P. MOHANRAJ vs M/s SHAH BROTHERS ISPAT Pvt. Ltd.

CITATION	AIR 2021 SC 1308
DATE OF JUDGMENT	1st March, 2021
COURT	The Supreme Court of India
APPELLANT	P. Mohanraj & ors.
RESPONDENT	Shah Brothers Ispat Pvt. Ltd.
BENCH	Justice K.M. Joseph, Justice Navin Sinha, Rohinton Fali Nariman

INTRODUCTION 

In P. Mohanraj & ors. vs Shah Brothers Ispat Pvt. Ltd. case, the Supreme Court provided clarity as to whether the continuation of proceedings under section 138 and section 141 of the Negotiable Instruments Act can be covered under the scope of moratorium under section 14 of the Insolvency and Bankruptcy Code. In its decision, the Supreme Court critically analyzed the scope of section 14 of the Insolvency and Bankruptcy Code and the nature of proceedings that can be under section 138 and section 141 of the Negotiable Instruments Act. It examined when the moratorium order can be applied under this act.

FACTS OF THE CASE

1. The respondent was a steel product supplier. He supplied some steel products to a company named M/s. Diamond Engineering Pvt. Ltd. From 21.09.15 to 11.11.2016, the company was obligated to pay a total of INR 24,20,91,054. 
2. The company issued up to 51 checks to the respondent for amounts owed for supplies; however, on March 3, 2017, all the checks were returned unpaid with the note funds insufficient. 
3. On 31^st March 2017, the respondent issued a notice under section 138 and section 141 of the Negotiable Instruments Act, 1981 by which the company was given a deadline of 15 days to pay the due amount. 
4. On April 28, 2017, the respondent presented two cheques of total INR 80,70,133/- for encashment, which were returned with a note of insufficient funds. The respondent then issued a second demand notice on May 5, 2017, requesting the company to pay the due amount within 15 days of receiving the notice. 
5. Due to non-payment by the company even after the issuance of two statutory notices, the respondent filed a criminal complaint under section 138 read with section 141 of the Negotiable Instruments Act, 1981 against the company, and the appellant before the Additional Chief Metropolitan Magistrate in Kurla, Mumbai. 
6. A moratorium under Section 14 of the Insolvency Bankruptcy Code, 2016 was ordered after the respondent issued a notice to the company and the adjudication authority under Section 9 of the Insolvency Bankruptcy Code, 2016 passed an order admitting the application for the commencement of the corporate insolvency resolution process. 
7. On May 24, 2018, the Adjudicating Authority stayed further proceedings before the Additional Chief Metropolitan Magistrate. The NCLAT set aside the order in response to an appeal filed. NCLAT held that criminal proceedings cannot be covered under the scope of moratorium under section 14 of the Insolvency and Bankruptcy Code.
8. On October 26, 2018, The NCLAT stayed the further proceedings that were still pending before the Additional Chief Metropolitan Magistrate.

ISSUE RAISED

1. Can the continuation of proceedings under section 138 and section 141 of the Negotiable Instruments Act be covered under the scope of moratorium under section 14 of the Insolvency and Bankruptcy Code?

CONTENTIONS OF THE APPELLANT

1. The learned Senior Advocate argued that considering the purpose of Section 14, there is no reason to limit the definition of the term “proceedings,” which would thereby cover all civil and criminal proceedings against the corporate debtor that lead to the “execution” of any judgment for the payment of damages. 
2. It was contended that even if the criminal proceedings that are legally defined as such cannot be covered under Section 14(1)(a), a quasi-criminal Section 138 proceeding would undoubtedly be covered because its main goal is to compensate the person whose cheque bounced.
3. He further contended that Section 14(1)(a) was incredibly broad and should not be limited by judicial interpretation because the word “any” appears twice in Section 14(1)(a). This means that, if a court of law renders a judgment (which includes authority orders) that leads to coercive measures being taken against the corporate debtor’s assets, all related proceedings are inevitably included in the meaning of Section 14(1)(a).

