Proceeding under section 138/141 of the Negotiable Instruments Act is a quasi-criminal and would amount to a “proceeding” within the meaning of Section 14(1)(a) of IBC – Summary of Supreme Court’s Landmark judgment in P. Mohanraj & Ors. Vs. M/S. Shah Brothers Ispat Pvt. Ltd.

Proceeding under section 138/141 of the Negotiable Instruments Act is a quasi-criminal and would amount to a “proceeding” within the meaning of Section 14(1)(a) of IBC

Supreme Court of India
P. Mohanraj & Ors. Vs. M/s. Shah Brothers Ispat Pvt. Ltd.
(2021) ibclaw.in 24 SC
01-Mar-21

Judgments are set aside in this judgment:

Coverage of the Judgment:

  • Interpretation of Section 14 of the IBC
  • Application of the Noscitur A Sociis Rule of Interpretation
  • Object of Section 14 of the IBC
  • Section 14 in relation to other Moratorium Sections in the IBC
  • The Interplay Between Section 14 and Section 32A of the IBC
  • The Nature of Proceedings under Chapter XVII of the Negotiable Instruments Act is a quasi-criminal.
  • What is Quasi-Criminal & contempt Proceedings
  • Whether Natural Persons are Covered by Section 14 of the IBC
  • Case Law under Provisions of Other Statutes

Full text of the judgment, reported here: (2021) ibclaw.in 24 SC

Facts of the Judgment

Date Event
11.11.2016 Cheques issued to respondent
03.03.2017 Cheques dishonoured
21.03.2017 Issued Demand Notice U/s 8 of IBC
06.06.2017 CIRP of the M/s. Diamond Engineering Pvt. Ltd. initiated 
31.03.2017 Issue statutory demand notice under Section 138 read with Section 141 of the NI Act, 1881
28.04.2017 two cheques presented by the respondent for encashment were returned dishonoured for the reason “funds insufficient”
05.05.2017 Second demand notice u/s 138
17.05.2017 & 21.06.2017 Two criminal complaints under Section 138 read with Section 141 of the NI Act before the Additional Chief Metropolitan Magistrate
12.02.2018 Issued summons
24.05.2018 AA stayed further proceedings in the two criminal complaints pending before the ACMM

On 24.05.2018, the Adjudicating Authority stayed further proceedings in the two criminal complaints pending before the ACMM. In an appeal filed to the NCLAT, the NCLAT set aside this order, holding that Section 138, being a criminal law provision, cannot be held to be a “proceeding” within the meaning of Section 14 of the IBC.

The important question that arises in this appeal is whether the institution or continuation of a proceeding under Section 138/141 of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of the IBC.

Brief about the decision

Decision of the Hon’ble Supreme Court is summarised, with original paragraph, in following points:

1. Interpretation of Section 14 of the IBC

A cursory look at Section 14(1) makes it clear that subject to the exceptions contained in sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall mandatorily, by order, declare a moratorium to prohibit what follows in clauses (a) to (d). Importantly, under sub-section (4), this order of moratorium does not continue indefinitely, but has effect only from the date of the order declaring moratorium till the completion of the CIRP which is time bound, either culminating in the order of the Adjudicating Authority approving a resolution plan or in liquidation.(p10)

The two exceptions to Section 14(1) are contained in sub-sections (2) and (3) of Section 14. Under sub-section (2), the supply of essential goods or services to the corporate debtor during this period cannot be terminated or suspended or even interrupted, as otherwise the corporate debtor would be brought to its knees and would not able to function as a going concern during this period. The exception created in sub-section (3) (a) is important as it refers to “transactions” as may be notified by the Central Government in consultation with experts in finance. The expression “financial sector regulator” is defined by Section 3(18).(p11)

Thus, the Central Government, in consultation with experts, may state that the moratorium provision will not apply to such transactions as may be notified. This is of some importance as Section 14(1)(a) does not indicate as to what the proceedings contained therein apply to. Sub- section 3(a) provides the answer – that such “proceedings” relate to “transactions” entered into by the corporate debtor pre imposition of the moratorium. Section 3(33) defines “transaction”.(p12)

This definition being an inclusive one is extremely wide in nature and would include a transaction evidencing a debt or liability. This is made clear by Section 96(3) and Section 101(3) which contain the same language as Section 14(3)(a), these Sections speaking of ‘debts’ of the individual or firm. Equally important is Section 14(3)(b), by which a surety in a contract of guarantee of a debt owed by a corporate debtor cannot avail of the benefit of a moratorium as a result of which a creditor can enforce a guarantee, though not being able to enforce the principal debt during the period of moratorium – see State Bank of India v. V. Ramakrishnan, [2018] ibclaw.in 29 SC (at paragraph 20) [“ Ramakrishnan”].(p13)

