MAINTAINABILITY OF COMPLAINT U/S 138 OF NEGOTIABLE INSTRUMENTS ACT & INSOLVENCY PROCEEDINGS IN NCLT

 

MAINTAINABILITY OF COMPLAINT U/s 138 OF NEGOTIABLE INSTRUMENTS Act & INSOLVENCY PROCEEDINGS IN NCLT

The Supreme Court has settled the issue

The hon’ble Supreme Court (3 Judge bench CORAM: justice ROHINTON FALI NARIMAN, J,  NAVIN SINHA, J, K.M. JOSEPH, J) in a comprehensive judgment rendered as P. MOHANRAJ & ORS. Vs M/S. SHAH BROTHERS ISPAT PVT. LTD & Ors Crl Appeal No. 10355/2018, in March 2021, which was a lead matter with bunch of writ petitions raising similar pleas under Article 32 of the Constitution of India, by erstwhile Directors/persons in charge of and responsible for the conduct of the business of the corporate debtor. In a writ petition under Article 32 of Constitution of India, The order passed by ld Magistrate were impugned , whereby the ld Magistrates had held that Section 14 of the Insolvency & bankruptcy Code (IBC) would not cover proceedings under Section 138 of the Negotiable Instruments Act. The warrants of attachment had been issued under Section 431 read with Section 421 of Cr.PC against various accused persons, including the corporate debtor.

The petitions were premised upon the fact that Section 138 of Negotiable Instruments Act proceedings are covered by Section 14 of the IBC and hence, cannot continue against the corporate debtor and consequently, against the Directors. The hon’ble Supreme Court has finally adjudicated the matter and had set at rest the vexed issue that was craving for answers.

ISSUE BEFORE SUPREME COURT:

The hon’ble Supreme Court was pleased to deal with important question that arose in the appeals. The same was as under:  

“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 Insolvency & bankruptcy Code (IBC) 2016?.

After the enactment of the Insolvency & Bankruptcy Code, 2016, which is a comprehensive code, relating to insolvency of corporate debtors, the issue attained further importance. Before going further, section 14 of the IBC need meticulous perusal.   

SECTION 14 OF IBC 2016 and its ambit

(i)          MORATORIUM

As per the Insolvency Law Committee in February 2020, the object of Section 14 of IBC 2016 is a limited one i.e a criminal proceeding could not possibly be included within moratorium. This implies that proceedings u/s 138 of Negotiable Instruments Act shall continue, whether against the corporate debtor or in the name of Managing Director or Directors are required to be ascertained. The principle ejusdem generis/noscitur a sociis rules of construction that had, in fact, been applied to Section 14(1)(a) by the Bombay High Court and the Calcutta High Court to press home the point that since the expression “proceedings” takes its colour from the previous expression “suits”, such proceedings must necessarily be civil in nature. The 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 expressions contained in Section 22(1) of the Sick Industrial Companies Act, 1985 [“SICA”], and Section 446(2) of the Companies Act, 1956 is also relevant. Several judgments that the Delhi High Court had not applied Section 14 of the IBC to stay proceedings under Section 34 of the Arbitration and Conciliation Act, 1996; the Bombay High Court had not applied Section 14 of the IBC to stay prosecution under the Employees’ Provident Funds Act, 1952; and that the Delhi High Court had not stayed proceedings covered by the Prevention of Money-Laundering Act, 2002, stating that criminal proceedings were not the subject matter of Section 14 of the IBC.

The consistent view of the High Court has been that Section 138, being a criminal law provision, could not possibly be said to be covered by Section 14 of the IBC. The provision contained in Section 33(5) of the IBC relates to when a liquidation order is passed, no suit or other legal proceeding can be instituted by or against a corporate debtor, similar to what is contained in Section 446 of the Companies Act, 1956, and if those decisions are seen, then the expression “or other legal proceeding” obviously cannot include criminal proceedings.

