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This article is written by Dhruv Sharma who is pursuing a Certificate Course in Insolvency and Bankruptcy Code from LawSikho.

Introduction

The business has a vital part to play in this fast-growing environment. Various modes of financial exchange are also born with the growth of corporate operations. Negotiable tools also implemented advantageous means of cracking the conventional cash transfer procedure through the sale of goods and services. The introduction of the Law on Negotiable Instruments of 1881 has simplified and simplified contract procedures.

The law aims to ensure the use of multiple payment methods, such as cheque use, bills of exchange, bills and promissory notes, all individually highlighting how they apply. Section 138 of the Act strictly enforces payment default and thus constitutes the required instrument for regulating the Act. In compliance with the Negotiable Instruments Act of 1881 several steps are being taken towards innovations. Besides, the innovation taking place within the boundaries of the NI Act of, 1881 there is another legislation that has come up with the advent of bringing pedestal for all those corporate entities who have been going through an insolvency proceeding. It is very well known that as a developing nation, India has an upward trend in the debtors group.

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In periods of ever-shifting economic dimensions, the world of business plays a central role in sustaining a viable economy, with more and more businesses being liquidated each week. Insolvency regulation has a crucial role to play in the growth of countries as a whole. Through this article the author would like to Juxtapose these two legislation by linking the strings of these legislations with the broad contours of the landmark Judgment passed by the Apex Court of the Country on 01.03.2021.

A three-Judge Bench of the Supreme Court Comprising Justices RF Nariman, Navin Sinha and KM Joseph delivered the judgment on a batch of petitions (P Mohanraj and Ors. v. M/s Shah Brothers Ispat Ltd. and connected cases) which challenged the continuation of criminal trial under section 138 of NI Act, 1881. The Apex Court herein ruled that when an order of moratorium is passed under the Insolvency and Bankruptcy Code (IBC), parallel proceedings under Section 138 of the Negotiable Instruments Act (NI Act) against the Corporate Debtor cannot be allowed to continue as the same will be covered by the bar under Section 14 of the IBC (P Mohanraj v. M/S Shah Brothers Ispat Pvt Ltd).  

Brief facts of the case

In the present case, approximately fifty-one cheques given by Diamond Engineering Pvt. Ltd (“Company“) in favour of the respondent M/S Shah Brother Ispat Pvt. Ltd. (“Respondent“) were returned dishonoured by way of inadequate funds. As a result, the Respondent received a formal demand notice under Section 138 and 141 of the NI Act, calling upon the Company and its directors to pay the outstanding sums. 

Afterwards, two cheques were returned dishonoured for insufficient funds for a combined balance of roughly Rupees Eighty-Lakh. In compliance with the NI Act, the respondent issued a second demand notice. Subsequently, two criminal complaints were filed by the Respondent against the Company before the Additional Chief Metropolitan Magistrate, Kurla, Mumbai (“ACMM“).

The company received a formal notice pursuant to Section 8 and then made an appeal to the National Company Law Tribunal. The application was approved by the NCLT and a moratorium under Section 14 of the IBC was declared to begin the corporate insolvency resolution process for the Company. Next, in the two felony complaints pending before the ACMM, the NCLT stayed further proceedings.

In an appeal filed by the Respondent to the National Company Law Appellate Tribunal (“NCLAT“), the NCLAT set aside this order while 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. Thereafter, the NCLT approved the resolution plan as a result of which the moratorium order ceased to have effect.

Issue raised before the bench

The important question that arises, in this case, was 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.

What section 14 of the IBC holds

The definition of a “moratorium” is one of the Code’s most critical features. The moratorium is discussed in Section 14 of the Code and its effect on any proceeding. Moratorium has been elevated to a high status because it halts many concurrent litigation brought against the company as part of insolvency proceedings.

The moratorium offers a ‘calm time,’ allowing the already economically troubled corporate debtor to maximise asset realisation. Furthermore, the moratorium should ensure a successful settlement without having to think about the disbursement of additional assets in concurrent proceedings, if any are necessary.

insolvency

Objective of moratorium

The purpose of the moratorium, according to the Hon’ble Supreme Court, is to “shape a scheme that protects the corporate debtor from pecuniary attacks against it during the moratorium period so that the corporate debtor gets breathing room to proceed as a going concern in order to eventually rehabilitate itself.” i.e., the moratorium protects the corporate debtor by putting a stop to several concurrent proceedings and allowing the corporate debtor to maximise the value of the business without being burdened by additional debts.

Furthermore, the legislative purpose behind enacting the moratorium clause was to prevent the government from terminating or suspending several grants, such as licences, permits, quotas, and concessions, because these grants are critical to a company’s activity and maximising its value as a going concern.

The legislation on protection of the statutory rights of the creditors has consolidated the Insolvency and Bankruptcy Code. It has served to consolidate in one transaction all current rules concerning the insolvency of companies and persons.

The moratorium clause for the claimant as soon as corporate insolvency proceeding against the defaulting corporation begins, is provided for in section 14 of the Insolvency and Bankruptcy Code. IBC Section 14(1) forbids the corporate debtor after its operations.