It will be noticed that the expression “or” occurs twice in the first part of Section 14(1)(a) – first, between the expressions “institution of suits” and “continuation of pending suits” and second, between the expressions “continuation of pending suits” and “proceedings against the corporate debtor…”. The sweep of the provision is very wide indeed as it includes institution, continuation, judgment and execution of suits and proceedings. It is important to note that an award of an arbitration panel or an order of an authority is also included. This being the case, it would be incongruous to hold that the expression “the institution of suits or continuation of pending suits” must be read disjunctively as otherwise, the institution of arbitral proceedings and proceedings before authorities cannot be subsumed within the expression institution of “suits” which are proceedings in civil courts instituted by a plaint (see Section 26 of the Code of Civil Procedure, 1908). Therefore, it is clear that the expression “institution of suits or continuation of pending suits” is to be read as one category, and the disjunctive “or” before the word “proceedings” would make it clear that proceedings against the corporate debtor would be a separate category. What throws light on the width of the expression “proceedings” is the expression “any judgment, decree or order” and “any court of law, tribunal, arbitration panel or other authority”. Since criminal proceedings under the Code of Criminal Procedure, 1973 [“CrPC”] are conducted before the courts mentioned in Section 6, CrPC, it is clear that a Section 138 proceeding being conducted before a Magistrate would certainly be a proceeding in a court of law in respect of a transaction which relates to a debt owed by the corporate debtor. Let us now see as to whether the expression “proceedings” can be cut down to mean civil proceedings stricto sensu by the use of rules of interpretation such as ejusdem generis and noscitur a sociis.(p14)

2. Application of the Noscitur A Sociis Rule of Interpretation

  • State of Assam v. Ranga Mahammad, (1967) 1 SCR 454.
  • Jagdish Chander Gupta v. Kajaria Traders (India) Ltd., (1964) 8 SCR 50
  • Rajasthan State Electricity Board v. Mohan Lal, (1967) 3 SCR 377
  • CBI v. Braj Bhushan Prasad, (2001) 9 SCC 432
  • Godfrey Phillips India Ltd. v. State of U.P., (2005) 2 SCC 515
  • Vikram Singh v. Union of India, (2015) 9 SCC 502
  • Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416

A reading of these judgments would show that ejusdem generis and noscitur a sociis, being rules as to the construction of statutes, cannot be exalted to nullify the plain meaning of words used in a statute if they are designedly used in a wide sense. Importantly, where a residuary phrase is used as a catch-all expression to take within its scope what may reasonably be comprehended by a provision, regard being had to its object and setting, noscitur a sociis cannot be used to colour an otherwise wide expression so as to whittle it down and stultify the object of a statutory provision.(p12)

3. Object of Section 14 of the IBC

This then brings us to the object sought to be achieved by Section 14 of the IBC. The Report of the Insolvency Law Committee of February, 2020 throws some light on Section 14. Paragraphs 8.2 and 8.11 thereof. Paragraph 8.2 is important in 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. The idea is that it facilitates the continued operation of the business of the corporate debtor to allow it breathing space to organise its affairs so that a new management may ultimately take over and bring the corporate debtor out of financial sickness, thus benefitting all stakeholders, which would include workmen of the corporate debtor. Also, the judgment of this Court in Swiss Ribbons (P) Ltd. v. Union of India, [2019] ibclaw.in 03 SC states the raison d’être for Section 14 in paragraph 28.(p23)

It can thus be seen that regard being had to the object sought to be achieved by the IBC in imposing this moratorium, a quasi-criminal proceeding which would result in the assets of the corporate debtor being depleted as a result of having to pay compensation which can amount to twice the amount of the cheque that has bounced would directly impact the CIRP 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. Judged from the point of view of this objective, 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, on its getting the necessary breathing space to get back on its feet during the CIRP. Given this fact, it is difficult to accept that noscitur a sociis or ejusdem generis should be used to cut down the width of the expression “proceedings” so as to make such proceedings analogous to civil suits.(p24)

