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. A bench comprising Justices RF Nariman, Navin Sinha and KM Joseph delivered the judgment on a batch of petitions(P Mohanraj and others v M/s Shah Brothers Ispat Ltd and connected cases) which challenged the continuation of criminal trial under Section 138 NI Act during the pendency of liquidation proceedings in the National Company Law Tribunal(NCLT).The judgment also observed that moratorium was applicable only to the corporate debtor and that the cheque case proceedings can continue against natural persons in-charge of the corporate debtor, such as directors of the company."...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 moratoriumThe 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 remedyExamining 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...

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

Manu Sebastian

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