Moratorium Proceedings U/S 14 OF IBC Bars Criminal Proceedings U/S 138 OF NI ACT.

A Case Study Of P.Mohanraj & Ors. V. M/S Shah Brothers Ispat Pvt. Ltd.
Moratorium Proceedings U/S 14 OF IBC Bars Criminal Proceedings U/S 138 OF NI ACT.

1. Introduction

1.1 To understand the interplay between Section 14 of the IBC and Sections 138 to 142 of the NI Act, it is important to understand the objective of IBC.

1.2 The object of Section 14 of the Insolvency & Bankruptcy Code (IBC) is to ensure that there is no depletion of a corporate debtor’s assets during the insolvency resolution process aiming that the company keeps on functioning during the process.

1.3 The process of ‘moratorium’ has a significant role in the revival of the corporate debtor by allowing them certain relief by staying all proceedings causing a burden on their assets.

1.4 On the contrary, Section(s) 138 to 142 of the NI Act aims to ensure the efficacy of banking operations and maintain the credibility of transactions.

1.5 The Supreme Court has expanded the scope of the moratorium in the P. Mohanraj Case which was previously restricted to civil proceedings, now it shall also cover proceedings of quasi-criminal nature.

2. P. Mohanraj & Ors. (Appellant) v. M/S Shah Brothers Ispat Pvt. Ltd. (Respondent), 2021 SCC Online SC 152

2. 1 Brief Facts of the Case

a. Steel products were supplied by the respondent to M/s. Diamond Engineering Pvt. Ltd. and the company had issued 53 cheques. When the cheques were presented by the respondent all were returned dishonored due to the insufficiency of the funds.

b. Two notices were issued by the respondent one on 31stMarch 2017 and another on 5thMay 2017 respectively, under Section 138 read with Section 141 of the NI Act, wherein the respondent called upon the Directors of the company to clear the outstanding dues within 15 days.

c. The company failed to make the payment and hence the respondent filed criminal complaints against the company.

d. Before this, a demand notice was issued by the respondent on 21stMarch 2017, under Section 8 of the IBC followed by an Application under Section 9 of the Code before the National Company Law Tribunal, Chennai Bench (NCLT).

e. The NCLT admitted the Application filed by the respondent under Section 9 of the IBC. The adjudicating authority ordered a moratorium in terms of Section 14 of the IBC.

f. The Tribunal gave directions to the Respondent for withdrawal of its criminal complaint filed under Section 138 of the NI Act.

g. The respondent being aggrieved by the said order filed an appeal before the National Company Law Appellate Tribunal (NCLAT).

h. The Appellate Tribunal had set aside the order of the NCLT and held that proceedings under Section 138 are criminal proceedings and it cannot be held to be considered as parallel proceeding within the meaning of Section 14 of the IBC.

i. The appellants moved to the Apex Court against the order of the Appellate Tribunal and filed a Civil Appeal.

j. While the civil appeal was pending before the Apex Court, the Tribunal approved the resolution plan submitted by the company’s promoters.

3. Contentions of the Parties

3.1 The respondent placed reliance upon the ejusdem generis/ noscitur a sociis rule of construction and stated that the expression proceedings extracts its’ meaning from the expression ‘suits’ and such proceedings must be of civil nature.

3.2 The Appellant argued that the term “proceedings” contained under Section 14 of the IBC were to be construed to include criminal proceedings as per the second proviso to Section 32A.

4. Issue before the Supreme Court

4.1 Whether the initiation of cheque bounce proceedings under Section 138 of the NI Act against a debtor company and its directors is permissible when the debtor company is undergoing a resolution process?

5. Judgments set-aside by the Supreme Court

5.1 The Apex Court has overruled the decisions of the Bombay High Court passed in the case titled Tayal Cotton Pvt. Ltd. v. State of Maharashtra, 2018 SCC Online Bom 2069 (2019) 1 Mah LJ 312and the Calcutta High Courtin M/s MBL Infrastructure Ltd. v. Manik Chand Somani, CRR 3456/2018- wherein the Court has ruled that the benefit of the moratorium from cheque bounce cases would only be for the corporate debtor company and it would not extend to directors.

6. Observations of the Supreme Court

I. Scope of Provision of Moratorium: The Apex Court stated that Section 14 has a very vast scope which includes institution, continuation, judgment, and execution of suits and proceedings.

II. Meaning of the term 'proceedings': The Apex Court said that it includes any judgment, decree, or order that is ongoing before Court, Tribunal, Arbitration panel, or any other authority.

III. Nature of proceedings u/s 138: It was discussed in Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560, wherein the Court held that Section 138 is a regulatory offense.

In M. Abbas Haji v. T.N. Channakeshava, (2019) 9 SCC 606, the High Court held that the proceedings under Section 138 of the NI Act are quasi-criminal proceedings.

IV. Double Burden: If the quasi-criminal provisions of Section 138 are kept out of the moratorium process then it would lead to a double burden on the assets of the corporate debtor.

V. The doctrine of 'Noscitur a sociis': It is merely a rule of construction and cannot prevail where it is clear that wider and diverse etymology is intentionally and deliberately used in the provision.

7. Decision of the Supreme Court

[Judgment passed by a three-judge bench comprising of Justices Rohinton Nariman, Navin Sinha, and KM Joseph]

  1. The Hon’ble Apex Court held that when a moratorium procedure is initiated under the IBC then it would bar parallel criminal proceedings u/s 138 against the corporate debtor.

  2. The Court clarified that proceedings under the aforesaid provisions can continue against the directors and other officials of the company who are made accused in cheque bouncing proceedings.

  3. The Apex Court held that in the instant matter the proceedings under Section 138/141 shall continue against the company and its directors as the moratorium period has come to an end.

8. Conclusion

a. Section 14 of the Code does not provide any difference between any civil or criminal liability however, the provision casts a shadow on ongoing proceedings and on yet to begin proceedings and it is lifted once the moratorium period ends.

b. The proceedings under Section 138 of the NI Act are quasi-criminal. The object of Section 138 is compensatory and the punitive element is attached only to give it a binding effect.

c. Section 14(1)(a) refers to monetary liabilities of the corporate debtor and Section 14 (1)(b) to corporate debtor’s assets and these clauses act as a shield to the corporate debtor against pecuniary attacks during the moratorium period.

d. Relief under Section 14(1)(a) will not apply to the “natural persons” but will only apply to the corporate entity or the artificial juristic person the natural persons manage.

e. The proceedings u/s 138 NI Act revolves around the interest of the creditor and hence the Court permitted the moratorium period as the criminal proceedings against corporate debtor would adversely impact the resolution process.