Proceeding under S.138 of NI Act is quasi-criminal, amounts to “proceeding” under S.14(1)(a) of IBC

P. Mohanraj & Ors. Vs. M/s. Shah Brothers Ispat Pvt. Ltd.

Criminal Appeal Nos: 239 – 248 of 2021 [Arising out of SLP (Crl) 1359 – 5668/2020]

Decided on March 1st, 2021

The present case was decided by a bench of the Supreme Court consisting of Justice Rohinton Fali Nariman, Justice Navin Sinha and Justice K.M Joseph.

Diamond Engineering Pvt Ltd (the company) received steel products from 21. 09.2015 to 11.11.2016 and as a result INR 24,20,91,054/- was due and payable by the company. As many as 51 cheques were issued all of which were returned for the reason of “insufficient funds”. After the issuance of two demand notices on 31.3.2017 and on 5.5.2017 under Section 138 read with Section 141 of the NI Act, 1881 to which cheques were issued and once again returned for the same reason, two criminal complaints under Section 138 read with Section 141 of the NI Act before the Additional Chief Metropolitan Magistrate were filed on 17.5.2017 and 21.6.2017 respectively. The Adjudicating Authority stayed further proceedings in the two criminal complaints pending before the Additional Chief Metropolitan Magistrate [“ACMM”] on 24.5.2018.

The important question that arises in this appeal is 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. (Para 5)

The contention of the learned counsel of the Appellant argued that the object of a moratorium provision such as Section 14 is to see that there is no depletion of a corporate debtor’s assets during the insolvency resolution process so that it can be kept running as a going concern during this time, thus maximising value for all stakeholders.

The contention of the learned counsel for the respondents argued on the basis of the maxim ejusdem generis/noscitur a sociis wherein this maxim had been previously applied by the Bombay High Court to Section 14(1)(a) and emphasized that such ‘proceedings’ must necessarily be ‘civil’ in nature. He went on to argue that Section 138 of the Negotiable Instruments Act is a criminal proceeding whose object may be two fold, the primary object being to make what was once a civil wrong punishable by a jail sentence and/or fine.

The Supreme Court held that the declaration of moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC) covers criminal proceedings for dishonor of cheque under Section 138 of the Negotiable Instruments Act against the corporate debtor. 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.

The Appellants further argued that a legal action or proceeding in respect of any debt would, on its plain language, include a Section 138 proceeding. This is for the reason that a Section 138 proceeding would be a legal proceeding “in respect of” a debt. “In respect of” is a phrase which is wide and includes anything done directly or indirectly and they relied upon the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., (2018) 2 SCC 674 to reiterate this.

A reading of these judgments would show that ejusdem generis and noscitur a sociis, being rules as to the construction of statutes, cannot be exalted to nullify the plain meaning of words used in a statute if they are designedly used in a wide sense. Importantly, where a residuary phrase is used as a catch-all expression to take within its scope what may reasonably be comprehended by a provision, regard being had to its object and setting, noscitur a sociis cannot be used to colour an otherwise wide expression so as to whittle it down and stultify the object of a statutory provision. (Para 12)

The Court also referred to the case of Manish Kumar v. Union of India, 2021 SCC OnLine SC 30, when they upheld the fact that Section 32A cannot throw any light on the true interpretation of Section 14(1)(a) as the purpose behind Section 32A was completely unrelated to the moratorium provision. Also, Section 32A(1) operates only after the moratorium comes to an end.

The Court observed that:

A legal action or proceeding in respect of any debt would, on its plain language, include a Section 138 proceeding. This is for the reason that a Section 138 proceeding would be a legal proceeding “in respect of” a debt. “In respect of” is a phrase which is wide and includes anything done directly or indirectly – see Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., [2017] ibclaw.in 14 SC (at page 709) and Giriraj Garg v. Coal India Ltd., (2019) 5 SCC 192 (at pages 202-203). This, coupled with the fact that the Section is not limited to ‘recovery’ of any debt, would indicate that any legal proceeding even indirectly relatable to recovery of any debt would be covered.( Para 27)

In conclusion, disagreeing with the Bombay High Court and the Calcutta High Court judgments in Tayal Cotton Pvt. Ltd. v. State of Maharashtra, [2018] ibclaw.in 13 HC and M/s MBL Infrastructure Ltd. v. Manik Chand Somani, (2019) ibclaw.in 18 HC, respectively, we hold that a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC. (Para 78)

Resultantly, the civil appeal is allowed and the judgment under appeal is set aside. However, the Section 138/141 proceedings in this case will continue both against the company as well as the appellants for the reason given by us in paragraph 77 above as well as the fact that the insolvency resolution process does not involve a new management taking over. We may also note that the moratorium period has come to an end in this case. (Para 79)

Significantly, this Court did not hold that the moratorium provision would not extend to criminal liability and as far as the Directors/persons in management or control of the corporate debtor are concerned, a Section 138/141 proceeding against them cannot be initiated or continued without the corporate debtor.

This is because Section 141 of the Negotiable Instruments Act speaks of persons in charge of, and responsible to the company for the conduct of the business of the company, as well as the company.

The Supreme Court ruled that when an order of moratorium is passed under the Insolvency and Bankruptcy Code (IBC), parallel proceedings under Section 138 of the Negotiable Instruments Act (NI Act) against the Corporate Debtor cannot be allowed to continue as the same will be covered by the bar under Section 14 of the IBC.

The Court disposed the appeals in the above terms.

View/Download judgment: P. Mohanraj & Ors. Vs. M/s. Shah Brothers Ispat Pvt. Ltd.

Keerthana R.