Supreme Court on Applicability of IBC Moratorium to Cheque Bounce Cases

[Jai Anant Dehadrai is an Advocate based in New Delhi and Arnav Sinha is an Associate at Dehadrai and Company, New Delhi]

The Supreme Court in its recent and landmark decision of P. Mohanraj v.  Shah Brothers Ispat Pvt. Ltd., has put to rest the debate as to whether criminal proceedings under section 138 and section 141 of the Negotiable Instruments Act, 1881 (“NI Act”) would be stayed in accordance with the moratorium provisions under section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Supreme Court in its decision undertook a thorough analysis on the ambit and the rationale of a ‘moratorium’ envisaged under section 14 of the IBC. The judgment further delved into the nature of proceedings under section 138 and section 141 of the NI Act and conclusively decided their applicability to a moratorium under the Act. This article shall briefly examine these aspects and shed light on the implications of this landmark judgment on commercial arrangements.

Background of the Dispute

The sppellants no. 1 to 3 were directors of a company, Diamond Engineering Pvt. Ltd. (“the Company”). The Company received steel products from the respondent against which the Company issued 51 cheques towards the payment due. All 51cheques so issued were returned as dishonored due to ‘insufficiency of funds’ on 03 March 2017. The respondent issued a statutory notice on 31 March 2017 under section 138 read with section 141 of the NI Act to the Company and the appellant-directors calling them to pay the requisite amount within 15 days of the receipt of the notice. Furthermore, on 28 April 2017, two cheques amounting to a total of Rs. 80,70,133/-  presented for payment by the Company were returned as dishonored due to insufficiency of funds. Thereafter, a second statutory notice dated 05 May 2017 was issued to the Company and the appellant-directors under the above-mentioned provisions. Since there was no payment received from the Company, criminal complaints were filed by the respondent against the Company and the appellants under section 138 of the NI Act before the Additional Chief Metropolitan Magistrate (hereinafter “ACMM”), Kurla, Mumbai.

Meanwhile, on 21 March 2017 a demand notice under section 8 of the IBC was issued by the respondent to the Company, and the National Company Law Tribunal (“NCLT”) admitted the respondent’s petition for initiation of Corporate Insolvency Resolution Process (“CIRP”) of the Company and the moratorium period under the IBC commenced. The NCLT stayed the criminal proceedings under the NI Act before the ACMM in light of the moratorium. On appeal, the National Company Law Appellate Tribunal (“NCLAT”) set aside the Order of the NCLT by adjudging that proceedings under the NI Act for cheque bounce are criminal proceedings and hence will not be covered under the ambit of a moratorium under section 14 of the IBC.

Thus, upon appeal before the Supreme Court, an important question of law arose as to whether the institution or continuation of a proceeding under section 138/141 of the NI Act can be said to be covered by the moratorium under section 14 of the IBC.

Interpretation of Section 14 of the IBC    

                                                 The Court while interpreting the language of section 14(1)(a) observed that the expression “or” occurs twice in the first part of section 14(1)(a). The expression “institution of suits or continuation of pending suits” is to be read as one category and “proceedings against the corporate debtor” would constitute a separate category. These two categories are separated by a disjunctive “or”. The second category is widely worded to include “any judgment, decree or order” and “any court of law, tribunal, arbitration panel or other authority”. Thus, this will subsume criminal proceedings under the NI Act as criminal proceedings under the Code of Criminal Procedure, 1973 (“C.r.PC”) are conducted before the courts mentioned in section 6 of the C.r.PC. The Court further dismissed the applicability of ejusdem generis and noscitur a sociis as the same cannot be made to limit the scope of a widely worded provision which can be otherwise reasonably comprehended from the terminology employed in the provision.

Underlying Object of Section 14 of the IBC

The Court, in order to decipher the primary object of a moratorium under section 14, referred to the Report of the Insolvency Law Committee published in February 2020. Under paragraph 8.2, the report states as follows:

8.2 The moratorium under Section 14 is intended to keep the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the processes envisaged during the insolvency resolution process and ensuring that the company may continue as a going concern while the creditors take a view on resolution of default.

