Quashing of 138 NI proceedings in the light of IBC
proceedings
The
ratio of P. Mohan Raj Vs M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6
SCC 258Vishnoo Mittal Vs M/s Shakti Trading Company 2025 INSC 346 are
distinguishable
PART II
The
quashing of complaint/summons arising out of summon cases such as u/s 138 of
Negotiable Instruments act or quashing of F.I.R or charge sheet filed in F.I.R
cases could be exercised by the High Courts under section 482 of Cr.PC
(corresponding to section 528 of Bharitya Nyay Suraksha Sanhita in short “BNSS”).
In order to secure ends of justice and to prevent abuse of process of courts
the power is bestowed in high courts. It is the duty cast on Magistrate to
apply their mind before issuing summons in a complaint case. As regards F.I.R
case, after filing of charge sheet pursuant to registration of F.I.R and
examining the witnesses by the police charge sheet is submitted and cognisance
based on the materials are taken after perusal of record. In the complaints u/s
138 of Negotiable Instruments Act the complainant are examined prior to taking
cognisance and then summons in apt cases are issued. However, in summon cases, other
than Section 138 Negotiable Instruments Act, the complainant shall have to
examine himself/herself comprehensively in a complaint lodged u/s 200 CrPC
(correspond to Section 223 BNSS) along with other witnesses and after recording
satisfaction by the Magistrate order of summoning under the appropriate
sections to the accused could be issued. It is no gainsaying that complaints
u/s 138 of Negotiable Instruments Act are summary in nature and only after
filing of application under Section 145(2) CrPC the case could be termed as
summon case, in the event the Magistrate permits that and allows the application
field by the accused for seeking cross examination of the complainant witnesses,
the complainant witnesses therefore could be cross examined post summoning, as often
is the case. The summoning to the accused or the complaint u/s 138 of
Negotiable Instruments act or in other summon case, could be challenged before the
High Court for seeking its quashing, provided the case for quashing is made out.
In
a broad canvas, as set out above, some judicial precedents as regards criteria
for quashing may be deliberated before delineating it further in the context of
Insolvency cases and summoning u/s 138 of Negotiable Instruments Act.
Milestone/Judicial
precedents
In Madhavrao
Jiwaji Rao Scindia Vs SambhajiRao ChandrojiRao Angre and Ors 1988 1 SCC 692 had held that
“Court cannot be utilized for any oblique purpose and where in the
opinion of the court chances of an ultimate conviction is bleak and therefore
no useful purpose is likely to be served by allowing a criminal proceedings to
continue, the court while taking into consideration the special facts of the
case also quash the proceedings even though it may be at a preliminary stage”.
The
law as regards quashing has evolved over the years and a reference in this
regard could be made of celebrated judgment reported as State of Haryana
Vs Bhajan Lal & Ors AIR 1992 Supreme Court 604.
The
criteria for quashing were laid down in Bhajan Lal (Supra) and
the same is as under:
(i) If the allegation in F.I.R or a complaint,
if taken on face value does not disclose commission of any offence;
(ii) If the
allegation in F.I.R or complaint along with materials available on record does
not disclose commission of cognisable offence and thus not justifying any
investigation by police u/s 156(1) of Cr.PC;
(iii) If the uncontroverted
allegation in the F.I.R and complaint along with evidence on record does not disclose
any offence or make out any case against the accused;
(iv) If the
allegation in the F.I.R does not disclose any cognisable offence and at the
best only non- cognisable offence could be disclosed, then, the investigation
by police is not warranted, unless, ordered by a competent Magistrate in sync
with section 155(20 of Cr.PC;
(v) If the allegation in F.I.R and/or in the
complaint is so absurd and inherently improbable so that no prudent person can
reach to a conclusion about sufficient grounds for proceeding against the
accused;
(vi) If there is express legal bar against institution
of case and prosecution or if there is other express provision in the Code or
law for efficacious redressal of the matter;
(vii) If the
proceedings instituted is manifestly replete with mala fide and the act is
malicious and actuated with ulterior motive with a view to wreak vengeance on
the accused and to spite him due to personal grudge.
