Moratorium under Section 14 IBC Covers Proceedings Against Corporate Debtor For Cheque Dishonor Under Section 138 NI ACT: Supreme Court

Introduction

Hon’ble Supreme Court in matter of P. Mohanraj & Ors. v. M/s Shah Brothers Ispat Pvt. Ltd.  held that Moratorium under Section 14 of the Insolvency & Bankruptcy Code, 2016 (IBC) bars parallel proceedings against Corporate Debtor under Section 138 of the Negotiable Instrument Act, 1881 (NI Act). In the aforesaid scenario, Steel products were supplied by M/s Shah Brothers Ispat Pvt. Ltd (Respondent) to M/s Diamond Engineering Pvt. Ltd and a few cheques were returned dishonored on account of ‘fund insufficiency’.

In the meanwhile, application under Section 9 of the IBC was admitted against the company and moratorium in terms of Section 14 of the IBC was ordered.  On approaching the Hon’ble Appellant Tribunal at an earlier stage in the matter it was iterated that since Section 138 of the NI Act is a criminal law provision, it cannot fall within the ambit of “proceedings” within the meaning of Section 14 of the IBC. The concerned parties to the matter have approached the Apex Court to resolve the question of whether the institution or continuation of a proceedings under Section 138/141 of the NI Act, be said to be covered by the moratorium provisions namely, Section 14 of the IBC or not.

Contentions raised

For the aforementioned purpose counsel for the respondent relied upon the ejusdem generis/ noscitur a sociis rule of construction and cited similar judgments which helps to deduce the notion that since the expression “proceedings” takes its color from the previous expression “suits”, such proceedings must necessarily be of civil in nature. While counsel from the appellant, argued that the intent manifested in Section 14 of the IBC is reinforced by the introduction of Section 32A to the IBC and if the intent of Section 14 were to prohibit initiation or continuation of criminal proceedings, the legislature would not have contemplated the introduction of Section 32A by way of amendment. As per the counsel for the appellant, the term “proceedings” contained under Section 14 of the IBC were to be construed to include criminal proceedings as second proviso of Section 32A indicates towards pendency of criminal prosecution against those in charge of and responsible for the conduct of the corporate debtor, otiose.

The Judgment

Hon’ble Supreme Court while adjudicating on the subject observed that the rules of ejusdem generis and noscitur a sociis cannot be promoted to nullify the plain meaning of the words used in a statute, especially when they are designed in a way to use to promulgate a wider sense. Furthermore, it is a well-known fact that the underlying object of Section 14 of the IBC is to ensure that there is no depletion of corporate debtor’s assets and value of all stakeholders are maximized. It light of the arguments made and jurisprudence cited, the Hon’ble Supreme Court upheld that a quasi-criminal proceeding like one under Section 138 of NI Act, would result in depletion in the assets of the corporate debtor and any obligation to pay compensation which can even be twice the amount of cheque will directly impact the corporate insolvency resolution process. Hon’ble Supreme Court further added that there is Section 14 (1) (a) that refers to monetary liabilities of the corporate debtor and Section 14 (1) (b) refers to corporate debtor’s assets and combinedly these two clauses provide a scheme which shield the corporate debtor from pecuniary attacks in the moratorium period, such that it can continue as a going concern.

The Hon’ble Bench in the later parts of the judgment discussed in length the nature of proceedings under Section 138 of the NI Act, to analyze if such proceedings are entirely criminal or civil or quasi-criminal in nature. While looking at numerous judgments and jurisprudence on the subject, no clear and watertight distinction could be drawn, yet it made clear that civil contempt is essentially an action which is moved by the party in whose interest an order was made with a view to enforce its personal right, whereas criminal contempt in essence relates to the public interest in seeing that administration of justice remains unpolluted.