SC On Application U/S 34 Of Arbitration Act

OVERVIEW

The Supreme Court of India on the judgement of P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd. held that moratorium under Section 14 of IBC also includes criminal proceedings for cheque bounce cases under Section 138 of the Negotiable Instruments Act.

The Supreme Court said that criminal proceedings against a corporate debtor cannot be initiated under the Negotiable Instruments Act if the National Company Law Tribunal has already passed an order of moratorium under the Insolvency and Bankruptcy Code.

“A Section 34  proceeding is a proceeding against the Corporate Debtor in a court of law pertaining to a challenge to an arbitral award and would be covered just as an appellate proceeding in a decree from a suit would be covered,” the Court stated.

However, the Court further commented that such a bar will apply only to the Corporate Debtor and not the natural persons responsible for management of the company. Therefore, the directors and other natural persons who are in the management of the company can be proceeded against under Section 138 of Negotiable Instruments Act.

The Supreme Court further observed that an application under Section 34 of the Arbitration and Conciliation Act to set aside an award is covered by moratorium under Section 14 of the Insolvency and Bankruptcy Code.

BACKGROUND 

A company by the name M/s. Shah Brothers Ispat Pvt. Ltd. had supplied steel products to M/s. Diamond Engineering Pvt. Ltd. towards which an amount of INR 24,20,91,054/- was due and payable to Shah Brothers. A total of 51 cheques were issued by Diamond Engineering Pvt. Ltd. towards suvh payment and all of them were dishonoured due to insufficient funds.

Upon such dishonour, a statutory demand notice was issued under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, calling upon the company and its three Directors, to pay this amount within 15 days of the receipt of the notice.

A second statutory notice was issued on two cheques further dishonoured and same terms were demanded.

Upon observing no responsiveness from the end of Diamond Engineering Pvt. Ltd. towards either of the statutory notices issued to them, two criminal complaints were filed against the Company and its directors.

The Supreme Court, in this case, extended relief to the company by holding that criminal proceedings cannot be initiated or continued against companies which are facing issues relating to insolvency under the provisions of Insolvency and Bankruptcy Code. This moratorium of legal proceedings was, however, not extended towards the natural persons, and in this case, the cases against the Directors of such company will continue.

FURTHER DETAILS 

The National Company Law Tribunal (NCLT), Chennai had initiated Corporate Insolvency Resolution Process (CIRP) against Diamond Engineering Chennai Limited (Corporate Debtor) on June 6, 2017 on a petition by Shah Brothers Ispat Private Limited (Respondents in Supreme Court) and moratorium was imposed. 

The NCLT directed Shah Brothers to withdraw the complaint under Section 138 of NI Act treating it as a proceeding filed after order of moratorium with observation that such action amounts to misuse of the process of law.

The NCLAT was moved by the aggrieved party, who approved continuation of parallel proceedings under Section 138 of the Negotiable Instruments Act even as the resolution process under the IBC was under way against the company subjected to moratorium.

Such order, when challenged in the Supreme Court, the matter in the P Mohanraj and Ors v. M/s. Shah Brothers Ispat Pvt. Ltd. case was heard by a Bench of Justices Rohinton Nariman, Navin Sinha and KM Joseph in an appeal against a July 2018 judgment of the National Company Law Appellate Tribunal (NCLAT).

"Moratorium provision contained in Section 14 of the IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141 continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act," the Court held in this judgement.

"It is clear that a Section 138 proceeding can be said to be 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," the Court opined on the nature of the Section 138 of the Negotiable Instruments Act, 1881.

CONCLUSION

A bench headed by Justice R F Nariman was faced with the legal issue whether "the institution or continuation of a proceeding under Section 138 and Section 141 (cheque bounce cases) of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of IBC." 

Under the Insolvency and Bankruptcy Code, the moment a corporate insolvency resolution process (CIRP) is initiated against a company, it gets statutory protection under section 14 and consequently, a moratorium is put on judicial proceedings. Such moratorium is only extended to the body corporate but not to the natural persons involved in the matter, against whom proceedings have been initiated. 
The bench, also comprising justices Navin Sinha and K M Joseph, disagreed with the previous judgements of the Bombay and Calcutta High Courts on the issue in which they had held that the cheque bounce cases can continue against the firms facing insolvency resolution proceedings under the IBC. 

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