Judgments

P. MOHANRAJ & ORS VS. M/S SHAH BROTHERS ISPAT PVT. LTD. : CASE SUMMARY

The Supreme Court in P. Mohanraj Vs Shah Brothers Ispat Pvt Ltd (2021) 6 SCC 258  held that proceedings under Section 138 of Negotiable Instruments Act, 1881 will be covered under Section 14 (1) (a) IBC. The Supreme Court also held that such proceedings can be initiated against persons mentioned  under Section 141 (1) and (2) of the Negotiable Instruments Act.

FACTS OF THE CASE

Shah Brothers Ispat Pvt. Ltd.  (Operational Creditor/Respondent) supplied steel products to Diamond Engineering Pvt. Ltd. (Corporate Debtor ) as a result of which Rs. 24, 20, 91, 054/- was due and payable by the company.  51 cheques issued by the Respondent were returned dishonored for the reason “fund insufficient” on 03.03.2017.  As a result  the Respondent issued statutory demand notice under provisions  of Negotiable Instrument Act. On 28.04.2017 two more cheques were dishonored for which demand notice was sent. As payment was not made, two Criminal complaints were filed under Section 138 R/w 141 of Negotiable Instruments Act, 1881.

Meanwhile, the NCLT admitted an application under Section 9 IBC  filed by  Shah Brothers Ispat Pvt. Ltd. on 06.06.2017 and moratorium was declared under Section 14 IBC. The NCLT also stayed proceedings in two criminal complaints. On appeal, the NCLAT set aside the order holding that Section 138,  being criminal proceedings ,  cannot be held to be proceedings within meaning of Section 14 IBC.

FINDINGS OF THE SUPREME COURT

The issue before the Supreme Court was whether the institution or continuation of proceedings under Section 138/141 of the Negotiable Instruments Act, 1881 can be said to be covered by the moratorium under Section 14.

Under Section 14 (1) the Adjudicating Authority prohibits what follows in clauses (a) to (d).  Certain exceptions have been provided under sub-sections (2) and (3). Under sub-section 2 , the supply of essential goods and services to the Corporate Debtor during this period cannot be terminated or suspended or even interrupted.  Sub-section 3 (a) refers to transactions as may be notified by the Central Government in consultation with experts in finance.

The sweep of Article 14 (1) (a) is very wide indeed as it includes institution, continuation, judgment and execution of suits and proceedings. Award of an arbitration panel or an order of authority is also included. Expression “institution of suits or continuing of pending suits” is to be read as one category and proceedings against the Corporate Debtor would be separate category.  The expression “any judgment, decree or order” and “any court of law, tribunal, arbitration panel or other authority” throws light on the width of expression “proceedings”.  Section 138 proceedings conducted before a Court of Law will certainly be covered under Section 14 (1) (a).

The principles of ejusdem generis and noscitur a sociis,  being rules of construction of statutes, cannot be exalted to nullify the plain meaning of words used in statute if they are designedly used in a wide sense.

A quasi-criminal proceedings like Section 138, which would lead to depletion of assets in form of compensation, would directly impact the  Corporate Insolvency Resolution Process (CIRP) in the same manner as a decree in a suit in civil court. 

When the language of Section 14 and Section 85 are contrasted it becomes clear that Section 85 is only in respect of debts while Section 14 is not subject specific. Section 95 and 101 also use the word “debt” as used in Section 85. A Legal action or proceedings in respect of any debt would on its plain meaning include Section 138 proceedings. The Scope of Section 14 is even greater that scope of Sections 85, 95, and 101.

Section 14 and Section 32A

Section 32 A cannot possibly throw light on true interpretation of Section 14 (1) (a) as reason for introducing Section 32A has nothing to whatsoever with any moratorium provision. Heart of Section 31 A is extinguishment of criminal liability of the Corporate Debtor from date of approval of Resolution plan. On the other hand moratorium does not extinguish any liability, civil or criminal. If there is a clash between Section 14 and Section 32 A (1), this has to be best resolved by harmonious construction. The Expression “prosecution” in the first proviso of Section 31 A (1) refers to criminal proceedings either through First Information Report or complaint but not to quasi-criminal proceedings instituted under Section 138/141 of Negotiable Instrument Act.

The nature of proceedings under Chapter XVII of Negotiable Instrument Act

Civil proceedings is not necessarily a proceedings which begins with filing of suit and ends with execution. It includes revenue proceedings as well as Writ Petition filed under Section 226. Criminal proceedings are such proceedings wherein interest of state is involved. It is clear that a Section 138 proceedings can be said to be “civil sheep” in a “criminal wolf’s” clothing.

The gravamen of a proceedings under Section 138 is to get back the amount contained in dishonoured cheque together with interest and costs, expeditiously and cheaply.

Quasi Criminal Proceedings

It was contended before the Supreme Court that Section 138 proceedings are criminal proceedings rather than quasi-criminal proceedings as these proceedings result in imprisonment, fine or both. The Supreme Court rejected this argument. The Supreme Court observed that there are many instances wherein there are provisions for punishment of imprisonment or fine or both in quasi-criminal proceedings. Such instances are Section 630 of Companies Act, 1956, contempt of court proceedings etc.

Section 14 IBC and SICA

The Supreme Court observed that as the language, object , and context of Section 22 (1) of the SICA and Section 446 (2) of the Companies Act are far removed from Section 14 (1) of the IBC, none of the aforesaid judgments have any application to Section 14 of the IBC and are therefore distinguishable.

Whether natural persons will be covered under Section 14 ?

In Aneeta Hada Godfather Travels & Tours (P) Ltd (2012) 5 SCC661 it has been held that Section 138/141 proceedings cannot be initiated without the Corporate Debtor. Legal impediment under Section 14 will make it impossible to initiate proceedings against the Corporate Debtor as such Section 138/141 proceedings can be initiated against persons mentioned under Section 141 (1) and (2) of the Negotiable Instruments Act.

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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

Mukesh Kumar Suman

Mukesh Kumar Suman

Mukesh Kumar Suman is an advocate based at Delhi. He has rich experience in civil, criminal, commercial, arbitration and corporate insolvency matters. He regularly appears before District Courts, NCLT, NCLAT, High Court and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

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