CONTENTIONS OF RESPONDENT

1. It was contended that since Section 14 had a narrow objective, a criminal proceeding could not fall under its purview.
2. It was contented that since the term “proceedings” borrows its meaning from the earlier term “suits,” these proceedings must inevitably be civil. He proved this by using the ejusdem generis or noscitur a sociis rules of construction, which had been applied to Section 14(1)(a) by the Bombay High Court and the Calcutta High Court.
3. It was argued that Section 138 of the Negotiable Instruments Act constitutes a criminal proceeding with two possible goals. The first is to criminalize actions that were previously considered civil breaches, making them subject to fines or imprisonment, or, both.

JUDGMENT

The Supreme Court held that Section 14 of IBC only applies to Corporate Debtors, and thus cheque bounce proceedings against Corporate Debtors will be stayed. On another note, the Directors of Corporate Debtor may be sued in a cheque bounce case. The Supreme Court explained that 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 the Section 138 of the NI Act conducted before a Magistrate. The same, in the court’s opinion, is a proceeding in a court of law regarding a transaction related to a debt owed by the corporate debtor. Section 138 of the NI Act pertains to quasi-criminal proceedings, wherein the parties are perceived as “criminal wolves” disguised as “civil sheep.” According to the Court’s reasoning, the determination of whether a proceeding is criminal or civil should be made based on the reason behind the penalty rather than the potential punishment. The Court determined that the procedure under Section 138 of the NI Act is quasi-criminal, with the main objective being the use of criminal procedure to enforce a civil liability. The court decided that even if there was an ongoing moratorium period after the proceedings against the corporate debtor, the proceedings against the directors would still proceed.

ANALYSIS

 In Kaushalya Devi Massand vs Roopkishore Khore, the court held that an offence under Section 138 of the Negotiable Instruments Act, of 1881, is almost like a civil wrong that has been given criminal overtones.

M. Abbas Haji v. T.N. Channakeshava, this court held that proceedings under section 138 of the Negotiable Instruments Act are quasi-criminal.

Section 14 of the Insolvency and Bankruptcy Code (IBC) contains a moratorium provision that applies to corporate debtors. This provision allows for the continuation of section 138 and section 141 proceedings against the debtor and the initiation of proceedings during the bankruptcy resolution process. A director cannot be sued under Section 138/141 or have a proceeding brought against them without the corporate debtor. The proceeding can be continued against the director. Section 138 is not only a penal provision; it also serves to uphold the effectiveness and worth of a negotiable instrument by requiring the accused to honor the instrument and reimburse the amount for which it was executed.

The Court further dismissed the applicability of noscitur a sociis and ejusdem generis because they are insufficient to restrict the reach of a wide provision that is otherwise comprehensible based on the language used in the provision.

CONCLUSION 

The ruling in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. by the Supreme Court reinforces the structure of the Insolvency and Bankruptcy Code (IBC) by guaranteeing that the moratorium essentially stops any actions that might have an impact on the assets of the corporate debtor, thus promoting a more seamless process of insolvency resolution. It balances the interests of creditors and the corporate debtor at the same time by holding those accountable for dishonored checks. This ruling ensures uniformity and clarity in the application of the NI Act and the IBC by setting a crucial precedent in the field of insolvency law.

REFERENCE

https://www.scconline.com/blog/post/2021/03/10/interplay-between-negotiable-instruments-act-and-the-insolvency-code/

https://www.livelaw.in/law-firms/law-firm-articles-/ibc-moratorium-cheque-dishonour-maheshwari-co-181105

https://indiankanoon.org/doc/97452657

https://ibclaw.in/summary-of-landmark-judgment-p-mohanraj-ors-vs-m-s-shah-brothers-ispat-pvt-ltd

Written by Janvi Shukla an intern under legal vidhiya

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