P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd.
Supreme Court of India, 1 March 2021, 3 judges
Proceedings under Sections 138 and 141 of the Negotiable Instruments Act against a corporate debtor are 'proceedings' barred by the moratorium in Section 14(1)(a) IBC, but they may continue against its directors and persons in charge.
Facts
The respondent supplied steel to Diamond Engineering Pvt. Ltd. Cheques issued by the company were dishonoured in 2017, and the respondent filed complaints under Section 138 read with Section 141 of the Negotiable Instruments Act against the company and its three directors, the appellants. In separate proceedings the Adjudicating Authority admitted a Section 9 IBC application against the company on 6 June 2017 and declared a moratorium under Section 14. The Adjudicating Authority stayed the cheque cases, but the NCLAT held that a Section 138 case, being criminal, is not a 'proceeding' under Section 14. The directors appealed; connected appeals and writ petitions raised the same question.
Questions before the Court
- Is a proceeding under Sections 138 and 141 of the Negotiable Instruments Act against a corporate debtor covered by the moratorium under Section 14(1)(a) of the IBC?
- Does Section 32A of the IBC show that criminal proceedings are outside Section 14?
- Does the moratorium also protect directors and other persons in charge of the corporate debtor?
What the Court held
- The word 'proceedings' in Section 14(1)(a) is wide and is not confined to civil proceedings. A Section 138 case before a Magistrate is a proceeding in a court of law relating to a debt owed by the corporate debtor.
- Section 138 is a hybrid, quasi-criminal provision whose real object is to compensate the payee and enforce payment of a debt that is otherwise enforceable in civil law; it is covered by the moratorium.
- Section 32A, which extinguishes the corporate debtor's criminal liability after a resolution plan under new management, does not limit Section 14. A moratorium extinguishes no liability; it only suspends proceedings for its duration.
- The moratorium protects only the corporate debtor. Directors and persons in charge under Section 141(1) and (2) remain liable, and proceedings against them can be started or continued during the moratorium.
- The NCLAT's view was set aside, but on the facts the cheque cases were to continue against the company and the appellants, since the moratorium had ended and no new management had taken over.
Why it matters
The judgment settles that the IBC moratorium bars cheque dishonour prosecutions against a corporate debtor, disagreeing with the Bombay and Calcutta High Courts. It describes Section 138 proceedings as quasi-criminal and compensatory, separates the moratorium from the post-resolution immunity in Section 32A, and holds that directors and persons in charge get no protection from the moratorium, applying the impossibility exception recognised in Aneeta Hada.
In the Court's words
Copied from the official judgment; each passage links to its page.
“In conclusion, disagreeing with the Bombay High Court and the Calcutta High Court judgments in Tayal Cotton Pvt. Ltd. v. State of Maharashtra, 2018 SCC OnLine Bom 2069 : (2019) 1 Mah LJ 312 and M/s MBL Infrastructure Ltd. v. Manik Chand Somani, CRR 3456/2018 (Calcutta High Court; decided on 16.04.2019), respectively, we hold that a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC.”
“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.”
“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.”
“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.”
Provisions interpreted
Related judgments
- Follows Aneeta Hada v. Godfather Travels and Tours Pvt. Ltd. (2012)“what is stated in paragraphs 51 and 59 in Aneeta Hada (supra) would then become applicable” (page 113)
Case and bench
- Parties
- P. Mohanraj v. M/s. Shah Brothers Ispat Pvt. Ltd.
- Case
- Civil Appeal No. 10355 of 2018, with connected criminal appeals and writ petitions
- Decided
- 1 March 2021
- Bench
- Rohinton Fali Nariman, Navin Sinha, K.M. Joseph
- Opinions
- Judgment of the Court written by R.F. Nariman, J. and signed by all three judges; no separate opinion.
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