  1. The institution of legal actions or other prosecutions against the defaulting corporation, which include execution of any judgment, decree or order in the court of law, Tribunal or the Adjudicating Authority.
  2. Any action to enforce any security interest against the corporate debtor under the SARFAESI Act, 2002.

Any proceedings pending in accordance with numerous current insolvency laws are then suspended during the company insolvency period. However, there were decisions that were prosecuted after the moratorium by the Honorable High Court and the Supreme Court and were apparently deprived of the moratorium.

The Apex Court in this landmark judgment have made certain observation in regard to the major objective behind invoking section 14 of the IBC-

  1. The Supreme Court in this case addresses the purpose of the IBC moratorium clause and notes that the aim is to ensure that corporate debtor assets are not depleted during the course of resolving insolvency so that they can remain a matter for concern during those times.
  2. Given the above, a quasi-criminal procedure that may result in the debtor’s assets depreciated by paying compensation that could equal twice the amount of the bounced check would directly influence the process of corporate insolvency settlement in the same way as a corporation, continuance or enforcement of a decree thereof in a civil suit.
  3. Therefore, it cannot be discerned that there is a disparity between the effect of a suit and a case under Section 138 insofar as the corporate debtor has the requisite breathing room to recover during the insolvency resolution phase.
  4. In its plain words, any civil complaint or action against any debt will require a case under Section 138.
  5. The provisions on moratorium shall not extinguish all civil or criminal responsibility but merely throw a pall over already commenced proceedings and on proceedings to be initiated which are lifted before the expiration of the moratorium period.

Proceedings under section 138 of the NI Act, 1881

The proceedings pursuant to Section 138 of the 1881 NI Act was until recently an exception when the NCLAT allowed Section 138 of the NI Act to continue in the moratorium in the case of Shah Brothers Ispat Pvt. Ltd. vs. P Mohanra j& Ors.

In its judge bench ruling, however, the Apex Court held, on appeal to the Supreme Court, that in such cases, parallel proceedings under Section 138 of the Law on the Negotiable Instrument1881 were suspended where an adjucating authority’s moratorium order was issued in an insolvency petition. The Supreme Court of India has stressed the legislative intent of this decision for a moratorium and stated that it is now a clear position that it will not continue the paralleling proceedings pursuant to Section 138 of the NI Act.

In an explanation of Chapter XVII of the Law of the Negotiable Instruments of 1881, the Apex Courts held that it is clear, given that the purpose and context of section 14 of the IBC, of a quasi-criminal proceeding contained in chapter XVII of the Act of the Negotiable Instruments, the “proceeding” as set forth in section 14(1)(a).

Thus, in Shah Brothers’ decision, the Supreme Court postponed and resolved the conflicting position on the moratory effect on section 138 of the NI Act 1881 of the NCLAT reasoning and the interpretation of Section 138 of the NI Act1881 proceedings.

Analysis vis-à-vis P. Mohanraj & Ors. v. M/s Shah Brothers Ispat Pvt. Ltd.

The Apex Court has shed light upon the crucial aspect of proceeding that takes place under section 138 of NI, Act also complimented as Quasi- Criminal proceeding or to put straight in line we can say that such proceeding can be said to be a ‘civil sheep’ in a ‘criminal wolfs’ clothing. The Apex Court has comprehensively justified the essence of section 14 of the IBC, 2016 whereby, from now onwards it can be inferred that the now section 14 of IBC, 2016 holds a bigger ambit than before. 

The Judgment has once again established that the spirit of Constitution cannot be compromised at any cost. The rationale behind posing such statement is to examine the Ratio laid down by the bench in this judgment. The contention of the author is based on the hypothetical aspect that might have taken place if the judgment could have taken the opposite side of what now has been laid down. The room for arbitrariness could have opened up if the Apex Court has not covered the section 138 proceeding of the NI, Act under the head of section 14 of the IBC, 2016. 

It is paramount to understand that section 14 covers in Toto all those proceedings or suits which lies against the corporate entity. If in case a quasi criminal proceeding is not included then corporate debtor might have to face the dire consequences which would then 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 corporate insolvency resolution process. 

The objective behind the IBC is to restructure the debt of a corporate entity of rehabilitate a company reeling under a debt and not to become a debt recovery mechanism forum. The Apex Court in this regard has beautifully recognized the termed ‘Rational Nexus’ in consonance with the objective of IBC. Hence, it is clear section 14 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.

Conclusion

The immediate decision would give all stakeholders in the Indian insolvency system a sigh of relief. With this ruling, the decisions of the MBL Infrastructure v. Manik Chand Somaniof the High Court of Bombay, Tayal Cotton Pvt Ltd. v. State of Maharashtra and the High Court of Calcutta have thus overruled the stipulation that much is needed clarity in it. The inclusion in the scope of “proceedings,” as provided for under Section 14 of the IBC, of procedures under Sections 138 and 141 of the NI Act, would encourage more resolutions to be submitted and involved in the process of insolvency resolution. The immediate decision is in fact aligned with the purpose while retaining it as a continuing concern, to maximize the value of the debtor of the company.

References

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