Viewed from another point of view, clause (b) of Section 14(1) also makes it clear that during the moratorium period, any transfer, encumbrance, alienation, or disposal by the corporate debtor of any of its assets or any legal right or beneficial interest therein being also interdicted, yet a liability in the form of compensation payable under Section 138 would somehow escape the dragnet of Section 14(1). While Section 14(1)(a) refers to monetary liabilities of the corporate debtor, Section 14(1)(b) refers to the corporate debtor’s assets, and together, these two clauses form a scheme which shields the corporate debtor from pecuniary attacks against it in the moratorium period so that the corporate debtor gets breathing space to continue as a going concern in order to ultimately rehabilitate itself. Any crack in this shield is bound to have adverse consequences, given the object of Section 14, and cannot, by any process of interpretation, be allowed to occur.(p25)

4. Section 14 in relation to other Moratorium Sections in the IBC

Even otherwise, when some of the other provisions as to moratorium are seen in the context of individuals and firms, the provisions of Section 14 become even clearer. Thus, in Part III of the IBC, which deals with insolvency resolution and bankruptcy for individuals and partnership firms, Section 81, which occurs in Chapter II thereof, entitled “Fresh Start Process”, an interim moratorium is imposed. Similarly, in Section 85, which also occurs in Chapter II in Part III of the IBC, a moratorium is imposed.(p26)

When the language of Section 14 and Section 85 are contrasted, it becomes clear that though the language of Section 85 is only in respect of debts, the moratorium contained in Section 14 is not subject specific. The only light thrown on the subject is by the exception provision contained in Section 14(3)(a) which is that “transactions” are the subject matter of Section 14(1). “Transaction” is, as we have seen, a much wider expression than “debt”, and subsumes it. Also, the expression “proceedings” used by the legislature in Section 14(1)(a) is not trammelled by the word “legal” as a prefix that is contained in the moratorium provisions qua individuals and firms. Likewise, the provisions of Section 96 and Section 101 are moratorium provisions in Chapter III of Part III dealing with the insolvency resolution process of individuals and firms, the same expression, namely, “debts” is used as is used in Section 85.

A legal action or proceeding in respect of any debt would, on its plain language, include a Section 138 proceeding. This is for the reason that a Section 138 proceeding would be a legal proceeding “in respect of” a debt. “In respect of” is a phrase which is wide and includes anything done directly or indirectly – see Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., [2017] ibclaw.in 14 SC (at page 709) and Giriraj Garg v. Coal India Ltd., (2019) 5 SCC 192 (at pages 202-203). This, coupled with the fact that the Section is not limited to ‘recovery’ of any debt, would indicate that any legal proceeding even indirectly relatable to recovery of any debt would be covered.(p27)

When the language of Sections 96 and 101 is juxtaposed against the language of Section 14, it is clear that the width of Section 14 is even greater, given that Section 14 declares a moratorium prohibiting what is mentioned in clauses (a) to (d) thereof in respect of transactions entered into by the corporate debtor, inclusive of transactions relating to debts, as is contained in Sections 81, 85, 96, and 101. Also, Section 14(1)(d) is conspicuous by its absence in any of these Sections. Thus, where individuals or firms are concerned, the recovery of any property by an owner or lessor, where such property is occupied by or in possession of the individual or firm can be recovered during the moratorium period, unlike the property of a corporate debtor. For all these reasons, therefore, given the object and context of Section 14, the expression “proceedings” cannot be cut down by any rule of construction and must be given a fair meaning consonant with the object and context. It is conceded before us that criminal proceedings which are not directly related to transactions evidencing debt or liability of the corporate debtor would be outside the scope of this expression.(p28)

V. Ramakrishnan (supra) looked at and contrasted Section 14 with Sections 96 and 101 from the point of view of a guarantor to a debt. The observations in paragraph 26 and 26.1 of the judgment, when viewed in context, are correct. However, this case is distinguishable in that the difference between these provisions and Section 14 was not examined qua moratorium provisions as a whole in relation to corporate debtors vis-à-vis individuals/firms.(p29)

5. Other Sections of the IBC in relation to Section 14 of the IBC

Shri Mehta then argued that Section 33(5) of the IBC may also be seen, as it is a provision analogous to Section 14(1)(a).

It will be noted that under Section 33(5), the expression “no suit or other legal proceeding” occurs both in the enacting part as well as the proviso. Going by the proviso first, given the object that the liquidator now has to act on behalf of the company after a winding-up order is passed, which includes filing of suits and other legal proceedings on behalf of the company, there is no earthly reason as to why a Section 138/141 proceeding would be outside the ken of the proviso. On the contrary, as the liquidator alone now represents the company, it is obvious that whatever the company could do pre-liquidation is now vested in the liquidator, and in order to realise monies that are due to the company, there is no reason why the liquidator cannot institute a Section 138/141 proceeding against a defaulting debtor of the company. Obviously, this language needs to be construed in the widest possible form as there cannot be any residuary category of “other legal proceedings” which can be instituted against some person other than the liquidator or by the liquidator who now alone represents the company. Given the object of this provision also, what has been said earlier with regard to the non-application of the doctrines of ejusdem generis and noscitur a sociis would apply with all force to this provision as well.(p65)

In fact, several other provisions of the IBC may also be looked at in this context. Thus, when it comes to the duties of a resolution professional who takes over the management of the company during the CIRP u/s Section 25(2)(b).

