P.MOHANRAJ & ORS (Appellants)
vs
M/S SHAH BROTHERS ISPAT PRIVATE LIMITED (Respondents)
Civil Appeal No.10355 of 2018
FACTS
1. Steel products were supplied by the respondents to M/s Diamond Engineering Private limited (Appellants) as a result of which Rs. 24,20,91,054 were due and payable by the Appellants, cheques were issued in favour of the respondents by the appellant’s company which were returned dishonoured due to insufficient funds. Respondents issued a demand notice under section 138 r.w. section 141 of the Negotiable Instrument act, 1881 against the company and its directors. No payments were made and criminal complaints were filed against the appellants u/s 138 r.w. sec 141 of NIA, 1881.
2. Being a statutory notice, application were admitted by the AA(NCLT) u/s 9 of the IBC, 2016 and order of moratorium was ordered u/s 14 of the code. AA further stays the criminal proceedings against the appellants. In an appeal by the respondents NCLAT set aside AA order staying proceeding , holding that sec 138 , being a criminal law provision cannot be held to be a proceeding within the meaning of sec 14 of the code . Appeal were filed in the Supreme court against NCLAT order .
ISSUE
1. Whether the institution or continuation of proceedings under sec 138 r.w. sec 141 of the NIA, 1881 can be said to be covered by provision of moratorium given under sec 14 of the Insolvency and Bankruptcy Code, 2016?
2. Whether the expression proceeding can be cut down to mean civil proceedings in strict sense by using rule of interpretation such as ejusdem generis or noscitur a sociis?
3. Nature of Proceeding under chapter XVII of the Negotiable Instrument Act, 1881
ARGUMENTS
| For Appellants | For Respondents |
| It was argued that object of sec 14 is to preserved the assets of Corporate debtor during CIRP, it would be incongruous to hold that sec 138 proceeding which although criminal proceeding , whose essence is to recover money be kept out of the word proceedings contained in sec 14 Further it was argued that sec 14(1)(a) is extremely wide and is ought not to be cut down by the judicial interpretation given the expression “ANY” occurring twice in sec 14(1)(a) Therefore No rule of construction be it Ejusdem Generis or noscitur a sociis can be used to cut down the plain meaning of the words given u/s 14 | Rebutting claims of the appellants counsel respondent referred to Insolvency Committee Report of Feb 2020 to drive his point about the object of sec 14 being a limited one cannot include a criminal proceeding within its meaning Reliance was also placed upon the rule of Noscitur a sociis/Ejusdem generis construction and consistent view of HC that has held sec 138 being a criminal law provision cannot be covered by sec 14 ASG relied on the rule of Noscitur a sociis to state that expression proceeding contained in sec 14(1)(a) is preceded by the expression “Suits” and followed by the words “Execution” and it has to be read in a sense analogous to civil proceedings dealing with private rights of action as contrasted with criminal proceedings |
HOLDING
1. Court held that a section 138/141 proceeding against a corporate debtor is covered by sec 14(1)(a) of the code.
2. However , the statutory bar under section 14 of the code shall be applicable only to corporate debtor i.e. The Company only and not to natural persons that is to say proceedings against the natural person such as Director, officer mentioned u/s 141 of the NIA,1881 can continue and would not be covered by the provisions of moratorium
RATIONALE
1. The court while interpreting sec14 held that the sweep of the provision is very wide. Court said that the expression “Continuation of suits, continuation of pending suits” is to be read as one category and the disjunctive “OR” before the word proceeding would make it clear that proceeding against the corporate debtor would be a separate category
2. Court relied on various judgements to see whether rule of Ejusdem generis/Noscitur a sociis can be applied in current situation held that “ there must be a distinct genus or category running through the bodies already named to invoke rule of Ejusdem generis
3. Same while dealing with rule of Noscitur a sociis Hon’ble court relying on Mazdoor Sabha case : It must be borne in mind that noscitur a sociis is merely a rule of construction and it cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined word correspondingly wider. It is only where the intention of the legislature in associating wider words with words of narrower significance is doubtful, or otherwise not clear that the present rule of construction can be usefully applied.
4. Given the object sought to achieved by moratorium provisions 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 corporate insolvency resolution process.
5. 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.
6. 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. Hon’ble court said that sec 138 is a hybrid provision to enforce the payment of a bounced cheque even if it is otherwise enforceable in civil law. It is a quasi-criminal proceeding.
COMMENTS BY AUTHOR
The judgement finally settled the issue of sec 14 of the IBC (Moratorium) and its applicability to the proceeding initiated under sec 138 of the Negotiable Instrument Act. Supreme Court rightly balanced the intent of sec 14 with the interest of person’s right to enforce payment of bounced cheque by staying the proceeding against the Corporate debtor to protect its assets ,while allowing the proceeding against Natural persons i.e. Directors/Management of the Corporate debtors .
REFERENCES
(A) Sec 14 IBC: Sub-section (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 off 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);
(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.
(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.
(3) the provisions of sub-section (1) shall not apply to-
(a) such transaction as may be notified by the Central Government in consultation with any financial regulator;
(b) a surety in a contract of guarantee to a corporate debtor.
(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process: Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.
(B) Sec 138 NIA: 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.]
About the Author: Shikhar Pandey is pursuing the CS Course and a professional passed student & a law enthusiast with AIR in all 3 stages of CS.
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