Skip to main content

Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC

In P. MOHANRAJ & ORS. vs M/S. SHAH BROTHERS ISPAT PVT. LTD., appeal was filed against the NCLAT order holding that Section 138, being a criminal law provision, cannot be held to be a “proceeding” within the meaning of Section 14 of the IBC.

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.

The Supreme Court observed that in Section 14(1)(a) of IBC, it will be noticed that the expression “or” occurs twice in the first part – first, between the expressions “institution of suits” and “continuation of pending suits” and second, between the expressions “continuation of pending suits” and “proceedings against the corporate debtor...”. 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 Section 138 proceeding being conducted before a Magistrate would certainly be a proceeding in a court of law in respect of a transaction which relates to adebt owed by the corporate debtor. 

Further referring to the Report of the Insolvency Law Committee and the judgment in Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, it can thus be seen that regard being had to the object sought to be achieved by the IBC in imposing this moratorium, a quasi-criminal proceeding which would result in the assets of the corporate debtor being depleted as a result of having to pay compensation which can amount to twice the amount of the cheque that has bounced would directly impact the corporate insolvency resolution process in the same manner as the institution, continuation, or execution of a decree in such suit in a civil court for the amount of debt or other liability. Judged from the point of view of this objective, it is impossible to discern any difference between the impact of a suit and a Section 138 proceeding, insofar as the corporate debtor is concerned, on its getting the necessary breathing space to get back on its feet during the corporate insolvency resolution process.

Viewed from another point of view, clause (b) of Section 14(1) also makes it clear that during the moratorium period, any transfer, encumbrance, alienation, or disposal by the corporate debtor of any of its assets or any legal right or beneficial interest therein being also interdicted, yet a liability in the form of compensation payable under Section 138 would somehow escape the dragnet of Section 14(1). While Section 14(1)(a) refers to monetary liabilities of the corporate debtor, Section 14(1)(b) refers to the corporate debtor’s assets, and together, these two clauses 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.

On the issue of whether Section 138 involves a criminal or civil matter, the Supreme Court observed that a civil proceeding is not necessarily a proceeding which begins with the filing of a suit and culminates in execution of a decree. It would include a revenue proceeding as well as a writ petition filed under Article 226 of the Constitution, if the reliefs therein are to enforce rights of a civil nature. Interestingly, criminal proceedings are stated to be proceedings in which the larger interest of the State is concerned. Given these tests, it is clear that a Section 138 proceeding can be said to be a “civil sheep” in a “criminal wolf’s” clothing, as it is the interest of the victim that is sought to be protected, the larger interest of the State being subsumed in the victim alone moving a court in cheque bouncing cases, as has been seen by us in the analysis made hereinabove of Chapter XVII of the Negotiable Instruments Act.

A proceeding under Section 138, 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 dishonoured cheque together with interest and costs, expeditiously and cheaply. it is the victim alone who can file the complaint which ordinarily culminates in the payment of fine as compensation which may extend to twice the amount of the cheque which would include the amount of the cheque and the interest and costs thereupon. Therefore a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section 14 of the IBC, amount to a “proceeding” within the meaning of Section 14(1)(a), the moratorium therefore attaching to such proceeding.

On the question of whether natural persons are covered by section 14 of the IBC, the Supreme Court held that 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 – see Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661. 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. Since the corporate debtor would be covered by the moratorium provision contained in Section 14 of the IBC, by which continuation of Section 138/141 proceedings against the corporate debtor and initiation of Section 138/141 proceedings against the said debtor during the corporate insolvency resolution process are interdicted, what is stated in paragraphs 51 and 59 in Aneeta Hada (supra) would then become applicable. The legal impediment contained in Section 14 of the IBC would make it impossible for such proceeding to continue or be instituted against the corporate debtor. Thus, for the period of moratorium, since no Section 138/141 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 141 continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act.

In conclusion, disagreeing with the Bombay High Court and the Calcutta High Court judgments in Tayal Cotton Pvt. Ltd. v. State of Maharashtra, 2018 SCC OnLine Bom 2069 : (2019) 1 Mah LJ 312 and M/s MBL Infrastructure Ltd. v. Manik Chand Somani, CRR 3456/2018 (Calcutta High Court; decided on 16.04.2019), respectively, we hold that a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC.

Comments

Most viewed this month

Partition proceedings are vitiated even if single co-sharer is not made party or is not served in accordance with law

Cause Title :  Bhagwant Singh vs  Financial Commissioner (Appeals) Punjab, Chandigarh,  CWP-2132-2018 (O&M), High Court Of Punjab & Haryana At Chandigarh Date of Judgment/Order : 31.08.2022 Corum : Hon’ble Mr. Justice Sudhir Mittal Background A large parcel of land was owned by the Nagar Panchayat. Thereafter, some of the co-sharers sold their shares to third parties including the petitioners herein. On 22.11.1995, respondents No.3 to 5 filed an application for partition of the land. The petitioners were not impleaded as parties.  On completion of proceedings, sanad was issued on 28.08.1996. Vide two separate sale deeds dated 28.05.2008 respondents No.3 and 5 sold some portion in favour of respondent No.6 and 7. These respondents sought implementation of the sanad resulting in issuance of warrants of possession dated 05.06.2008. Allegedly, it was then that the petitioners realized that joint land had been partitioned and that proceedings h...

The recovery of vehicles by the financier not an offence - SC

Special Leave Petition (Crl.) No. 8907  of 2009 Anup Sarmah (Petitioner) Vs Bhola Nath Sharma & Ors.(Respondents) The petitioner submitted that  respondents-financer had forcibly taken away the vehicle financed by them and  illegally deprived the petitioner from its lawful possession  and  thus,  committed  a crime. The complaint filed by the petitioner had been  entertained  by  the Judicial Magistrate (Ist Class), Gauhati (Assam) in Complaint Case  No.  608 of 2009, even directing the interim custody of the vehicle (Maruti  Zen)  be given to the petitioner vide order dated  17.3.2009.  The respondent on approaching the Guwahati High  Court against this order, the hon'ble court squashed the criminal  proceedings  pending   before  the  learned Magistrate. After hearing both sides, the Hon'ble Supreme Court decided on 30th...

Preferential Right Of Hindu Heirs Applicable Also To Agricultural Land

In CIVIL APPEAL NO. 2553 OF 2019,  Babu Ram vs Santokh Singh, the issue before the Supreme Court was regarding scope and applicability of Section 22 of the Hindu Succession Act, 1956, and particularly, whether preferential right given to an heir of a Hindu under said Section 22 will be inapplicable if the property in question is an agricultural land. The Supreme Court observed that Section 22 of the Act says:- Preferential right to acquire property in certain cases –  (1) Where, after the commencement of this Act, an interest in any immovable property of an intestate, or in any business carried on by him or her, whether solely or in conjunction with others, devolves upon two or more heirs specified in class I of the Schedule, and any one of such heirs proposes to transfer his or her interest in the property or business, the other heirs shall have a preferential right to acquire the interest proposed to be transferred.  (2) The consideration for which any inte...