A Full Bench of the Hon’ble Supreme Court comprising Justices R.F. Nariman, Navin Sinha, and K.M. Joseph, held that proceeding under section 138 read with section 141 of the Negotiable Instruments Act, 1881 (NI Act) is quasi-criminal in nature and amount to a “proceeding” within the meaning of section 14(1)(a) of Insolvency and Bankruptcy Code, 2016 (IBC). Hence, cheque dishonour cases cannot be instituted or continued against Corporate Debtors undergoing Corporate Insolvency Resolution Process (CIRP) under the IBC. However, the Supreme Court also clarified those proceedings under NI Act can continue against erstwhile Directors/persons in charge of and responsible for the conduct of the business of the Corporate Debtor. [REED 2021 SC 03526]
BACKGROUND
M/s Shah Brothers Ispat Pvt. Ltd. (Respondent) supplied steel products to M/s Diamond Engineering Pvt Ltd (DEPL) amounting to INR 24,20,91,054/-. DEPL issued 51 cheques in favour of Respondent, all of which were returned dishonoured for the reason ‘funds insufficient’. As a result, the Respondent issued a statutory demand notice dated 21 March 2017, under section 138 read with section 141 of the NI Act, calling upon DEPL and its three directors (Appellants), to pay this amount. Since no payment was made pursuant to the statutory demand notice, the Respondent filed a criminal complaint dated 17 May 2017, under the above-stated section, whereupon the Additional Chief Metropolitan Magistrate (ACMM), Kurla, Mumbai on 12 February 2018, issued summons to the Appellants.
Meanwhile, as a statutory notice under section 8 of the IBC had been issued on 21 March 2017 by the Respondent, the Adjudicating Authority vide order dated 6 June 2017 admitted the application under section 9 of the IBC, directing commencement of the CIRP with respect to DEPL and a moratorium in terms of section 14 of the IBC was ordered.
Pursuant thereto, the Adjudicating Authority stayed further proceedings in the criminal complaint pending before the ACMM. In an appeal filed to the National Company Law Appellate Tribunal (NCLAT), it set aside the said order, holding that section 138 of NI Act, being a criminal law provision, cannot be held to be a ‘proceeding’ within the meaning of section 14 of the IBC. Aggrieved, the Appellants filed an appeal before the Supreme Court.
ISSUE
The moot questions that arose for consideration before the Supreme Court was whether the institution or continuation of a proceeding under section 138/141 of the NI Act is covered by the moratorium under section 14 of the IBC?
ANALYSIS
Section 14(1)(a) of the IBC stipulates that when an order declaring moratorium is passed, “the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including the execution of any judgment, decree or order in any court of law, tribunal, arbitration panel” will be prohibited. Interpreting the aforesaid section, the Supreme Court noted that the expression “institution of suits or continuation of pending suits” is to be read as one category and “proceedings against the corporate debtor” constitute a separate category, both being separated by a disjunctive “or”. Further, the second category is widely worded to include “any judgment, decree or order” and “any court of law, tribunal, arbitration panel or other authority” and thus, will subsume criminal proceedings under the NI Act as criminal proceedings under the Code of Criminal Procedure, 1973 (Cr.P.C.) is conducted before the courts mentioned in section 6 of the Cr.P.C. The Supreme Court further dismissed the applicability of rules of construction of statutes, namely ejusdem generis and noscitur a sociis, in the present case, stating that the same cannot be exalted to nullify the plain meaning of words used in a statute if they are designedly used in a wide sense.
The Supreme Court further placed reliance on its judgment in Swiss Ribbons (P) Ltd. v. Union of India, REED 2019 SC 01504, wherein it was observed that section 14 of IBC aims to preserve the assets of the Corporate Debtor during the resolution process and the provision protects the assets from further dilution. In light thereof, the Apex Court noted that there would essentially be no difference between a quasi-judicial proceeding of a cheque bounce case under the NI Act and a civil suit as both will result in the assets of the Corporate Debtor being depleted since the Corporate Debtor would have to pay compensation which can extend to twice the amount of the bounced cheque. Hence, it concluded that the objective of the moratorium under section 14 of IBC will be defeated, if proceedings under section 138 of the NI Act be allowed to continue during the pendency of a CIRP.
The Supreme Court also analyzed the nature of proceedings under Chapter XVII of the NI Act and concluded it to be quasi-criminal in nature. It stated that no court can take cognizance of an offence punishable under section 138 except on a complaint made in writing by the payee or the holder in due course of the cheque. Further, the complaint under section 138(c) is to be made within one month of the date on which the “cause of action” arises. The Apex Court observed that the expression “cause of action” is never used in criminal jurisprudence and applies only in civil cases to recover money and therefore, called section 138 proceedings to be a ‘civil sheep’ in a ‘criminal wolf's clothing, as the provision seeks to safeguard the interest of the victim.
In light of the foregoing, the Supreme Court held that Section 14 of IBC cover proceedings under section 138 of the NI Act and consequently, proceedings to recover dishonoured cheque from Corporate Debtor would be stayed during the moratorium period. However, the Apex Court clarified those proceedings under NI Act can continue against erstwhile Directors/persons in charge of and responsible for the conduct of the business of the Corporate Debtor. Resultantly, the present appeal was allowed and the impugned order by NCLAT was set aside.