Section 14 Of The Insolvency And Bankruptcy Code, 2016 Vis-à-vis Section 138 Of The Negotiable Instruments Act, 1881: What Prevails? – Insolvency/Bankruptcy/Re-structuring – India–mondaq.com

Clipped from: https://www.mondaq.com/india/insolvencybankruptcy/1050172/section-14-of-the-insolvency-and-bankruptcy-code-2016-vis-vis-section-138-of-the-negotiable-instruments-act-1881-what-prevails?type=popular

An order of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 shall cover proceedings under Sections 138 and 141 of the Negotiable Instruments Act, 1881: Supreme Court of India.

The Hon’ble Supreme Court in the recent decision of P. Mohanraj & Ors. v. M/s Shah Brothers Ispat Pvt. Ltd.1has resolved the conundrum of whether the proceedings under Sections 138 and 141 of the Negotiable Instruments Act, 1881 (NI Act) can be said to be covered by the moratorium provision, under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). This article briefly examines how the Hon’ble Supreme Court analysed the scope of Section 14 of the IBC to arrive at its judgment.

Brief Facts

The respondent in the instant matter supplied steel products to the corporate debtor (Corporate Debtor), for which the Corporate Debtor was required to pay INR 24,20,91,054. The Corporate Debtor issued several cheques in favour of the respondent, all of which were returned dishonoured for insufficient funds. The respondent issued multiple statutory demand notices under Section 138 of the NI Act. Since the Corporate Debtor continued not to pay the due amounts, criminal complaints were filed by the respondent against the Corporate Debtor and the appellants under Section 138 of the NI Act.

In the meantime, a statutory notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 was issued by the respondent against the Corporate Debtor wherein the adjudicating authority passed an order admitting the application. The adjudicating authority directed for the commencement of the Corporate Insolvency Resolution Process (CIRP), and a moratorium under Section 14 of the IBC was ordered. In pursuance of the order passed, the adjudicating authority stayed further proceedings in the criminal complaints filed under the NI Act. The National Company Law Appellate Tribunal (NCLAT), in an appeal, set aside the order of the adjudicating authority holding that Section 138 being a criminal law proceeding could not be deemed to be a “proceeding” within the meaning of Section 14 of the IBC.

In the present appeal before the Hon’ble Supreme Court of India, the moot question was whether the institution or continuation of a proceeding under Section 138/141 of the NI Act can be covered by a moratorium provision under Section 14 of the IBC.

Findings of the Court

The Hon’ble Supreme Court rendered its findings on the instant matter under several heads as follows:

  1. Interpretation of Section 14 of the IBC:

The Hon’ble Supreme Court noted that the sweep of Section 14 of the IBC is vast as it includes a prohibition on the institution, continuation, judgment and execution of suits and proceedings. Similarly, the definition of “transaction” in Section 3(33) under the IBC is an inclusive one that is extremely wide in nature and would include a transaction evidencing a debt or liability. Consequently, it was observed that the proceedings under Section 138 of the NI Act would certainly be a proceeding in a court of law in respect of a transaction which related to a debt owed by the corporate debtor. The Hon’ble Supreme Court further clarified that the ejusdem generis and noscitur a sociis being rules of construction of statutes, cannot be used to colour an otherwise wide expression so as to whittle it down and stultify the object of a statute.

  1. The object of Section 14 of the IBC

The Hon’ble Supreme Court referred to the Report of the Insolvency Law Committee of February 2020 to state that the object of moratorium provision under Section 14 of the IBC is to see that there is no depletion of corporate debtor’s assets during the insolvency resolution process so that it can continue as a going concern while maximising its value. A reference was also made to the decision in Swiss Ribbons (P) Ltd. v. Union of India2 wherein it was held that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor and its management from a corporate death by liquidation.

The Hon’ble Supreme Court held that proceedings under Section 138 of the NI Act would result in the depletion of the assets of the corporate debtor directly impacting the CIRP in the same manner as the institution, continuation, or execution of a decree of a civil court. Based on this analysis, the Hon’ble Supreme Court observed that it was impossible to discern any difference between the impact of a suit and a Section 138 proceeding under the NI Act. It was also observed that the scheme under Section 14 of the IBC is to shield the corporate debtor from pecuniary attacks against it in the moratorium period so that the corporate debtor gets some breathing space to rehabilitate itself. The Hon’ble Supreme Court opined that any crack in the shield would have adverse consequences, which given the object of Section 14 cannot be allowed. This being the case, the Hon’ble Supreme Court clarified that the moratorium provision contained in Section 14 of the IBC would apply only to the corporate debtor. However, the natural persons mentioned in Section 141 such as the directors and officers of the corporate debtor would continue to be statutorily liable under Chapter XVII of the Negotiable Instruments Act.