Here again, given the fact that it is the resolution professional alone who is now to preserve and protect the assets of the corporate debtor in this interregnum, the resolution professional therefore is to represent and act on behalf of the corporate debtor in all judicial, quasi-judicial, or arbitration proceedings, which would include criminal proceedings. Here again, the word “judicial” cannot be construed noscitur a sociis so as to cut down its plain meaning, as otherwise, quasi-judicial or arbitration proceedings, not being criminal proceedings, the word “judicial” would then take colour from them. This would stultify the object sought to be achieved by Section 25 and result in an absurdity, namely, that during this interregnum, nobody can represent or act on behalf of the corporate debtor in criminal proceedings. Likewise, if a corporate debtor cannot be taken over by a new management and has to be condemned to liquidation, the powers and duties of the liquidator, while representing the corporate debtor, are enumerated in Section 35.

Section 35(1)(k) specifically speaks of “prosecution” and “criminal proceedings”. Contrasted with Section 25(2)(b) and Section 33(5), an argument could be made that the absence of the expressions “prosecution” and “criminal proceedings” in Section 25(2)(b) and Section 33(5) would show that they were designedly eschewed by the legislature. We have seen how inelegant drafting cannot lead to absurd results or results which stultify the object of a provision, given its otherwise wide language. Thus, nothing can be gained by juxtaposing various provisions against each other and arriving at conclusions that are plainly untenable in law.(p66)

6. The Interplay between Section 14 and Section 32A of the IBC

Shri Mehta, however, strongly relied upon Section 32A(1) of the IBC, which was introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020, to argue that the first proviso to Section 32A(1) would make it clear that “prosecutions” that had been instituted during the CIRP against a corporate debtor will result in a discharge of the corporate debtor from the prosecution, subject to the other requirements of sub-section (1) having been fulfilled. According to him, therefore, a prosecution of the corporate debtor under Section 138/141 of the Negotiable Instruments Act can be instituted during the CIRP, making it clear that such prosecutions are, therefore, outside the ken of the moratorium provisions contained in Section 14 of the IBC.

The raison d’être for the enactment of Section 32A has been stated by the Report of the Insolvency Law Committee of February, 2020 in para 17. This Court, in Manish Kumar v. Union of India, (2021) ibclaw.in 16 SC, upheld the constitutional validity of this provision.(p31-32)

Section 32A cannot possibly be said to throw any light on the true interpretation of Section 14(1)(a) as the reason for introducing Section 32A had nothing whatsoever to do with any moratorium provision. At the heart of the Section is the extinguishment of criminal liability of the corporate debtor, from the date the resolution plan has been approved by the Adjudicating Authority, so that the new management may make a clean break with the past and start on a clean slate. A moratorium provision, on the other hand, does not extinguish any liability, civil or criminal, but only casts a shadow on proceedings already initiated and on proceedings to be initiated, which shadow is lifted when the moratorium period comes to an end. Also, Section 32A(1) operates only after the moratorium comes to an end. At the heart of Section 32A is the IBC’s goal of value maximisation and the need to obviate lower recoveries to creditors as a result of the corporate debtor continuing to be exposed to criminal liability. Unfortunately, the Section is inelegantly drafted. The second proviso to Section 32A(1) speaks of persons who are in any manner in charge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor and who are, directly or indirectly, involved in the commission of “such offence”, i.e., the offence referred to in sub-section (1), “as per the report submitted or complaint filed by the investigating authority …”. The report submitted here refers to a police report under Section 173 of the CrPC, and complaints filed by investigating authorities under special Acts, as opposed to private complaints. If the language of the second proviso is taken to interpret the language of Section 32A(1) in that the “offence committed” under Section 32A(1) would not include offences based upon complaints under Section 2(d) of the CrPC, the width of the language would be cut down and the object of Section 32A(1) would not be achieved as all prosecutions emanating from private complaints would be excluded. Obviously, Section 32A(1) cannot be read in this fashion and clearly incudes the liability of the corporate debtor for all offences committed prior to the commencement of the CIRP. Doubtless, a Section 138 proceeding would be included, and would, after the moratorium period comes to an end with a resolution plan by a new management being approved by the Adjudicating Authority, cease to be an offence qua the corporate debtor.(p33)