(ii)        CIVIL PROCEEDINGS/CRIMINAL PROCEEDINGDS DISTINGUISHED

The expression “or other legal proceeding” should be contrasted with the word “proceedings” in Section 14(1)(a) of the IBC, which cannot possibly include a criminal proceeding, given its object. It is of pertinence that Section 32A of the 1IBC, was introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020 w.e.f. 28.12.2019, which contains a provision that the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease in certain circumstances. Why this provision is there in the Code? If  Section 14(1)(a) were to cover criminal offences as well and if the moratorium were to be imposed even in criminal case, then, this provision would have been wholly unnecessary. One may thus infer that criminal prosecutions are outside the ken of the expression “proceedings” contained in Section 14(1)(a) of the IBC.

(iii)      ANALYSIS OF CHAPTER XVII OF NEGOTIABLE INSTRUMENTS ACT & SECTION 14 OF IBC 2016: INTERRELATIONSHIP

Chapter XVII of the Negotiable Instruments Act would reveal that the offence under Section 138 of NI Act is a purely criminal offence which results in imposition of a terms of imprisonment or fine or both, and punishments exclusively awardable under Section 53 of the Indian Penal Code, 1860 only in a criminal proceeding, and hence, does not fall within “proceedings” contemplated by Section 14 of the IBC. Moreover, compounding under criminal law can only take place at the instance of the complainant/injured party, a subordinate criminal court has no inherent power to terminate proceedings under Section 138/141 upon “payment of compensation to the satisfaction of the court”. The rule of noscitur a sociis to state that since the expression “proceedings” contained in Section 14(1)(a) of the IBC is preceded by the expression “suits” and followed by the expression “execution”, it has to be read in a sense analogous to civil proceedings dealing with private rights of action as contrasted with criminal proceedings which deal with public wrongs. The intent manifest in Section 14 of the IBC is reinforced by the introduction of Section 32 A to the IBC ( w.e.f 12.12.2019) in that 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 32 A by way of amendment. If the expression “proceedings” contained in Section 14 were to be construed so as to include criminal proceedings, it would render the first proviso to Section 32, which deals with institution of prosecution against a corporate debtor during the corporate insolvency resolution process, and the second proviso, which indicates pendency of criminal prosecution against those in charge of and responsible for the conduct of the corporate debtor, otiose.

The moratorium under Section 14 is intended to keep the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the processes envisaged during the insolvency resolution process and ensuring that the company may continue as a going concern while the creditors take a view on resolution of default. Keeping the corporate debtor running as a going concern during the CIRP helps in achieving resolution as a going concern as well, which is likely to maximize value for all stakeholders. In other jurisdictions too, a moratorium may be put in place on the advent of formal insolvency proceedings, including liquidation and reorganization proceedings. The United Nation Commissions on International Trade Law (UNCITRAL) Guide notes that a moratorium is critical during reorganization proceedings, since, it facilitates the continued operation of the business and allows the debtor a breathing space to organize its affairs, time for preparation and approval of a reorganization plan and for other steps such as shedding unprofitable activities and onerous contracts, where appropriate.

Further, the purpose of the moratorium is to keep the assets of the debtor together for successful insolvency resolution, and it does not bar all actions, especially where countervailing public policy concerns are involved. For instance, criminal proceedings are not considered to be barred by the moratorium, since they do not constitute “money claims or recovery” proceedings. In this regard, the Committee also noted that in some jurisdictions, laws allow regulatory claims, such as those which are not designed to collect money for the estate but to protect vital and urgent public interests, restraining activities causing environmental damage or activities that are detrimental to public health and safety to be continued during the moratorium period.”

(iv)      OBJECT OF MORATORIUM UNDER SECTION 14 OF IBC 2016

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 maximizing value for all stakeholders. The idea is that it facilitates the continued operation of the business of the corporate debtor to allow it breathing space to organize its affairs so that a new management may ultimately take over and bring the corporate debtor out of financial sickness, thus benefitting all stakeholders, which would include workmen of the corporate debtor. Also, the judgment of this Court in Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 states the raison d’être for Section 14 in paragraph 28 as follows:

 

“28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor's assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.”

 

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 of NI Act, 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.

