The Apex Court: Moratorium Under Section 14 Of Insolvency & Bankruptcy Code Will Bar Section 138 Of Negotiable Instruments Act Proceedings Against The Corporate Debtor

KEY TAKEAWAYS

• This decision is in relation to: P Mohanraj v. M/S Shah Brothers Ispat Pvt Ltd. 
• Section 14 of IBC to be applied only on Corporate Debtors, and is not applicable on natural persons, or any persons mentioned in Section 141 of Negotiable Instruments Act, 1881.
• NCLAT faced with a question: is section 138 of Negotiable Instruments Act considered as proceedings, as defined under Section 14 of Insolvency and Bankruptcy Code?
• Apex Court stated that Section 14 of IBC, moratorium includes criminal proceedings even for cheque bounce cases that fall under Section 138 of NI Act.

INTRODUCTION

The Apex Court on Monday opined that criminal proceedings can not be commenced against a corporate debtor if the National Company Law Tribunal (NCLT) has already passed an order of moratorium under the Insolvency and Bankruptcy Code (IBC). A Bench of Justices Rohinton Nariman, Navin Sinha and KM Joseph delivered a judgement against another judgement that was delivered in July 2018 by National Company Law Appellate Tribunal (NCLAT), stating when an order of moratorium is passed under the Insolvency and Bankruptcy Code (IBC), any parallel proceedings under Section 138 of the Negotiable Instruments Act against the Corporate Debtor will not be allowed to continue, as it will be barred by the Section 14 of IBC. It was also observed that such a prohibition will only apply to the Corporate Debtor(s), and is not applicable to any natural person that is responsible to manage the company, and therefore any proceedings can be initiated or continued against said natural person.

FURTHER DETAILS

The objective of the moratorium provision is to ensure that there is no depletion of the corporate debtor's assets, during the process of insolvency resolution, so that it can be kept running as a going concern during this time, thus maximising value for all stakeholders. As per the Supreme Court's observation- “The idea is that it facilitates the continued operation of the business of the corporate debtor to allow it breathing space to organise its affairs so that a new management may ultimately take over and bring the corporate debtor out of financial sickness, thus benefiting all stakeholders, which would include workmen of the corporate debtor." A supplier of steel products, Shah Brothers Ispat Private Ltd filed a criminal complaint under Section 138 of the Negotiable Instruments Act, 1881- against the Corporate Debtor of the case- Diamond Engineering Chennai Ltd, after their cheques were dishonored due to insufficient funds. NCLT initiated the insolvency resolution process in June of 2017, and accepted the director's plea that there will be no complaints filed during the moratorium period. Shah Brothers Ispat Private Ltd filed another complaint under Section 138 of Negotiable Instruments Act, within the moratorium period, to which The NCLT directed them to withdraw the complaint, stating that it was a proceeding filed after order of moratorium, and such action amounts to misuse of the process of law. When Shah Brothers approached NCLAT to appeal against the Law Tribunal's orders, the question before NCLAT was if Section 138 of the Negotiable Instruments Act can be considered as proceeding, as defined under Section 14 of IBC. NCLAT observed that Section 138 is a penal provision, which gives the trial court the power to pass orders of imprisonment or fine, and as such, cannot be found as a proceeding or any judgment or decree of money claim, and hence parallel criminal proceedings under the Negotiable Instruments Act can go on, even as the resolution process is in the works. "Imposition of fine cannot be held to be a money claim or recovery against the Corporate Debtor nor order of imprisonment, if passed by the court of competent jurisdiction on the Directors, they cannot come within the purview of Section 14. Infact no criminal proceeding is covered under Section 14 of I&B Code,” the NCLAT opined.

WHAT'S HAPPENING NOW?

“The legal impediment contained in Section 14 of the IBC would make it impossible for such proceedings to continue or be instituted against the corporate debtor. Thus, for the period of moratorium, since no Section 138/141 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,” Justice Nariman said, stating that even though section 14 bars any proceedings against the corporate debtor, the same proceedings can be initiated, or continued against the people who manage the company, or whoever falls under the definition of natural persons in Section 141(1) and (2) of the Negotiable Instruments Act, 1881. 

CONCLUSION

Contrary to the views of Bombay and Calcutta High Courts, this judgement declared that Section 138/141 of the Negotiable Instruments Act, 1881 will be defined as proceedings under Section 14(1)(a) of Insolvency and Bankruptcy Code (IBC), thus during the moratorium period, no such proceeding can be commenced against a corporate debtor. Various appeals were filed seeking clarity on whether the NCLT’s moratorium during the corporate insolvency resolution process will prohibit parallel proceedings under Section 138 of the Negotiable Instruments Act. Many similar cases that found their way to the Supreme Court, were then clubbed together, and heard as one. After a thorough reading of the provisions of Section 138 of the Negotiable Instruments Act, the Bench stated that the proceedings under Section 138 are "really a hybrid provision to enforce payment under a bounced cheque if it is otherwise enforceable in civil law." Meaning that this provision aims at compensating the victim, and not punish the wrongdoer for a mistake that has already been committed. The Court also coined the term "civil sheep in a criminal wolf's clothing", defining Section 138 of Ni Act as such, as in such cases the victim is protected, over the larger interest of the State. 

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