A section which has been introduced by an amendment into an Act with its focus on cesser of liability for offences committed by the corporate debtor prior to the commencement of the CIRP cannot be so construed so as to limit, by a sidewind as it were, the moratorium provision contained in Section 14, with which it is not at all concerned. If the first proviso to Section 32A(1) is read in the manner suggested by Shri Mehta, it will impact Section 14 by taking out of its ken Section 138/141 proceedings, which is not the object of Section 32A(1) at all. Assuming, therefore, that there is a clash between Section 14 of the IBC and the first proviso of Section 32A(1), this clash is best resolved by applying the doctrine of harmonious construction so that the objects of both the provisions get sub-served in the process, without damaging or limiting one provision at the expense of the other. If, therefore, the expression “prosecution” in the first proviso of Section 32A(1) refers to criminal proceedings properly so-called either through the medium of a First Information Report or complaint filed by an investigating authority or complaint and not to quasi-criminal proceedings that are instituted under Sections 138/141 of the Negotiable Instruments Act against the corporate debtor, the object of Section 14(1) of the IBC gets sub-served, as does the object of Section 32A, which does away with criminal prosecutions in all cases against the corporate debtor, thus absolving the corporate debtor from the same after a new management comes in.(p34)

6. The Nature of Proceedings under Chapter XVII of the Negotiable Instruments Act

This brings us to the nature of proceedings under Chapter XVII of the Negotiable Instruments Act. Sections 138 to 142 of the Negotiable Instruments Act were added by Chapter XVII by an Amendment Act of 1988. (p35)

Section 138 contains within it the ingredients of the offence made out. The deeming provision is important in that the legislature is cognizant of the fact that what is otherwise a civil liability is now also deemed to be an offence, since this liability is made punishable by law. It is important to note that the transaction spoken of is a commercial transaction between two parties which involves payment of money for a debt or liability. The explanation to Section 138 makes it clear that such debt or other liability means a legally enforceable debt or other liability. Thus, a debt or other liability barred by the law of limitation would be outside the scope of Section 138. This, coupled with fine that may extend to twice the amount of the cheque that is payable as compensation to the aggrieved party to cover both the amount of the cheque and the interest and costs thereupon, would show that it is really a hybrid provision to enforce payment under a bounced cheque if it is otherwise enforceable in civil law. Further, though the ingredients of the offence are contained in the first part of Section 138 when the cheque is returned by the bank unpaid for the reasons given in the Section, the proviso gives an opportunity to the drawer of the cheque, stating that the drawer must fail to make payment of the amount within 15 days of the receipt of a notice, again making it clear that the real object of the provision is not to penalise the wrongdoer for an offence that is already made out, but to compensate the victim.(p36)

Likewise, under Section 139, a presumption is raised that the holder of a cheque received the cheque for the discharge, in whole or in part, of any debt or other liability. To rebut this presumption, facts must be adduced which, on a preponderance of probability (not beyond reasonable doubt as in the case of criminal offences), must then be proved. Section 140 is also important, in that it shall not be a defence in a prosecution for an offence under Section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that Section, thus making it clear that strict liability will attach, mens rea being no ingredient of the offence. Section 141 then makes Directors and other persons statutorily liable, provided the ingredients of the section are met. Interestingly, for the purposes of this Section, explanation (a) defines “company” as meaning any body corporate and includes a firm or other association of individuals.(p37)

If Shri Mehta’s arguments were to be accepted, under the same Section, namely, Section 141, two different results would ensue – so far as bodies corporate, which include limited liability partnerships, are concerned, the moratorium provision contained in Section 14 of the IBC would not apply, but so far as a partnership firm is concerned, being covered by Sections 96 and 101 of the IBC, a Section 138/141 proceeding would be stopped in its tracks by virtue of the moratorium imposed by these Sections. Thus, under Section 141(1), whereas a Section 138 proceeding against a corporate body would continue after initiation of the CIRP, yet, the same proceeding against a firm, being interdicted by Sections 96 and 101, would not so continue. This startling result is one of the consequences of accepting the argument of Shri Mehta, which again leads to the position that inelegant drafting alone cannot lead to such startling results, the object of Sections 14 and 96 and 101 being the same, namely, to see that during the insolvency resolution process for corporate persons/individuals and firms, the corporate body/firm/individual should be given breathing space to recuperate for a successful resolution of its debts – in the case of a corporate debtor, through a new management coming in; and in the case of individuals and firms, through resolution plans which are accepted by a committee of creditors, by which the debtor is given breathing space in which to pay back his/its debts, which would result in creditors getting more than they would in a bankruptcy proceeding against an individual or a firm.(p38)

