SUPREME COURT SETTLES DEBATE ON MORATORIUM UNDER INSOLVENCY CODE FOR CHEQUE DISHONOUR CASES
Background and Issue
Whether the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) imposes a moratorium on proceedings against the corporate debtor, including those initiated under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) dealing with the dishonour of cheques, has been the subject matter of many litigations.
Settling the legal position once and for all, India’s Supreme Court (SC) has, in the case of P. Mohanraj and Others v Shah Brothers Ispat Private Limited (Civil Appeal No.10355 of 2018), ruled that the moratorium under Section 14 of the IBC bars parallel proceedings under Sections 138 and 141 of the NI Act against the corporate debtor.
This judgment has overruled all previous judgments on this issue, including: (i) the Calcutta High Court’s ruling in MBL Infrastructure Limited v Manik Chand Somani (Criminal Revision 3456 of 2018) under which it was held that the scope of the moratorium in winding up proceedings initiated under the Companies Act, 2013 would not cover proceedings under Section 138 of the NI Act; and (ii) the Bombay High Court’s ruling in Tayal Cotton Private Limited v State of Maharashtra (Criminal Writ Petition 1437 of 2017) under which it was held that a criminal proceeding would be an exception to an application for moratorium under Section 14 of the IBC.
Scope and interpretation of Section 14 of the IBC
The SC assessed the issue at length and highlighted that Section 14 of the IBC is very wide and includes within its ambit a moratorium on institution, continuation, passing of judgment, and execution of suits and proceedings against a corporate debtor. The SC added that the expression “the institution of suits or continuation of pending suits” cannot be read disjunctively, but has to be read as one category. While applying the basic principles of interpretation of statutes, namely, ejusdem generis or noscitur a sociis, the SC emphasized that no rule of construction can be used to cut down the plain meaning of the words used in Section 14(1)(a) of the IBC.
Object and intent behind Section 14 of the IBC
To shed some light on the object behind Section 14 of the IBC, the SC referred to paragraph 8.2 of the February 2020 report of the Insolvency Law Committee, which provides that, “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 maximising value for all stakeholders.” As such, it is clear that the object sought to be achieved through the moratorium provision is in conflict with the quasi-criminal proceedings under Section 138 of the NI Act, which would result in depletion of the assets of the corporate debtor.
Interplay between Section 32A and Section 14 of the IBC
The SC delved into the interplay between Section 32A and Section 14 of the IBC.
Section 32A of the IBC, introduced by an amendment, emphasises that the liability of a corporate debtor for an offence committed prior to the commencement of the resolution process, ceases in certain circumstances. The SC relied on paragraph 17 of the February 2020 report of the Insolvency Law Committee and held that Section 32A did not in any way relate to the moratorium provision. It merely extinguished the criminal liability of the corporate debtor, so that the new management could get a clean break from the past and start on a clean slate.
Nature of Proceedings under Chapter XVII of the NI Act
The SC went a step ahead and analysed the nature of proceedings under Chapter XVII of the NI Act. The SC assessed that Section 138 of the NI Act is a hybrid provision for the enforcement of a civil remedy, whose real object is not penalising the wrongdoer but compensating the victim. In addition, Section 142 of the NI Act sets out a procedure for taking cognizance of offences under the NI Act which is different from that under the Code of Criminal Procedure.
One, no court is to take cognizance of an offence punishable under Section 138 except on a complaint made in writing by the payee or the holder in due course of the cheque, i.e., the victim. Two, the complaint under Section 138(c) is to be made within one (1) month of the date on which the “cause of action” arises. Three, the expression “cause of action” is never used in criminal jurisprudence and applies only in civil cases to recover money.
Therefore, the SC called Section 138 proceedings to be a “civil sheep” in a “criminal wolf’s” clothing, as the provision seeks to safeguard the interest of the victim.
The SC, however, clarified that the scope of the moratorium in cheque bounce cases would not be extended to directors or the management personnel of the company undergoing insolvency.
The intent to include the moratorium provision in the IBC is to ensure that the rights of the creditors and other stakeholders in an insolvency procedure are not compromised. This judgment of the SC resolves the long-standing dispute surrounding the scope of the moratorium provisions and strikes a chord with the larger objective of India’s insolvency law.
About the Author
Neerav Merchant, Partner at Majmudar & Partners has over 22 years of experience in dispute resolution, arbitration, litigation, enforcement of foreign judgments and awards, asset recovery, technology and telecommunication, intellectual property, employment, anti-corruption, and real property matters.
He regularly speaks at several international forums, including seminars and conferences hosted by Asian Legal Business, International Bar Association, and Law Society of England and Wales. He is on the panel of arbitrators of Mumbai Centre for International Arbitration.
Read more about him here.
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