

"The sweep of the provision is very wide indeed as it includes institution,continuation, judgment and execution of suits and proceedings .It is important to note that an award of an arbitration panel or an order of an authority is also included. This being the case, it would be incongruous to hold that the expression "the institution of suits or continuation of pending suits" must be read disjunctively as otherwise, the institution of arbitral proceedings and proceedings before authorities cannot be subsumed within the expression institution of "suits" which are proceedings in civil courts instituted by a plaint (see Section 26 of the Code of Civil Procedure, 1908). Therefore, it is clear that the expression "institution of suits or continuation of pending suits" is to be read as one category, and the disjunctive "or" before the word "proceedings" would make it clear that proceedings against the corporate debtor would be a separate category.What throws light on the width of the expression "proceedings" is the expression "any judgment, decree or order" and "any court of law,tribunal, arbitration panel or other authority". Since criminal proceedings under the Code of Criminal Procedure, 1973 ["CrPC"] are conducted before the courts mentioned in Section 6, CrPC, it is clear that a Section138 proceeding being conducted before a Magistrate would certainly be a proceeding in a court of law in respect of a transaction which relates to a debt owed by the corporate debtor"

Objective of moratorium

The Court observed that the objective of moratorium is to "form a scheme which shields the corporate debtor from pecuniary attacks against it in the moratorium period so that the corporate debtor gets breathing space to continue as a going concern in order to ultimately rehabilitate itself."

"Any crack in this shield is bound to have adverse consequences, given the object of Section 14, and cannot, by any process of interpretation, be allowed to occur", the bench observed.

Section 138 NI Act a hybrid provision to enforce a civil remedy

Examining the provisions of NI Act, the bench observed that Section 138 proceedings are "really a hybrid provision to enforce payment under a bounced cheque if it is otherwise enforceable in civil law".

The real object of the provision is not to penalise the wrongdoer for an offence that is already made out, but to compensate the victim.

The judgment observed that a a civil proceeding is not necessarily a proceeding which begins with the filing of a suit and culminates in execution of a decree.

The Court termed Section 138 NI Act as a "civil sheep" in a "criminal wolf's clothing" as it is the interest of the victim that is sought to be protected, the larger interest of the State being subsumed in the victim alone moving a court in cheque bouncing cases,

"Given our analysis of Chapter XVII of the Negotiable Instruments Act together with the amendments made thereto and the case law cited hereinabove, it is clear that a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section14 of the IBC, amount to a "proceeding" within the meaning of Section14(1)(a), the moratorium therefore attaching to such proceeding".

The mere fact that punishments that are awardable relate to Section 53 of the Indian Penal Code would not, therefore, rendera civil contempt proceeding a criminal proceed

Last year, a division bench comprising Justices UU Lalit and Aniruddha Bose had issued notice to the Attorney General to determine the issue whether NCLT's moratorium during corporate insolvency resolution proceess will bar complaint under Section 138 NI Act.

The notice to AG was issued while considering an appeal against a Madras High Court judgment which held that NCLT's moratorium will not affect complaint under Section 138 NI Act.

The Madras High Court had held that since Section 138 NI Act was a criminal proceeding, the moratorium under Section 14 IBC will not affect it.

"The Section 138 of Negotiable Instruments Act is a penal provision which empowers the court of competent jurisdiction to pass the order of imprisonment or fine. It is not the civil proceedings and even fine imposed by the criminal court cannot held to be a money claim or recovery against Corporate Debtor. It is seen from the above provision, the criminal proceedings is not covered under the prohibition and as such the petitioner cannot have a shelter under Section 14 of Insolvency and Bankruptcy Code", a single bench of Justice G K Ilanthiraiyan of Madras HC had held.

Case Details

Case Title :P Mohanraj and others v M/s Shah Brothers Ispat Ltd and connected cases

Coram  : Justices RF Nariman, Navin Sinha and KM Joseph

Appearances : Senior Advocates Jayanth Muthu Raj, Jayant Mehta, S Nagamuthu for petitioners; ASG Aman Lekhi for the Union of India

Citation   : LL 2021 SC 120

Click here to read/download the judgment