A cursory reading of Section 142 will again make it clear that the procedure under the CrPC has been departed from. First and foremost, 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 – the victim. Further, the language of Section 142(1) (b) would again show the hybrid nature of these provisions inasmuch as a complaint must be made within one month of the date on which the “cause of action” under clause (c) of the proviso to Section 138 arises. The expression “cause of action” is a foreigner to criminal jurisprudence, and would apply only in civil cases to recover money. Chapter XIII of the CrPC, consisting of Sections 177 to 189, is a chapter dealing with the jurisdiction of the criminal courts in inquiries and trials. When the jurisdiction of a criminal court is spoken of by these Sections, the expression “cause of action” is conspicuous by its absence.(p40)

By an Amendment Act of 2002, various other sections were added to this Chapter. Thus, under Section 143, it is lawful for a Magistrate to pass a sentence of imprisonment for a term not exceeding one year and a fine exceeding INR 5,000/- summarily. This provision is again an important pointer to the fact that the payment of compensation is at the heart of the provision in that a fine exceeding INR 5000/-, the sky being the limit, can be imposed by way of a summary trial which, after application of Section 357 of the CrPC, results in compensating the victim up to twice the amount of the bounced cheque. Under Section 144, the mode of service of summons is done as in civil cases, eschewing the mode contained in Sections 62 to 64 of the CrPC. Likewise, under Section 145, evidence is to be given by the complainant on affidavit, as it is given in civil proceedings, notwithstanding anything contained in the CrPC. Most importantly, by Section 147, offences under this Act are compoundable without any intervention of the court, as is required by Section 320(2) of the CrPC.(p41)

By another amendment made in 2018, the hybrid nature of these provisions gets a further tilt towards a civil proceeding, by the power to direct interim compensation under Sections 143A and 148.(p42)

With this analysis of Chapter XVII, let us look at some of the decided cases. In CIT v. Ishwarlal Bhagwandas, (1966) 1 SCR 190, this Court distinguished between civil proceedings and criminal proceedings in the context of Article 132 of the Constitution. A perusal of this judgment would show that a civil proceeding is not necessarily a proceeding which begins with the filing of a suit and culminates in execution of a decree. It would include a revenue proceeding as well as a writ petition filed under Article 226 of the Constitution, if the reliefs therein are to enforce rights of a civil nature. Interestingly, criminal proceedings are stated to be proceedings in which the larger interest of the State is concerned. Given these tests, it is clear that a Section 138 proceeding can be said to be a “civil sheep” in a “criminal wolf’s” clothing, as it is the interest of the victim that is sought to be protected, the larger interest of the State being subsumed in the victim alone moving a court in cheque bouncing cases, as has been seen by us in the analysis made hereinabove of Chapter XVII of the Negotiable Instruments Act.(p43)

  • Goaplast (P) Ltd. v. Chico Ursula D’Souza, (2003) 3 SCC 232
  • Vinay Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd., (2008) 2 SCC 305
  • Damodar S. Prabhu v. Sayed Babalal H., (2010) 5 SCC 663
  • JIK Industries Ltd. v. Amarlal V. Jumani, (2012) 3 SCC 255
  • Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593
  • Vijayan v. Baby, (2012) 1 SCC 260
  • Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129
  • Lafarge Aggregates & Concrete India (P) Ltd. v. Sukarsh Azad, (2014) 13 SCC 779
  • Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560
  • M. Abbas Haji v. T.N. Channakeshava
  • H.N. Jagadeesh v. R. Rajeshwari, (2019) 16 SCC 730

A conspectus of these judgments would show that the gravamen of a proceeding under Section 138, though couched in language making the act complained of an offence, is really in order to get back through a summary proceeding, the amount contained in the dishonoured cheque together with interest and costs, expeditiously and cheaply. We have already seen how it is the victim alone who can file the complaint which ordinarily culminates in the payment of fine as compensation which may extend to twice the amount of the cheque which would include the amount of the cheque and the interest and costs thereupon. Given our analysis of Chapter XVII of the Negotiable Instruments Act together with the amendments made thereto and the case law cited hereinabove, it is clear that a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section 14 of the IBC, amount to a “proceeding” within the meaning of Section 14(1)(a), the moratorium therefore attaching to such proceeding.(p53)