M/s Pepsi Foods
Limited & Anr Vs Special Judicial Magistrate & Ors AIR 1998 Supreme
Court 128 it
is held as under:
“summoning an
accused in a criminal case is a serious matter. Criminal law cannot be set in
motion in a matter of course. It is not that the complainant has to bring only two
witness to support his allegations in the complaint to have the criminal
complaint set into motion. The order of the Magistrate summoning the accused
must reflect that he has applied his mind to the facts of the case and the law applicable
thereto. He has to examine the nature of allegations made in the complaint and
evidence both oral and documentary in support thereof and would that be sufficient
for the complaint to succeed in bringing charge home to accused It is not that
Magistrate is a silent spectator at the time of recording of preliminary
evidence before summoning of the accused. Magistrate has to carefully
scrutinise the evidence brought on record and may even himself put questions to
the complainant and his witnesses to elicit answers to find out the
truthfulness of the allegations or otherwise and then examine if any offence is
prima facie committed by all or any of the accused”
The outline as above
shall reflect as to the circumstances when the complaint and/or F.I.R could be
quashed by High Courts under its inherent powers. The discussion herein, in the
above backdrop, relates to criteria for quashing complaint u/s 138 of
Negotiable Instruments Act , in case a parallel proceeding under Insolvency
& bankruptcy (in short “IBC”) 2016 is pending against the company and/or
its Directors who are also roped in as accused in a complaint u/s 138 of the Negotiable
Instruments Act.
The
judgments/precedents as regards quashing of F.I.R and complaints are settled.
However, for the present we are concerned about quashing of complaints u/s 138
of Negotiable Instruments Act and that too, in the backdrop of ongoing
insolvency proceedings. What is to be analysed in the context is as to whether
during the pendency of Insolvency & Bankruptcy Code (IBC) 2016,
proceedings, whether complaints under Section 138 of Negotiable Instruments Act
against the accused /director of corporate debtor company when proceedings
under National Company Law Tribunal (NCLT) is underway could be continued or
not? If, it could be continued what are the parameter and if there are
prohibitions what are the criteria laid down.
In
a matter captioned as Vishnoo Mittal Vs M/s Shakti Trading Company
2025 INSC 346 the Supreme Court has further clarified its earlier judgment
reported as P. Mohan Raj Vs M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC
258
FACTUAL
MATRIX OF VISHNU MITTAL (Supra)
(i) In order to appreciate the law laid down
in P. Mohan Raj (Supra), it is deemed necessary herein to cull out the
facts of Vishnoo Mittal (Supra) case). The appellant (Vishnoo Mittal) had challenged
the order dated 21.12.2021 of the learned Single Judge of the Punjab and
Haryana High Court by which the appellant’s petition under section 482 of
Criminal Procedure Code, 1973 seeking quashing of proceedings initiated under
Section 138 of Negotiable Instruments Act, 1881 (‘NI Act’) against the
appellant, was dismissed.
(ii) The appellant was the director of M/s
Xalta Food and Beverages Private Limited (hereinafter ‘corporate debtor’).
There was a contract between the corporate debtor and the Respondent M/s Shakti
Trading Company where the respondent was to function as a super stockist of the
corporate debtor. Consequent to above, and business relationship between the
two companies, the appellant, in his capacity as director of the
corporate debtor, had drawn eleven cheques in favour of the respondent of
varying amounts.
(iii)
These cheques were dishonoured on
07.07.2018. A legal notice under Section 138 of the Negotiable Instruments Act was
issued to the appellant by the respondent as the cheque amounts were not
furnished to the respondent by the bank. As the amount was not paid, in
September 2018, a complaint was filed before the appropriate Court by the
respondent against the appellant for offences under Section 138 of NI Act.
(iv) In the meanwhile, on 25.07.2018, insolvency
proceedings against the corporate debtor, of which the appellant was the
director, commenced and a moratorium under Section 14 of the Insolvency and
Bankruptcy Code, 2016 (hereafter ‘IBC’) was imposed. The interim resolution
professional (hereinafter ‘IRP’) was appointed on the same day i.e. 25.07.2018
in relation to the corporate debtor.
(v)
In the midst of above, vide order
dated 07.09.2018, the Court had issued summons to the appellant in the
proceedings u/s 138 of Negotiable Instruments Act initiated by the respondent
against the appellant.