The Court rightly observed that the idea of a moratorium is that there is no depletion of the corporate debtor’s assets during the CIRP so that it can be kept running as a going concern during this time, thus maximizing value for all stakeholders.

The judgment further placed reliance on another landmark decision by the Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India [(2019) 4 SCC 17] wherein the Court had, while discussing the object of the moratorium under the IBC held that section 14 aims to preserve the assets of the corporate debtor during the resolution process and the provision protects the assets from further dilution. The Supreme Court held that there would essentially be no difference between a quasi-judicial proceeding of a cheque bounce case under the NI Act and a civil suit as both will result in the assets of the corporate debtor being depleted since the corporate debtor would have to pay compensation which can extend to twice the amount of the bounced cheque. Thus, the object of the moratorium provision will not be attained, should proceedings under the section 138 of the NI Act be allowed to continue during the pendency of a CIRP.

‘Quasi-Criminal’ Proceedings Under the NI Act, 1881

The judgment further analyzes the primary nature of the proceedings under the NI Act, 1881 observing that the ‘liability’ under section 138 is essentially a civil liability deemed to be a penal offence, since such a liability is made punishable by law. The real object of the provision is not to punish the wrongdoer but to compensate the victim.

The Court also distinguished the procedure of taking cognizance of an offence under section 138 by a magistrate from the procedure under the C.r.PC. Following an offence under section 138, no Court can take cognizance except upon a complaint made in writing by a payee. Furthermore, such complaint is to be made within one month from the date on which the “cause of action” under section 138 arises. “Cause of action” as a concept is alien to criminal proceedings. The Court thus arrived at the conclusion that an offence under section 138 of the NI Act is not criminal in nature.

No Bar Under Section 14 on the Personal Liability of Natural Persons In-charge of a Business

Interestingly, the Court allowed proceedings under sections 138/141 of the NI Act to continue against the natural persons who were in charge of, and were responsible for the conduct of the company as they would not be granted a protection of a moratorium. These natural persons would include directors, managers, company secretaries etc. as per section 141(2) of the Act. The Court observed that section 141 makes it mandatory that the Company along with the ‘persons-in-charge’ of a business be impleaded in a section 138 proceeding however the moratorium would apply only to the corporate debtor i.e. the Company. The natural persons (i.e., the persons-in-charge) mentioned in section 141 shall remain liable under the NI Act.

Thus, there is no protection from personal liability provided to directors and key managerial personnel by the apex court through this decision. However, the narrow interpretation of the term “in charge of, and was responsible to, the company for the conduct of the business of the company”in section 141taken by the apex court in other landmark cases does provide a possible recourse. The Court in a plethora of judgments such as National Small Industries v. Harmeet Singh Paintal [(2010) 3 SCC 330] and Pooja Ravinder Devadasani v. State of Maharshtra [(2014) 16 SCC 1] has held that it is the responsibility of the complainant to make specific averments against accused directors to make them liable for an offence under section 138. It has also held that “Section 141 does not necessarily make all the Directors liable for the offence” (see National Small Industries). Thus, while the bar under section 14 shall not be operative on the natural persons in charge of the corporate debtor, the obligation remains on the complainant to prove the role of each accused natural person.

Conclusion

The High Courts of Bombay and Calcutta in Tayal Cotton Pvt. Ltd. v. State of Maharashtra [2018 SCC OnLine Bom 2069] and MBL Infrastructure Ltd. v. Manik Chand Somani respectively have narrowed the ambit of a moratorium to specifically exclude criminal proceedings. The High Courts in these cases further emphasized on the criminal nature of the proceedings for a cheque-bounce case under the NI Act.

The Supreme Court has vide this judgment set aside the said position and has conclusively held that the ambit of section 14 of the IBC is wide enough to hit proceedings under sections 138/141 of the NI Act. Thus, this conclusively settles the issue of whether proceedings under the NI Act against a corporate debtor will be stayed upon admission and commencement of CIRP. However, the Court allowed the proceedings under sections 138/141 to be continued against natural persons under section 141(1) and (2) as the bar under section 14 of the IBC shall only be operative upon the corporate debtors and not the natural persons in charge of the corporate debtor.

Jai Anant Dehadrai & Arnav Sinha

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