When the language of these Sections is juxtaposed against the

language of Section 14, it is clear that the width of Section 14 is even greater, given that Section 14 declares a moratorium prohibiting what is mentioned in clauses (a) to (d) thereof in respect of transactions entered into by the corporate debtor, inclusive of transactions relating to debts, as is contained in Sections 81, 85, 96, and 101. Also, Section 14(1)(d) is conspicuous by its absence in any of these Sections. Thus, where individuals or firms are concerned, the recovery of any property by an owner or lessor, where such property is occupied by or in possession of the individual or firm can be recovered during the moratorium period, unlike the property of a corporate debtor. For all these reasons, therefore, given the object and context of Section 14, the expression “proceedings” cannot be cut down by any rule of construction and must be given a fair meaning consonant with the object and context. The criminal proceedings which are not directly related to transactions evidencing debt or liability of the corporate debtor, would be outside the scope of this expression.

Section 138 contains within it, the ingredients of the offence made out. The deeming provision is important in that the legislature is cognizant of the fact that what is otherwise a civil liability is now also deemed to be an offence, since this liability is made punishable by law. It is important to note that the transaction spoken of is a commercial transaction between two parties which involves payment of money for a debt or liability. The explanation to Section 138 makes it clear that such debt or other liability means a legally enforceable debt or other liability. Thus, a debt or other liability barred by the law of limitation would be outside the scope of Section 138. This, coupled with fine that may extend to twice the amount of the cheque that is payable as compensation to the aggrieved party to cover both the amount of the cheque and the interest and costs thereupon, would show that it is really a hybrid provision to enforce payment under a bounced cheque, if it is otherwise enforceable in civil law. Further, though the ingredients of the offence are contained in the first part of Section 138 when the cheque is returned by the bank unpaid for the reasons given in the Section, the proviso gives an opportunity to the drawer of the cheque, stating that the drawer must fail to make payment of the amount within 15 days of the receipt of a notice, again making it clear that the real object of the provision is not to penalise the wrongdoer for an offence that is already made out, but to compensate the victim.

Likewise, under Section 139 of NI Act, a presumption is raised that the holder of a cheque received the cheque for the discharge, in whole or in part, of any debt or other liability. To rebut this presumption, facts must be adduced which, on a preponderance of probability (not beyond reasonable doubt as in the case of criminal offences), must then be proved. Section 140 is also important, in that it shall not be a defence in a prosecution for an offence under Section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that Section, thus making it clear that strict liability will attach, mens rea being no ingredient of the offence. Section 141 then makes Directors and other persons statutorily liable, provided the ingredients of the section are met. Interestingly, for the purposes of this Section, explanation (a) defines “company” as meaning anybody corporate and includes a firm or other association of individuals.\

(v)        LIABILITY OF CORPORATE DEBTOR FOR OFFENCES COMMITTED PRIOR TO INITIATION OF CIRP

Section 17 of the IBC (Code) provides that on commencement of the Corporate Insolvency Resolution Process (CIRP), the powers of management of the corporate debtor vest with the interim resolution professional. Further, the powers of the Board of Directors or partners of the corporate debtor stand suspended, and are to be exercised by the interim resolution professional. Thereafter, Section 29 A, read with Section 35(1)(f), places restrictions on related parties of the corporate debtor from proposing a resolution plan and purchasing the property of the corporate debtor in the CIRP and liquidation process, respectively. Thus, in most cases, the provisions of the Code effectuate a change in control of the corporate debtor that results in a clean break of the corporate debtor from its erstwhile management. However, the legal form of the corporate debtor continues in the CIRP, and may be preserved in the resolution plan. Additionally, while the property of the corporate debtor may also change hands upon resolution or liquidation, such property also continues to exist, either as property of the corporate debtor, or in the hands of the purchaser. However, even after commencement of CIRP or after its successful resolution or liquidation, the corporate debtor, along with its property, would be susceptible to investigations or proceedings related to criminal offences committed by it prior to the commencement of a CIRP, leading to the imposition of certain liabilities and restrictions on the corporate debtor and its properties even after they were lawfully acquired by a resolution applicant or a successful bidder, respectively.