Being
aggrieved, the appellant approached the High Court under section 482 of CrPC
challenging the summoning order u/s 138 of Negotiable Instruments Act and
prayed for the quashing of the section 138 Negotiable Instruments act
complaint, since, it was contended that moratorium was issued under
Section 14 of the IBC. The Punjab & Haryana High Court, however, vide the
impugned order dated 21.12.2021, was pleased to dismiss the appellant’s
petition and declined to quash the complaint against him.
The appellant was therefore before
Supreme Court.
It
was the case of the appellant that the corporate debtor is presently facing
insolvency proceedings before the National Company Law Tribunal (NCLT) and a
moratorium order was issued on 25.07.2018 under Section 14 of the IBC.
MORATORIUM under IBC 2016
The
relevant portion of Section 14 of the IBC reads as under:
“14. Moratorium.
(1) Subject to provisions of
sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating
Authority shall by order declare moratorium for prohibiting all of the
following, namely:--
(a) the institution of suits or
continuation of pending suits or proceedings against the corporate debtor
including execution of any judgment, decree or order in any court of law,
tribunal, arbitration panel or other authority;
(b) transferring, encumbering,
alienating or disposing of by the corporate debtor any of its assets or any
legal right or beneficial interest therein;
(c) any action to foreclose,
recover or enforce any security interest created by the corporate debtor in
respect of its property including any action under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (54 of 2002);
(d) the recovery of any property
by an owner or lessor where such property is occupied by or in the possession
of the corporate debtor…”
Placing
reliance on the aforesaid provisions, it was the case of the appellant that since
the moratorium order was imposed on 25.07.2018 and was in operation, therefore,
the proceedings under section 138 of the Negotiable Instruments Act could not
have been initiated against the appellant. It was further argued that although
the cheques were drawn and dishonoured prior to the above date i.e.,
25.07.2018, however, the notice under Section 138 of the NI Act was given on
06.08.2018 i.e., post 25.07.2018. Therefore, the cause of action for the
offence under Section 138 of the Negotiable Instruments Act would commence
after a period of 15 days calculated from 06.08.2018 and it would be
21.08.2018, however, by this time moratorium had already been imposed on
25.07.2018.
The
submission of the appellant was, however, not accepted by the High Court on the
premise that the judgment of Supreme Court in a precedent reported as P.
Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258 it was
held that the immunity granted by the moratorium order issued under Section 14
of the IBC can only be obtained by a
Corporate Debtor and not by a natural person such as the present appellant, who
was the Director of the Corporate Debtor.
In
para 102 of the P.Mohan Raj (Supra) the Supreme Court had noted:
“… for the period of moratorium,
since no Sections 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 Sections 141(1) and (2) of the
Negotiable Instruments Act. This being the case, it is clear that the
moratorium provision contained in Section 14 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.”
The
High Court was swayed by the aforesaid. The Supreme Court however has held that
the high court erred in dismissing the petition u/s 482 for seeking quashing of
complaint. According to Supreme Court,
the facts in P. Mohan Raj (Supra) was vastly different and the
case Vishnoo Mittal
(supra) is thus distinguishable from it.
According
to Supreme Court, in P.Mohan Raj (Supra), certain cheques drawn
by the appellants therein were dishonoured on 03.03.2017 and 28.04.2017.
Thereafter, demand notices dated 31.03.2017 and 05.05.2017 were issued by the
complainant. The moratorium was imposed on 06.06.2017, which is clearly after the
lapse of 15 days from the date of demand notices. In other words, in that case,
the cause of action under section 138 NI Act arose before the imposition of the
moratorium and on these facts, the Supreme Court had held that section 14 of
IBC bars or stays proceedings only against the corporate debtor and proceedings can be continued or initiated
against the natural persons. Therefore, the case of Vishnoo Mittal (Supra)
is different from P.Mohan Raj (Supra), since, the cause of action in Vishnoo
Mittal (Supra) arose, after the commencement of the insolvency process
only.
It
was held by Supreme Court in para no, 9 of Vishnoo Mittal (Supra) that:
9.that
the return of the cheques dishonoured simpliciter does not create an offence
under section 138 Negotiable Instruments Act, which reads as under:
“138.
