Dishonour of Cheque: The Duality of IBC and Negotibale Instruments Act, 1881 – By Ms. Reema Jain

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Ms. Reema Jain, Law student at Symbiosis Law School, Hyderabad

Dishonour of Cheque: The Duality of IBC and Negotibale Instruments Act, 1881

 A cheque is a negotiable instrument under the ambit of Section 13 of the Negotiable Instruments Act, 1881 (Hereinafter referred to as “The Act”). When the cheque is dishonoured, it is returned by the bank to the payee along with the Cheque return memo. The payee can within thirty days of receiving such information, send a legal notice to the drawer. After receiving such notice, if the drawer does not honour the cheque within fifteen days, the payee can institute criminal proceedings against the drawer under Section 138 of The Act. On the other hand, the law was murky on the understanding of the validity of the proceedings if moratorium had been imposed on the Corporate debtor, who is the payee under section 14(1)(a) of the Insolvency and Bankruptcy Code, 2016 (Hereinafter referred to as “The Code”).

Under Section 14(1)(a) of The Code, the institution of suits or continuation of pending suits are prohibited against the corporate debtor after the adjudicating body orders the moratorium. The question of whether the criminal proceedings under Section 138 of The Act are included in the ambit of Section 14 of the Code arose before the Bombay High Court in Tayal Cotton v. State of Maharashtra[i] and was answered in the negative. This judgment lingered on the legislative intent and interpretation of statute. This case referred to the judgment in Indorama Synthetics India Limited Nagpur V/s State of Maharashtra[ii], where it was held that the term “suits and proceedings” under Section 446(1) of Companies Act 1956 did not include criminal proceedings. This provision mentions that no suits or proceedings shall be instituted or continued after the official liquidator has been appointed. The objective of Section 138 of The Act was underlined as the safeguard to the credibility of commercial transactions and to prevent bouncing of cheques by providing a personal criminal liability against the drawer of the cheque in public interest. The suits and proceedings included only those proceedings that adversely affected the assets or the winding-up process of the company. Therefore, it was held that criminal proceedings under Section 138 of the Act could be instituted against the company even if the winding-up process had begun. In the case of Tayal Cotton, the facts of the case were different but the division bench understood that the line of reasoning for exclusion of criminal proceedings was the same in both the cases. Additionally, the legislative intent was to exclude criminal proceedings as the “adjective was conspicuously omitted”.

However, Supreme Court took a sharp turn from this analogy and gave a differing judgment in P. Mohanraj & Ors. Vs. M/S Shah Brothers Ispat.[iii] In this judgment as well, legislative intent and language of the legislation were points of ultimate decision. It was highlighted that criminal proceedings are undertaken as per the provisions of Criminal Procedure Code, 1973 (CrPc) and the proceedings under Section 138 are conducted before a magistrate. These proceedings can be construed as “Proceedings in the court of law” which are prohibited under Section 14 of The Code. In this case, Supreme Court also shed light upon the jurisprudence of interpretation of statutes. It observed that when the expression in a statute is wide and includes all that is reasonably understood and foreseen, then the doctrine of noscitur a sociis which shrinks the scope of the legislation, should not be employed.

As per the “Going Concern” accounting concept, businesses operate with the assumption that they would not be liquidated in the near-future. The objective of Section 14 is to ensure that the assets of the Corporate Debtor do not deplete during the process of Insolvency Resolution Process (IRP), so that the creditors can be paid and business is not liquidated. In other string of cases, Supreme Court has consistently held that the nature of Section 138 is intrinsically civil. In the case of Kaushalya Devi Massand v. Roopkishore Khore[iv] it was held that,  “[T]he 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”. Similar philosophy was observed in the case of Meters & Instruments v. Kanchan Mehta [v] where the court held that, “Offence under Section 138 of the Act is primarily a civil wrong”.

After the ruling of Supreme Court in P. Mohanraj case, Madras High Court in Ajay Kumar Bishnoi v. M/S Tap Engineering[vi] emphasized on the same subject again. In this case, the scope of Section 14 and Section 31 of The Code and Section 138 of The Act are exclusively discussed. The judgment highlights that Section 233 of The Act includes the word “Prosecution” along with “suits and proceedings” while discussing exceptions. On the other hand, Section 14 only mentions “Suits and Proceedings”. This shows that the lawmakers deliberately omitted the term “Prosecutions”. However, the attention was drawn to Section 31(1) where it is provided that after resolution plan is approved, the moratorium ceases to have effect. But, it was observed that if the dissolution proceedings were instituted while the criminal proceedings were in action, then the directors will still be liable under Section 141 of the Act, which makes them liable as agents of the Company. Finally, it was understood that under Section 238 of the Code, The Code has an overriding effect over all the laws for the time being in force but no provision of the Insolvency and Bankruptcy Code bars the continuation of the criminal prosecution initiated against the corporate debtor or its directors and officials.

In the opinion of the author, Section 138 of The Act shall be decriminalized as the fine payable under the penalty is adequate to ensure public interest as put forward by courts. Despite, the clear ruling of Supreme Court, the reasoning of Madras High Court with respect to deliberate omission  cannot be sidelined. The drafting mistake with respect to “payment” which was corrected by amendment in 2019 of the Code to “repayment” can be taken as an example to add “Prosecutions” to Section 14 if the legislative intent sits right.

ENDNOTES

[i] Tayal Cotton v. State of Maharashtra [2018] ibclaw.in 13 HC

[ii] Indorama Synthetics India Limited Nagpur v. State of Maharashtra, (2016) 198 Comp Cas 46.

[iii] P. Mohanraj & Ors. Vs. M/S Shah Brothers Ispat  (2021) ibclaw.in 24 SC

[iv] Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593.

[v] Meters & Instruments v. Kanchan Mehta, AIR 2017 SC 4594.

[vi] Ajay Kumar Bishnoi v. M/S Tap Engineering, [2020] ibclaw.in 14 HC

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