Status as on- 09/07/2021
Brief Facts of the case
- M/s. Shah Brothers Ispat Pvt. Ltd. (“SB Ispat”), respondent, supplied steel goods worth Rs. 24.20 crores to M/s Diamond Engineering Private Limited (DEPL) in 2015-2016. Mr. P. Mohanraj, the appellant, is the director of DEPL.
- DEPL issued 51 checks, all of which were returned due to “insufficient money.” As a result, on March 31, 2017, SB Ispat issued a demand notice under section 138 read with 141 of the NI Act, 1881, requiring the firm and its directors to make good the payment within 15 days. DEPL issued two more cheques in April 2017 that were similarly returned owing to “insufficient money.” SB Ispat sent a second demand notice to DEPL. Because DEPL did not make any payments to SB Ispat, SB Ispat filed two criminal cases against DEPL before Additional Chief Metropolitan Magistrate (ACMM) Kurla, Mumbai on May 17th and June 21st, 2017. On February 12th, 2018, both parties were served a summons.
- On March 21, 2017, SB Ispat initiated proceedings against DEPL under Section 8 of the IBC. On June 6, 2017, an order was issued admitting the insolvency petition under Section 9 of the IBC. A moratorium has been imposed in accordance with section 14 of the IBC. As a result, the procedures in the two criminal cases brought before ACMM Mumbai were halted.
- The NCLAT overturned the ruling on an appeal filed against the stay, holding that section 138 of the NI Act is a criminal law and hence cannot be considered “proceeding” under section 14 of the IBC.
- High courts agreed that the criminal provisions of Sections 138/141 of the NI Act 1881 were not a “proceeding” within the meaning of Section 14 of the IBC. As a result, despite the moratorium imposed by section 14 of the IBC, cheque dishonour cases can be pursued concurrently.
The Hon’ble Supreme Court ruled as follows:
- Cheque bounce cases under sections 138/141 of the NI Act are quasi-criminal proceedings and are subject to moratorium under section 14 of the IBC.
- Cheque dishonour cases brought under Section 138 of the NI Act cannot be initiated or continued against corporations subject to the moratorium imposed by Section 14 (1) (a) of the IBC.
- The moratorium under section 14 of the IBC applies only to the corporate debtor — the corporation. Cheque bounce cases can be prosecuted against natural individuals, such as the director of the corporate debtor company.
- Justice Nariman said “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 (directors/persons in management or control of the corporate debtor) mentioned in Section 141(1) and (2) of the Negotiable Instruments Act”.
Impact of the case
Disagreeing with the contrary view taken by the Bombay and the Calcutta High Courts, the Bench led by Justice R F Nariman in a batch of cases led by P Mohanraj vs M/S Shah Brothers Ispat Pvt Ltd held that moratorium under Section 14 of IBC also includes criminal proceedings for cheque bounce cases under Section 138 of the Negotiable Instruments Act, thus parallel proceedings against a corporate debtor cannot be allowed.
In a 120-page decision, the court stated unequivocally that criminal proceedings for cheque dishonour under Section 138 of the Negotiable Instruments Act 1881 (NI Act) are “quasi criminal” in nature. They went on to say that Section 138 of the NI Act is a “civil sheep” dressed as a “criminal wolf”. In other words, such actions cannot be launched or pursued against the Corporate Debtor who may have purportedly committed the offence of cheque dishonour as contemplated by S 138/141 of the Ni Act while a CIRP process is pending under IBC.
The Supreme Court’s decision reiterates the long-standing opinion that proceedings under the NI Act are not strictly criminal in nature. In a series of instances, the Supreme Court has ruled those procedures under Section 138 of the NI Act are civil in nature, with the primary goal of being compensating, as in Kaushalya Devi Massand vs Roopkishore Khore.
Proceedings under Section 138 of the NI Act are not completely criminal in character, with the provision for jail and fines given solely to pressurize the alleged debtor to return the sum owing to the complainant. Allowing continuation of actions under Section 138 of the NI Act after all forms of civil procedures have been halted defeats the purpose of the settlement process. Furthermore, the resolution procedure and resolution plan address the rights of all creditors since, according to Section 31 of the IB Code, once a resolution plan is adopted, it binds all creditors. By enabling the drawee complaint to pursue an independent recovery proceeding, the entire settlement process is jeopardized.
Source- Mohanraj & Ors. V/s M/s. Shah Brothers Ispat Pvt. Ltd.
(SUPREME COURT Judgement Dated 01.03.2021 in CIVIL APPEAL NO. 10355 OF 2018)
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