Dishonour of cheque for insufficiency, etc., of funds in the account.—
Where any cheque
drawn by a person on an account maintained by him with a banker for payment of
any amount of money to another person from out of that account for the
discharge, in whole or in part, of any debt or other liability, is returned by
the bank unpaid, either because of the amount of money standing to the credit
of that account is insufficient to honour the cheque or that it exceeds the
amount arranged to be paid from that account by an agreement made with that
bank, such person shall be deemed to have committed an offence and shall,
without prejudice to any other provision of this Act, be punished with
imprisonment for a term which may be extended to two years, or with fine which
may extend to twice the amount of the cheque, or with both: Provided that
nothing contained in this section shall apply unless—
(a) the cheque has been presented
to the bank within a period of six months from the date on which it is drawn or
within the period of its validity, whichever is earlier;
(b) the payee or the holder in
due course of the cheque, as the case may be, makes a demand for the payment of
the said amount of money by giving a notice; in writing, to the drawer of the
cheque, within thirty days of the receipt of information by 6 him from the bank
regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque
fails to make the payment of the said amount of money to the payee or, as the
case may be, to the holder in due course of the cheque, within fifteen days of
the receipt of the said notice.
Explanation.—For the purposes of
this section, “debt of other liability” means a legally enforceable debt or
other liability.” Clause (c) of the proviso to Section 138 of NI Act makes it
clear that cause of action arises only when demand notice is served and payment
is not made pursuant to such demand notice within the stipulated fifteen-day
period.
The
Supreme Court in Jugesh Sehgal v. Shamsher Singh Gogi (2009) 14 SCC 683
has explained the ingredients of Section 138 of NI Act offence as follows:
“13.
It is manifest that to constitute an offence under Section 138 of the Act, the
following ingredients are required to be fulfilled:
(i)
a person must have drawn a cheque on an account maintained by him in a bank for
payment of a certain amount of money to another person from out of that
account;
(ii)
the cheque should have been issued for the discharge, in whole or in part, of
any debt or other liability;
(iii)
that cheque has been presented to the bank within a period of six months from
the date on which it is drawn or within the period of its validity whichever is
earlier;
(iv)
that cheque is returned by the bank unpaid, either because of the amount of
money standing to the credit of the account is insufficient to honour the cheque
or that it exceeds the amount arranged to be paid from that account by an
agreement made with the bank;
(v)
the payee or the holder in due course of the cheque makes a demand for the
payment of the said amount of money by giving a notice in writing, to the
drawer of the cheque, within 15 days of the receipt of information by him from
the bank regarding the return of the cheque as unpaid;
(vi)
the drawer of such cheque fails to make payment of the said amount of money to
the payee or the holder in due course of the cheque within 15 days of the
receipt of the said notice.
Being
cumulative, it is only when all the aforementioned ingredients are satisfied
that the person who had drawn the cheque can be deemed to have committed an
offence under Section 138 of the Act.” In other words, the cause of action
arises only when the amount remains unpaid even after the expiry of fifteen
days from the date of receipt of the demand notice”.
It
was further noted that in Vishnoo Mittal (Supra) on 25.07.2018, the moratorium was imposed and
management of the corporate debtor was taken over by the interim resolution
professional as per section 17 of the IBC. For ready referenced section 17 of
the IBC reads as under:
“17.
Management of affairs of corporate debtor by interim resolution professional.-
(1)
From the date of appointment of the interim resolution professional,—
(a)
the management of the affairs of the corporate debtor shall vest in the interim
resolution professional;
(b)
the powers of the board of directors or the partners of the corporate debtor,
as the case may be, shall stand suspended and be exercised by the interim
resolution professional;
(c) ……………
(d)
the financial institutions maintaining accounts of the corporate debtor shall
act on the instructions of the interim resolution professional in relation to
such accounts and furnish all information relating to the corporate debtor
available with them to the interim resolution professional…”
From
the bare perusal of above, it will be evident that the appellant did not have
the capacity to fulfil the demand raised by the respondent by way of the notice
issued under clause (c) of the proviso to Section 138 of Negotiable Instruments
Act. It was so, because, when the notice was issued to the appellant, he was
not in charge of the corporate debtor as he was suspended from his position as
the director of the corporate debtor as soon as Insolvency Resolution
Professional (IRP) was appointed on 25.07.2018. Therefore, the powers vested
with the board of directors were to be exercised by the IRP in accordance with
the provisions of IBC. All the bank accounts of the corporate debtor were
operating under the instructions of the IRP, hence, it was not possible for the
appellant to repay the amount in light of section 17 of the IBC. It was also informed
on behalf of the appellant that, after the imposition of the moratorium, the
IRP had made a public announcement inviting the claims from the creditors of
the Corporate Debtor and the respondent has filed a claim with the IRP.