7. Quasi-Criminal & Contempt Proceedings

Shri Lekhi, learned Additional Solicitor General, took strong objection to the use of the expression “quasi-criminal” to describe proceedings under Section 138 of the Negotiable Instruments Act, which, according to him, can only be described as criminal proceedings. This is for the reason that these proceedings result in imprisonment or fine or both, which are punishments that can be imposed only in criminal proceedings as stated by Section 53 of the Indian Penal Code. It is difficult to agree with Shri Lekhi. There are many instances of acts which are punishable by imprisonment or fine or both which have been described as quasi-criminal. One instance is the infraction of Section 630 of the Companies Act, 1956.(p54)

Likewise, contempt of court proceedings have been described as “quasi-criminal” in a long series of judgments. We may point out that the predecessor to the Contempt of Courts Act, 1971, namely, the Contempt of Courts Act, 1952 did not contain any definition of the expression “contempt of court”. A Committee was appointed by the Government of India, referred to as the Sanyal Committee, which then went into whether this expression needs to be defined. The Sanyal Committee Report, 1963 then broadly divided contempts into two kinds – civil and criminal contempt.(p55)

Whether the contempt committed is civil or criminal, the High Court is empowered to try such “offences” whether the person allegedly guilty is within or outside its territorial jurisdiction.(p58)

In criminal contempt cases, “cognizance” in contempts other than those referred to in Section 14 of the Act is taken by the Supreme Court or the High Court in the manner provided by Section 15. Section 17 then lays down the procedure that is to be followed after cognizance is taken. Finally, by Section 23, the Supreme Court and the High Courts are given the power to make rules, not inconsistent with the provisions of the Act, providing for any matter relating to its procedure.(p59)

The description of contempt proceedings being “quasi-criminal” in nature has its origin in the celebrated Privy Council judgment of Andre Paul Terence Ambard v. Attorney-General of Trinidad and Tobago, AIR 1936 PC 141 in which Lord Atkin referred to contempt of court proceedings as quasi-criminal (see page 143).

That contempt proceedings are “quasi-criminal” is also stated in Kanwar Singh Saini v. High Court of Delhi, (2012) 4 SCC 307 (at paragraph 38) and in T.C. Gupta v. Bimal Kumar Dutta, (2014) 14 SCC 446 (at paragraph 10).(p61)

What is clear from the aforesaid is that though there may not be any watertight distinction between civil and criminal contempt, yet, an analysis of the aforesaid authorities would make it clear that civil contempt is essentially an action which is moved by the party in whose interest an order was made with a view to enforce its personal right, where contumacious disregard for such order results in punishment of the offender in public interest, whereas a criminal contempt is, in essence, a proceeding which relates to the public interest in seeing that the administration of justice remains unpolluted. What is of importance is to note that even in cases of civil contempt, fine or imprisonment or both may be imposed. The mere fact that punishments that are awardable relate to Section 53 of the Indian Penal Code would not, therefore, render a civil contempt proceeding a criminal proceeding. There is a great deal of wisdom in the finding of the Sanyal Committee Report that the question whether a contempt is civil or criminal is not to be judged with reference to the penalty which may be inflicted but with reference to the cause for which the penalty has been inflicted.(p63)

Clearly, therefore, given the hybrid nature of a civil contempt proceeding, described as “quasi-criminal” by several judgments of this Court, there is nothing wrong with the same appellation “quasi-criminal” being applied to a Section 138 proceeding for the reasons given by us on an analysis of Chapter XVII of the Negotiable Instruments Act. We, therefore, reject the learned Additional Solicitor General’s strenuous argument that the appellation “quasi-criminal” is a misnomer when it comes to Section 138 proceedings and that therefore some of the cases cited in this judgment should be given a fresh look.(p64)

8. Whether Natural Persons are Covered by Section 14 of the IBC

As far as the Directors/persons in management or control of the corporate debtor are concerned, a Section 138/141 proceeding against them cannot be initiated or continued without the corporate debtor – see Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661 [“Aneeta Hada”]. This is because Section 141 of the Negotiable Instruments Act speaks of persons in charge of, and responsible to the company for the conduct of the business of the company, as well as the company.

