Cheque bounce cases covered under section 14 of IBC

The apex court carefully after considering the legal impediment contained in section 14 of IBC stated that section 14 of IBC would make it impossible for cheque bounce proceeding to continue or be instituted against the corporate debtor during the moratorium period

The gloomy air pertaining to whether the institution or continuation of so deemed criminal proceeding under section 138/141 of the Negotiable Instruments Act (NI Act) can be said to be covered by the section 14 i.e. the moratorium provision of Insolvency & Bankruptcy Code, 2016 (IBC), has been cleared off by the apex court. It was Supreme Court three-judge bench led by Justice R F Nariman in the batch matters of P Mohanraj and Others vs Shah Brothers Ispat Ltd. on March 1, 2021 which held that "…a section 138/141 proceeding against a corporate debtor is covered by section 14 (1) (a) of the IBC."

The Bench interpreted section 14 of IBC and stated that "A cursory look at section 14 (1) makes it clear that subject to the exceptions contained in sub-sections (2) and (3), on the insolvency commencement date, the adjudicating authority shall mandatorily, by order, declare a moratorium to prohibit what follows in clauses (a) to (d). Importantly, under sub-section (4), this order of moratorium does not continue indefinitely, but has effect only from the date of the order declaring moratorium till the completion of the corporate insolvency resolution process which is time bound, either culminating in the order of the adjudicating authority approving a resolution plan or in liquidation." Thereafter, the apex court pondered upon the language of section 14 (1) (a) of IBC and clarified that the expression "institution of suits or continuation of pending suits" is to be read as one category, and the disjunctive "or" before the word "proceedings" would make it clear that proceedings against the corporate debtor would be a separate category. What throws light on the width of the expression "proceedings" is the expression "any judgment, decree or order" and "any court of law, tribunal, arbitration panel or other authority".

Since criminal proceedings under the Code of Criminal Procedure, 1973 (CrPC) are conducted before the courts mentioned in section 6, Cr PC, it is clear that a section 138 proceeding being conducted before a Magistrate would certainly be a proceeding in a court of law in respect of a transaction which relates to a debt owed by the corporate debtor.

The judgment deals with the object of section 14 of IBC as well, wherein the fundamental and the utmost vital intention of moratorium provision have been reiterated. The Report of the Insolvency Law Committee of February, 2020 has been referred which throws some light on section 14. Paragraph 8.2 of the report states that the object of a moratorium provision such as section 14 is to see that there is no depletion of a corporate debtor's assets during the insolvency resolution process so that it can be kept running as a going concern during this time, thus maximising value for all stakeholders. Therefore, the idea of moratorium is that it facilitates the continued operation of the business of the corporate debtor to allow it a breathing space to organise its affairs so that new management may ultimately take over and bring the corporate debtor out of financial sickness, thus benefitting all stakeholders, which would inter alia include workmen of the corporate debtor. Thereby with regard to the basic object sought to be achieved by IBC in imposing this moratorium, a proceeding under section 138 of NI Act would result in depletion of the assets of the corporate debtor and consequently would lead to compensation which can amount to twice the amount of the cheque that has bounced that would directly impact the corporate insolvency resolution process in the same manner as the institution, continuation or execution of a decree in such suit in a civil court for the amount of debt or other liability. Judged from the point of view of this objective, 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. The Section 14 (1) (a) refers to monetary liabilities of the corporate debtor, Section 14 (1) (b) refers to the corporate debtor's assets, and together, these two clauses form a scheme which shields the corporate debtor from pecuniary attacks against it in the moratorium period so that the corporate debtor gets breathing space to continue as a going concern in order to ultimately rehabilitate itself. Any crack in this shield is bound to have adverse consequences, given the object of Section 14, and cannot, by any process of interpretation, be allowed to occur. Therefore, the object and context of Section 14, the expression 'proceedings' cannot be cut down by any rule of construction and must be given a fair meaning in consonance with the aim and purpose of IBC.

The Bench then went on to elucidate the nature of proceedings under Chapter XVII of the NI Act pertaining to sections 138 to 142. Section 138 contains within it the ingredients of the offence made out. The deeming provision is important in that the legislature is cognizant of the fact that what is otherwise a civil liability is now also deemed to be an offence, since this liability is made punishable by law. It is important to note that the transaction spoken of is a commercial transaction between two parties which involves payment of money for a debt or liability. The explanation to section 138 makes it clear that such debt or other liability means a legally enforceable debt or other liability. Thus, a debt or other liability barred by the law of limitation would be outside the scope of section 138. 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. Further, though the ingredients of the offence are contained in the first part of section 138 when the cheque is returned by the bank unpaid for the reasons given in the Section, the proviso gives an opportunity to the drawer of the cheque, stating that the drawer must fail to make payment of the amount within 15 days of the receipt of a notice, again making it clear that the real object of the provision is not to penalise the wrongdoer for an offence that is already made out, but to compensate the victim

In CIT v. Ishwarlal Bhagwandas, (1966) 1 SCR 190, the apex court stated that a civil proceeding is not necessarily a proceeding which begins with the filing of a suit and culminates in execution of a decree. It would include revenue proceeding as well as a writ petition filed under article 226 of the Constitution, if the reliefs therein are to enforce rights of a civil nature. Interestingly, criminal proceedings are stated to be proceedings in which the larger interest of the State is concerned. The Bench then stated that "Given these tests, it is clear that 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, as has been seen by us in the analysis made hereinabove of Chapter XVII of the Negotiable Instruments Act." Therefore, after analyzing the provisions of the NI Act the Supreme Court proclaimed that a "…quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section 14 of the IBC, amount to a "proceeding" within the meaning of Section 14 (1) (a), the moratorium therefore attaching to such proceeding."

Thereupon, the Bench also shed some light on whether the natural persons i.e. the directors/persons in management or control of the corporate debtor can avail the benefit of moratorium on judicial proceedings in such cheque bounce cases or not! The apex court carefully after considering the legal impediment contained in section 14 of IBC stated that section 14 of IBC would make it impossible for cheque bounce proceeding to continue or be instituted against the corporate debtor.

Thus, for the period of moratorium, since no section138/141 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. This being the case, it is clear that the moratorium provision contained in section 14 of the IBC would apply only to the corporate debtor, but the natural persons mentioned in section 141continues to be statutorily liable under Chapter XVII of the NI Act as they would not be covered by the moratorium under section 14 of IBC.

Thus, the apex court after looking very minutely through its judicial magnifying glasses into the provisions of IBC and NI Act has closed the long opened Pandora's Box filled with ambiguous questions pertaining to proceedings against the corporate debtor under the moratorium.

(The authors are Principal Associate, and, Associatea at Dhir & Dhir Associates respectively)

Amir Bavani & Rishika Kumar