P. Mohan Raj (Supra) & Vishnoo Mittal (Supra) are
distinguishable
The
judgments as referred to above are clearly distinguishable as narrated above
and shall further be culled out as under:
|
S.N |
P.Mohan
Raj (Supra) |
Vishnu
Mittal (Supra) |
|
1. |
The
cause of action u/s 138 of Negotiable Instruments Act shall arise only after
statutory demand legal notice was issued and after expiry of fifteen (15)
days the amount so demanded was not paid. The cause of action will arise only
then. The
fifteen (15) days period after issuing legal notice had already expired and
the amount was not paid and only thereafter moratorium was imposed. Hence, at
the time of cause of action the Directors were in command of the corporate
debtor company, hence liable. |
The
cause of action u/s 138 of Negotiable Instruments Act shall arise only after
statutory demand legal notice was issued and after expiry of fifteen (15)
days the amount so demanded was not paid. The cause of action will arise only
then. However,
before expiry of Fifteen (15) days period, the moratorium was imposed and
Insolvency Resolution Professional (IRP) was appointed. |
|
2. |
The
Directors remained in command of the corporate debtor company at the stage of
cause of action and hence liable. |
All
the bank accounts of the corporate debtor were operating under the
instructions of the IRP, hence, it was not possible for the appellant to
repay the amount in light of section 17 of the IBC. |
|
3. |
All
aspects such as imposition of moratorium or inviting claims from creditor by
IRP were the events unveiled much after cause of action and hence, Directors
were held to be liable. |
IRP
had made public announcement for submission of claim and even the complainant
had submitted claim before IRP. |
|
4. |
Jugesh
Sehgal v. Shamsher Singh Gogi (2009) 14 SCC 683 remained
applicable and on the date of cause of action, there being no moratorium
Directors were held to be liable. |
The
distinction is made by relying upon Jugesh Sehgal v.
Shamsher Singh Gogi (2009) 14 SCC 683 in
respect of cause of action. |
|
5. |
The
accused had capacity to pay on the date of cause of action, since management
was yet to be taken over by IRP and the capacity of accused on the date of
cause of action remained unaltered. |
The
accused had no capacity to pay on the date of cause of action, since
management was taken over by IRP and the capacity of accused was that of a
suspended director and hence not capable of making payment from the accounts
of corporate debtor /accused company |
In
the face of above, more particularly, what emanates from Section 17 of
Insolvency & Bankruptcy Code (IBC) 2016 and also in the light of the dicta
of Supreme Court as laid down in Jugesh Sehgal v. Shamsher Singh Gogi
(2009) 14 SCC 683, the cause of action shall arise only when the legal
demand notice is served and fifteen (15) days period under the notice is
elapsed and remittance not made. A complaint u/s 138 of Negotiable Instruments
Act could be filed only when the bundle of cause of action culminates, i.e when
the demand notice is served on the accused and after expiry of fifteen (15)
days as stipulated u/s 138 of Negotiable Instruments Act, for making payment, yet
no payment is made. It is also settled now that mere issuance of cheque and its
dishonour in itself shall not give rise to cause of action. In fact, even
issuance of demand notice in itself shall not give rise to cause of action and
only expiry of fifteen (15) days notice period after receipt of notice coupled
with no payment made even as on that date and despite remaining in command of
corporate debtor/accused company and yet payment is not made shall make
directors liable. However, in case moratorium is imposed before expiry of notice
period as narrated above shall incapacitate the accused company from making
payment in view of the fact that the management of corporate debtor company no
longer remains with its directors as the same is vested in IRP after the
moratorium. Therefore, P Mohan Raj (Supra) was clearly
distinguishable and hence, the complaint against Vishnoo Mittal
(Supra) was quashed.
-------
Anil K Khaware
Founder & Senior Associate
Societylawandjustice.com
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