Since the corporate debtor would be covered by the moratorium provision contained in Section 14 of the IBC, by which continuation of Section 138/141 proceedings against the corporate debtor and initiation of Section 138/141 proceedings against the said debtor during the CIRP are interdicted, what is stated in paragraphs 51 and 59 in Aneeta Hada (supra) would then become applicable. The legal impediment contained in Section 14 of the IBC would make it impossible for such proceeding to continue or be instituted against the corporate debtor. Thus, for the period of moratorium, since no Section 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 Section 141(1) and (2) of the Negotiable Instruments Act. This being the case, it is clear that the moratorium provision contained in Section 14 of the 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.(p77)

9. Case Law under Provisions of Other Statutes

Shri Mehta then relied strongly upon judgments under Section 22(1) of the SICA and under Section 446(2) of the Companies Act, 1956. He relied upon BSI Ltd. v. Gift Holdings (P) Ltd., (2000) 2 SCC 737, which judgment held that the expression “suit” in Section 22(1) of the SICA would not include a Section 138 proceeding.

This case is wholly distinguishable as the word “proceedings” did not come up for consideration at all. Further, given the object of Section 22(1) of the SICA, which was amended in 1994 by inserting the words that were interpreted by this Court, parliament restricted proceedings only to suits for recovery of money etc., thereby expressly not including prosecution proceedings, as was held by this Court. The observations contained in paragraph 20, that Section 138 of the Negotiable Instruments Act is a penal provision in a criminal proceeding cannot now be said to be good law given the march of events, in particular, the amendments of 2002 and 2018 to the Negotiable Instruments Act, as pointed out hereinabove, and the later judgments of this Court interpreting Chapter XVII of the Negotiable Instruments Act.

The next decision relied upon by Shri Mehta is the judgment in Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd.,(2000) 2 SCC 745, which merely followed this judgment (see paragraphs 15-18). Likewise, all the judgments cited under Section 446(2) of the Companies Act, 1956 are distinguishable.

In S.V. Kandeakar v. V.M. Deshpande, (1972) 1 SCC 438 [“S.V. Kandeakar”], this Court explained why income tax proceedings would be outside the purview of Section 446(2). From this judgment, what becomes clear is the fact that the winding-up court under Section 446(2) is to take up all matters which the company court itself can conveniently dispose of rather than exposing a company which is under winding up to expensive litigation in other courts. This being the object of Section 446(2), the expression “proceeding” was given a limited meaning as it is obvious that a company court cannot dispose of an assessment proceeding in income tax or a criminal proceeding. This is further made clear in Sudarshan Chits (I) Ltd. v. O. Sukumaran Pillai, (1984) 4 SCC 657 (at paragraph 8) and in Central Bank of India v. Elmot Engineering Co., (1994) 4 SCC 159 (at paragraph 14).

Shri Mehta also relied upon D.K. Kapur v. Reserve Bank of India, 2001 SCC OnLine Del 67 : (2001) 58 DRJ 424 (DB). This judgment referred to Section 446(1) and (2) of the Companies Act, 1956 and contrasted the language contained therein with the language contained in Section 457 of the same Act, which made it clear that the liquidator in a winding up by the court shall have power, with the sanction of the court, to institute or defend any suit, prosecution, or other legal proceeding, civil or criminal, in the name and on behalf of the company.

Shri Mehta’s reliance on Indorama Synthetics (I) Ltd. v. State of Maharashtra, 2016 SCC OnLine Bom 2611 : (2016) 4 Mah LJ 249, is also misplaced, for the reason that the finding of the Bombay High Court that Section 138 proceedings were not included in Section 446 of the Companies Act only follows the reasoning of the earlier judgments on the scope of Section 446 of the Companies Act. Significantly, given the object of Section 446 of the Companies Act, it was held that a Section 138 proceeding is not a proceeding which has a direct bearing on the collection or distribution of assets in the winding up of a company. The ultimate conclusion of the court is contained in paragraph 30.

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.

This raison d’être is completely different from what has been advocated by Shri Mehta. The confiscation of the proceeds of crime is by the government acting statutorily and not as a creditor. This judgment, again, does not further his case.(p67-73)

10. Conclusion

In conclusion, disagreeing with the Bombay High Court and the Calcutta High Court judgments in Tayal Cotton Pvt. Ltd. v. State of Maharashtra, [2018] ibclaw.in 13 HC and M/s MBL Infrastructure Ltd. v. Manik Chand Somani, (2019) ibclaw.in 18 HC, respectively, we hold that a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC.(p78)

Resultantly, the civil appeal is allowed and the judgment under appeal is set aside. However, the Section 138/141 proceedings in this case will continue both against the company as well as the appellants for the reason given by us in paragraph 77 above as well as the fact that the insolvency resolution process does not involve a new management taking over. We may also note that the moratorium period has come to an end in this case.(p79)


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