 

(vi)      WHETHER NATURAL PERSONS ARE COVERED BY SECTION 14 OF THE IBC

  In Aneeta Hada Vs Godfather Travels & Tours Pvt.Ltd.  (2012) 5 SCC 661 case it is 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 impleading 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 Court, therefore, in Aneeta Hada (supra) held as under:

“51. We have already opined that the decision in Sheoratan Agarwal [(1984) 4 SCC 352 : 1984 SCC (Cri) 620] runs counter to the ratio laid down in C.V. Parekh [(1970) 3 SCC 491 : 1971 SCC (Cri) 97] which is by a larger Bench and hence, is a binding precedent. On the aforesaid ratiocination, the decision in Anil Hada [(2000) 1 SCC 1 : 2001 SCC (Cri) 174] has to be treated as not laying down the correct law as far as it states that the Director or any other officer can be prosecuted without impleadment of the company. Needless to emphasise, the matter would stand on a different footing where there is some legal impediment and the doctrine of lex non cogit ad impossibilia gets attracted.”

 

The Supreme Court has held, thus, that for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative. The other categories of offenders can only be brought in the drag-net on the touchstone of vicarious liability as the same has been stipulated in the provision itself. This was done on the basis of the ratio laid down in C.V. Parekh [(1970) 3 SCC 491 : 1971 SCC (Cri) 97] which is a three-Judge Bench decision. Thus, it was held that the view expressed in Sheoratan Agarwal [(1984) 4 SCC 352 : 1984 SCC (Cri) 620] does not correctly lay down the law and, accordingly, it was overruled. The decision in Anil Hada [(2000) 1 SCC 1 : 2001 SCC (Cri) 174] is also overruled with the qualifier.

Though in Aneeta Hada (Supra) case it is held that for proceedings against the Directors of a company, the company needed to be arraigned as an accused, though, a company is a juristic person and thereafter the Directors could be made party or parties and may be proceeded against, however, in the P. MOHANRAJ (Supra) case, it is held that section 138 NI Act during the moratorium and proceedings under IBC 2016 shall continue or may be filed against the Directors, authorized signatories of cheques etc. This appears, little contrasting. However, the P Mohandas (Supra) judgment is a three judge bench judgment after taking note of prevailing law and further, IBC 2016 was not even enacted at that time and finding of hon’ble Supreme Court is clear and categorical that Section 14 of the IBC 2016 shall not be stumbling block to proceedings under 138 of Negotiable Instruments Act so far as the same are against managing Director, Directors, Authorized Persons/Signatories etc.   

(vii)     ARBITRAL AWARD AND SECTION 14 OF IBC 2016

The hon’ble Supreme Court has held that the judgment of Delhi High Court in Power Grid Corporation of India Ltd vs Jyoti Structures Ltd., 2017 SCC OnLine Del 12189 : (2018) 246 DLT 485, is not correct law. The Delhi High Court held that a Section 34 application under Arbitration & Conciliation Act 1996( as amended and up to date) to set aside an award under the said Act would not be covered by Section 14 of the IBC. The hon’ble Supreme Court however has noted that Section 34 proceeding is certainly a proceeding against the corporate debtor which may result in an arbitral award against the corporate debtor being upheld, as a result of which, monies would then be payable by the corporate debtor. A Section 34 of the said Act is a proceeding against the corporate debtor, in a court of law pertaining to a challenge to an arbitral award and would be covered just as an appellate proceeding in a decree from a suit would be covered. Thus, Section 14 of IBC Code 2016 shall apply on arbitral award. 

The hon’ble Supreme Court has disagreed with the Bombay High Court Tayal Cotton Pvt. Ltd. v. State of Maharashtra, 2018 SCC OnLine Bom 2069 : (2019) 1 Mah LJ 312 and the Calcutta High Court judgments in M/s MBL Infrastructure Ltd. v. Manik Chand Somani, CRR 3456/2018 decided on 16.04.2019), respectively, and held that a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC, but the same shall not apply to natural persons as narrated above. The net result of this, according to hon’ble Supreme Court is that there is no embargo in continuing or proceeding with natural persons u/s 138/141 of NI Act, save the corporate debtor.

REMARK

The hon’ble Supreme Court has thus held that proceedings u/s 138 of Negotiable Instruments Act can continue against erstwhile Directors/persons in charge of and responsible for the conduct of the business of the corporate debtor and provision of Moratorium u/s 14 of the IBC 2016 shall not extend to Managing Director, Director and signatory of cheques and that shall only apply to corporate debtor i.e company and as such no Managing Director, Directors. Authorized signatory can claim that proceedings u/s 138 of Negotiable Instruments Complaint proceedings cannot continue or be instituted qua them.

                                                            Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com