DISHONOURED CHEQUE PROCEEDINGS UNDER NI ACT AGAINST A CORPORATION SUBJECTED TO MORATORIUM UNDER IBC
The Hon’ble Supreme Court of India, in the matter of P. Mohanraj & Ors. Vs M/s. Shah Brothers Ispat Pvt. Ltd. has clarified the difference between section 14 of the IBC Code, 2016 and section 138/141 of the Negotiable Instruments Act. Besides determining the difference between the two, the Hon’ble Court has also emphasised whether Moratorium under Section 14 of IBC covers Section 138 of NI Act.
In relation to Section 138 of the Negotiable Instruments Act, 1888 and Section 14 of the Insolvency and Bankruptcy Code, 2016(IBC), preceding NCLAT ruling, the National Company Law Appellate Tribunal in Shah Brothers Ispat (P) Ltd. v. P. Mohanraj, approved parallel continuation of proceedings under the Negotiable Instruments Act against a company subjected to moratorium while undergoing resolution process under the Insolvency & Bankruptcy Code. The appellant creditors before the Tribunal had initiated two separate proceedings under Section 138 of the NI Act, one prior to the admission of insolvency proceedings and one post the admission of insolvency proceedings under the IB Code.
In turn, the respondent placed reliance on Section 14 of the IB Code, which specifies:
(Insolvency and Bankruptcy Code, 2016, Section 14(1):
(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); and
(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.)
The respondent debtor asserted that once a moratorium is imposed under Section 14(1) of the IB Code, proceedings under the NI Act would have to come to a halt. The NCLAT rejected the submission holding that: as Section 138 is a penal provision, which empowers the court of competent jurisdiction to pass order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim. Imposition of fine cannot be held to be a money claim or recovery against the corporate debtor nor order of imprisonment, if passed by the court of competent jurisdiction on the directors, they cannot come within the purview of Section 14. In fact no criminal proceeding is covered under Section 14 of Insolvency & Bankruptcy Code.
Factors to be Considered
The major precise for the NCLAT to allow parallel continuation of proceedings was that the moratorium does not cover criminal proceedings. It was then criticized and questioned that while this position might be true, proceedings under the NI Act cannot be classified as criminal proceedings in strict sense. The decision of the NCLAT raises multiple issues, namely,
(a) whether the proceedings under the NI Act are purely criminal in nature or stricto sensu criminal in nature.
(b) whether the accused company’s right to compose (and put an end to) a cheque bounce case is circumvented during the imposition of moratorium: and
(c) whether continuation of parallel proceedings under the NI Act and the IB Code conflict with the object and the procedure of the resolution process and if it affects the rights of other creditors. For the purposes of the above queries, the differentiation between NI proceedings initiated prior to the initiation of proceedings under the IB Code and NI proceedings initiated post the initiation of proceedings under the IB Code since the reasoning of the NCLAT permeated both the scenarios.
The Supreme Court’s Decision
The Supreme Court in the present case held that moratorium under Section 14 of IBC covers the proceedings under the NI Act on the following reasons: (a)The word “proceedings” used in Section 14 in the phrase “proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority” also includes the proceedings under Section 138 of the NI Act conducted before a Magistrate.
In the Court’s opinion, is a proceeding in a court of law in respect of a transaction, which relates to a debt owed by the corporate debtor. The Court therefore correctly brings these proceedings within the ambit of Section 14 keeping in mind the objective behind moratorium.
The proceedings under Sections 138 and 141 of the NI Act if decided against the corporate debtor would have resulted in depletion of a corporate debtor’s assets during the insolvency resolution process since a company would have to pay fine which may extend to twice the amount of the cheque.
(b)The proceedings under Section 138 of the NI Act are quasi-criminal in nature i.e. “a ‘civil sheep’ in a ‘criminal wolf’s’ clothing”. The Court reasoned – whether the proceeding is civil or criminal in nature is not to be judged with reference to the penalty that may be prescribed but with reference to the cause for which the penalty has been inflicted.
In the case of Kaushalya Devi Massand v. Roopkishore Khore, the Supreme Court categorically stated: the gravity of a complaint under the Negotiable Instruments Act cannot be equated with an offence under the provisions of the Penal Code, 1860 or other criminal offences. An offence under Section 138 of the Negotiable Instruments Act, 1881, is almost in the nature of a civil wrong which has been given criminal overtones.
Simultaneously, the Court noted that the object of the Section 14 gets circumvented if:
a quasi-criminal proceeding which would result in the assets of the corporate debtor being depleted as a result of having to pay compensation would directly impact the corporate insolvency resolution process in the same manner as the institution, continuation, or execution of a decree in such suit in a civil court for the amount of debt or other liability
In this light, it was held that it is impossible to discern any difference between the impact of a suit and a Section 138 proceeding, insofar as the corporate debtor is concerned which is to be helped in getting back on its own feet. Resultantly, it was held that the proceeding under the NI Act against the corporate debtor would be halted by the moratorium. On the issue of personal liability of the directors, the Court held that the proceedings against the directors would subsist and continue even if the proceedings against the corporate debtor stand on hold due to moratorium.
The Court by allowing the proceedings under Section 138 read with Section 141 to continue against the directors, the Court has again left the promoters to be hung out to dry. The position of law, however, is not unprecedented. Section 14(3)(b) itself excludes “a surety in a contract of guarantee to a corporate debtor” from the coverage of moratorium. Explaining the rationale of Section 14(3)(b), the Supreme Court in SBI v. V. Ramakrishnan stated:
Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them.
The Purpose of Section 138/141 Proceedings under the NI Act
The object and intent of the NI Act was discussed by the Supreme Court in Rajneesh Agarwal v. Amit J Bhalla (2001), where the court held that Section 138 of the NI Act amounted to quasi-criminal proceedings, which could not be quashed on account of deposit of money. The Supreme Court held that not initiating action in proceedings concerning dishonest issuance of cheques affected the credibility of transacting business on negotiable instruments.
The idea of inserting penalties in case of dishonour of cheques for insufficiency of funds in the accounts was to retain the faith in the banking operations and strengthening the credibility of the negotiable instruments.
Section 138 and Section 141 of the Negotiable Instruments Act, 1881 are as follows:
Section 138 in The Negotiable Instruments Act, 1881
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 provisions of this Act, be punished with imprisonment for 19 [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, 20 [within thirty days] of the receipt of information by 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 or other liability” means a legally enforceable debt or other liability.
Section 141 of the Act
Offences by companies. —
(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence: 22 [Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.]
(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation.— For the purposes of this section,—
(a) “company” means any body corporate and includes a firm or other association of individuals; and
(b) “director”, in relation to a firm, means a partner in the firm.
As per the above mentioned interpretation, it’s acknowledged that the proceedings initiated on account of dishonoured cheque shall fall within the scope of section 14(1)(a) of Insolvency & Bankruptcy Code, however the defence is not extended to the natural persons (persons who’re in-charge or responsible to the affairs of the corporate debtor). Section 200 of CrPC requires to assert the facts which establishes that all the natural persons named as accused are participating in the management and affairs of the company at the time of signing the cheque(s).
Nevertheless, more clarity on the matter is required to enable the other courts to exercise their duty in such cases (dishonour of cheque) against a company as well as against the natural persons during moratorium. It may be expedient for the Government to bring about an appropriate legislative amendment at the earliest in keeping with the broad principle laid down by the Hon’ble Supreme Court, to avoid confusion and multiplicity of proceedings.
Written by Sheazal Gupta- Student of GLS University