  1. Section 14 in relation to other Moratorium Sections in the IBC.

The Hon’ble Supreme Court noted that the scope of Section 14 is much wider than other provisions for moratorium under Sections 96 and 101. The expression “transaction” used in Section 14 is much wider than the term “debt” used in Section 85. It was also observed that the term “proceedings” used by the legislature in Section 14(1)(a) was not curtailed by the word “legal”. This, coupled with the fact that Section 14 is not limited to ‘recovery’ of any debt, would indicate that any legal proceedings even indirectly related to the recovery of any debt would be covered. The Hon’ble Supreme Court held that the expression “proceedings” cannot be cut down by way of a narrow interpretation and must be given a fair meaning aligned with the object of Section 14. Therefore, a legal action or proceeding in respect of any debt would, on its plain reading, would include a Section 138 proceeding.

  1. The interplay between Section 14 and Section 32A of the IBC.

The Hon’ble Supreme Court held that Section 32A cannot possibly be said to throw any light on the true interpretation of Section 14(1)(a) as the reason for introducing Section 32A had nothing whatsoever to do with any moratorium provision. At the heart of Section 32A is the extinguishment of the corporate debtor’s criminal liability, from the date the adjudicating authority approves the resolution plan so that new management may take a clean break and start afresh. On the other hand, a moratorium provision does not extinguish any liability, civil or criminal, but only casts a shadow on proceedings already initiated or to be initiated. Thus, the Hon’ble Supreme Court held that Section 32A, which was introduced by an amendment into the IBC, could not be construed to limit the moratorium provision contained in Section 14.

  1. Nature of Proceedings under Chapter XVI of the NI Act

The Hon’ble Supreme Court referred to the decision in Goaplast (P) Ltd. v. Chico Ursula D’Souza3 to hold that the object of provisions under Chapter XVI is to introduce an atmosphere of faith and reliance on the banking system. Provisions contained in Sections 138 to 142 of the NI Act are intended to discourage people from not honouring their commitments by way of payment through cheques. Similarly, reliance was placed upon the decision in Vinay Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd.4 wherein it was held that the penal provisions contained in Chapter XVI of the NI Act regulate financial promises in the growing business, trade, commerce and industrial activities of the country and the strict liability to promote greater vigilance in financial matters.

The Hon’ble Supreme Court, while commenting upon the nature of the offence under Section 138 of the NI Act, referred to the decision in Kaushalya Devi Massand v. Roopikishore Khore5 to hold that an offence under Section 138 is almost in the nature of a civil wrong which has been given criminal overtones. Similarly, in Meters and Instruments (P) Ltd. v. Kanchan Mehta6 it was held that an offence under Section 138 is primarily a civil wrong.

The Hon’ble Supreme Court concluded that the gravamen of a proceeding under Section 138 of the NI Act, though couched in language making the act complained of an offence, is really in order to get back through a summary proceeding, the amount contained in the dishonored cheque together with interest and costs, expeditiously and cheaply.

  1. Conclusion

The Hon’ble Supreme Court observed that it is clear that a Section 138 proceeding can be said to be a “civil sheep” in “criminal wolf’s” clothing. Therefore, the Hon’ble Supreme Court concluded that proceedings under Sections 138 and 141 of the NI Act against a corporate debtor are covered by Section 14(1)(a) of the IBC.

Comments

The decision in the instant matter would bring a sigh of relief to all the stakeholders in the Indian insolvency regime. With this judgment, the decisions of the Bombay High Court in Tayal Cotton Pvt. Ltd. v. State of Maharashtra7and the Calcutta High Court in M/s MBL Infrastructure v. Manik Chand Somani8 stand overruled thereby bringing much needed clarity on the moot proposition. The inclusion of proceedings under Section 138 and 141 of the NI Act within the scope of “proceedings” as envisaged under Section 14 of the IBC would incentivise more resolution applicants to come forward and engage in the insolvency resolution process. The instant judgment is indeed aligned with the goal of maximizing the corporate debtor’s value while keeping it as a going concern and is a much needed precedent.

Footnotes

P. Mohanraj & Ors. v. M/s Shah Brothers Ispat Pvt. Ltd., 2021 SCC OnLine SC 152.

Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17.

Goaplast (P) Ltd. v. Chico Ursula D’Souza, (2003) 3 SCC 232.

Vinay Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd., (2008) 2 SCC 305.

Kaushalya Devi Massand v. Roopikishore Khore, (2011) 4 SCC 593.

Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.

Tayal Cotton Pvt. Ltd. v. State of Maharashtra, 2018 SCC OnLine Bom 2069.

M/s MBL Infrastructure v. Manik Chand Somani, 2019 (4) RCR (Criminal) 476.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s