Supreme Court Widens Scope of Moratorium on Criminal Proceedings

[Prachi Gupta is a fourth-year B.A., LL.B. (Hons.) student at the Institute of Law, Nirma University]

On 1 March 2021, the Supreme Court in the case of P. Mohanraj  v. Shah Brothers Ispat Pvt. Ltd. has put an end to a much-debated topic of applicability of moratorium under section 14 of Insolvency and Bankruptcy Code, 2016 (“IBC”) to proceedings of dishonour of cheque under section 138 of Negotiable Instruments Act, 1881 (“NI Act”). After examining the nature of proceedings under the NI Act and the legislature’s intent to allow maximizing value of assets, the court concluded that section 14 would cover proceedings under section 138 of the NI Act. Consequently, proceedings to recover dishonored cheque, which is a civil wrong with criminal consequences, would be stayed if they are pending against the corporate debtor. This decision has far-reaching implications on a range of hybrid natured proceedings like attachment of assets under the Prevention of Money Laundering Act, 2006 (“PMLA”). In the present post, the author examines the judgement of the Supreme Court and its implications below.

Factual Matrix

Shah Brothers Ispat Pvt. Ltd. supplied steel to Diamond Engineering Pvt. Ltd., the corporate debtor for a consideration of INR 24,20,91,054/-. However, various cheques issued in favour of Shah Brothers were dishonoured. Consequently, Shah Brothers initiated criminal proceedings under section 138 of the NI Act to recover the dishonoured amount against Diamond Engineering and its directors. Simultaneously, insolvency proceeding under section 9 of the IBC was also initiated which was admitted by the NCLT. Concerning criminal proceedings under the NI Act, the NCLT stayed the proceedings considering moratorium period is triggered as soon as the application for insolvency is admitted. On appeal to the NCLAT, the order was set-aside and criminal proceedings were allowed to be continued. In the instant case, the Supreme Court decides the contested question of law: whether section 14 of IBC covers criminal proceedings under section 138 of the NI Act.

Civil Nature of Offence of Dishonour of Cheque

Under section 138 of the NI Act, a legal deeming fiction has been formulated to provide for strict criminal liability against the person who dishonours the cheque, which is otherwise a civil dispute between two private parties and entails civil liability. The objective of the proceedings is both punitive and compensatory with an overarching aim to deter debtors from dishonouring their obligation. To achieve the objective, a hybrid punishment is contemplated, i.e., imprisonment and compensation with fine which is both criminal and civil liability. Given the objective of the provision, the court called proceedings under section 138  to be ‘civil sheep’ in ‘criminal wolf’s clothing’s’ as it is primarily a civil wrong with criminal overtones and held that proceedings are quasi-criminal in nature.

Meaning of ‘Proceedings’ Under section 14

An important aspect of the judgement was interpretation of the word ‘proceedings’ in light of the objective of the section 14. Previously, the Bombay High Court in Tayal Cotton (P.) Ltd. v. State of Maharashtra have restricted the meaning of the word ‘proceedings’ to civil proceedings by applying the principle of ejusdem generis (when specific words constitute a distinct genus or category only then can the meaning of the following general word be restricted) and observed that as section 14 was only intended to prohibit proceedings and suits which are of civil nature. Under section 14(1)(a), the adjudicating authority shall impose a stay on “the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority”. Here, the word ‘proceedings’ is preceded by ‘the institution of suits or continuation of pending suits’ which forms a distinct category. However, usage of catch-all residuary words like ‘proceedings’ has wide import and reflects the legislature’s intention to broaden the scope of section to the widest amplitude. This can be further seen through the plain and ordinary wordings of the section, which uses the word ‘any’ twice before any judgment, order or decree, and before any court of law. When the legislature’s intention is clearly to widen the scope of the provision, no rule of interpretation can be used to stifle the ordinary plain meaning and defeat the objective of the section. Considering section 14 was aimed to give breathing space to the corporate debtor while it recovers, the court ultimately held that the word ‘proceedings’ cannot be limited to only civil proceedings. Proceedings would include any proceedings that can create any further monetary liability or encumbrance on assets of corporate debtor like quasi-criminal proceedings in section 138 of NI Act which would result in a monetary fine on the corporate debtor.

Implications for Hybrid Proceedings like PMLA

Through this decision, the apex court has expanded the scope of moratorium which was previously restricted to civil proceedings as held in various cases. This has the ability to impact myriad pending cases against the corporate debtor and their directors or promoters. One such example of this is proceedings conducted under PMLA which aims to curb the criminal act of money laundering through hybrid proceedings of both civil and criminal nature. While proceedings under section 138 of NI Act and PMLA both have criminal and civil consequences, they differ in terms of mode of proceedings which are held before the court. Under PMLA, two separate proceedings are initiated against the offender i.e., criminal proceedings before the special courts and civil proceedings for attachment of ‘proceeds of crime’ before the adjudicating authority. Unlike section 138 NI Act proceedings, civil and criminal liability and proceedings are separable and run parallel to each other. Arguably, the nature of attachment of property proceedings before the adjudicating authority under section 5 of PMLA can be quasi-criminal when judged against cause for which penalty is inflicted i.e., criminal wrong of showing proceeds of scheduled offence as untainted property. Either way, the present judgement implies that attachment proceedings under PMLA would be stayed as it creates encumbrance on the assets of the Corporate Debtor. Subsequently, the liability of corporate debtor would be extinguished in accordance with section 32A of the IBC.

However, considering the public interest generated and different field of operations of the PMLA, it appears that proceedings under PMLA can fall outside the net of moratorium.  This was also recognised in the case of Axis Bank v. Enforcement Directorate where the Delhi High Court observed that the IBC and the PMLA operate in different field having distinct objectives. Moreover, PMLA would override IBC in as much as ‘proceeds of crime’ is concerned. Guidance can be taken from UNCITRAL Legislative Guide to Insolvency Law, from which IBC is heavily influenced, in which exception to stay and moratorium has been mentioned in those cases when undeniable public interest is involved. Likewise, the UK has also followed this principle in the case of Lindsey Cooper v. Natural Resources Body of Wales where the England and Wales High Court refused to stay environmental criminal proceedings as there is compelling public interest after taking into account the gravity of the crime involved and the impact on the society as a whole. The court also reasoned that even if the result of the criminal court would lead to confiscation or fine to be imposed upon the debtor, the criminal proceedings are not brought to advance the interest of creditor but of the society.  
The underlying crimes for which proceedings under PMLA are initiated are grave and serious crimes like illicit drug and human trafficking, murder, fraud, narcotics and others which undeniably have compelling state interest in penalising the conduct. It cannot also be ignored that this can lead to potential abuse of law by providing escape route to offenders through insolvency. Having said that, a middle path can be created through harmonising the provisions of both the PMLA and the IBC where ‘deemed tainted properties’ – properties of sister or parent concerns of corporate debtor or of the directors or individuals, equivalent to the value of the proceeds of crimes are attached.


The Supreme Court through this judgement has broadened the scope of moratorium to include proceedings of quasi-criminal nature, like section 138 of NI Act. Moratorium plays an interesting role in resurrection of the corporate debtor by allowing them the breathing space by staying all proceedings which can potentially burden the corporate debtor’s assets. Considering that proceedings under section 138 of the NI Act revolve around the interest of the creditor, the Court allowed the moratorium to be imposed as the fine imposed would adversely impact the resolution process. If applied to civil attachment proceedings under the PMLA, it would mean that proceedings would be stayed as it potentially creates a burden on the assets of the corporate debtor.

Prachi Gupta

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