The Supreme Court Monday held the cheque bounce cases can neither be instituted nor be continued against companies which are facing insolvency proceedings and are protected under a provision of Insolvency and Bankruptcy Code (IBC) putting a moratorium on legal proceedings against them.
The top court, however, did not extend the benefit of a moratorium on judicial proceedings in cheque bounce cases to directors or signatories of cheques of such firms, saying criminal cases would continue against “natural persons”. A bench headed by Justice R F Nariman was faced with the legal issue of whether “the institution or continuation of a proceeding under Section 138/141 (cheque bounce cases) of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of IBC.”
Under IBC, the moment a corporate insolvency resolution process is initiated against a company, it gets statutory protection under section 14 and consequently, a moratorium is put on judicial proceedings against it.
Holding that the judicial proceedings in cheque bounce cases are covered under IBC, the apex court said, “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 … Chapter XVII of the Negotiable Instruments Act.
The bench, also comprising justices Navin Sinha and K M Joseph, disagreed with the judgements of the Bombay and Calcutta High Courts on the issue in which they had held that the cheque bounce cases can continue against the firms facing insolvency resolution proceedings under the IBC.
“In conclusion, disagreeing with the Bombay High Court and the Calcutta High Court judgments in Tayal Cotton Pvt. Ltd. v. State of Maharashtra…, and M/s MBL Infrastructure Ltd. v. Manik Chand Somani…, respectively, we hold that a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC,” Justice Nariman, writing the judgement for the bench, said.
In the 120-page judgement, the top court dealt in detail the various legal issues related to IBC and the Negotiable Instruments Act.
“Since the corporate debtor would be covered by the moratorium provision contained in Section 14 of the IBC, by which continuation of Section 138/141 proceedings against the corporate debtor and initiation of Section 138/141 proceedings against the said debtor during the corporate insolvency resolution process are interdicted…
“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. 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, the natural persons mentioned in Section 141 continuing to be statutorily liable…,” it said.
It held the proceedings related to the cheque bounce cases are covered under the same term used in IBC and hence can be stalled against the companies during the period of insolvency resolution proceedings.
It referred to the difference between criminal and civil contempt and said that though the proceedings in cheque bounce cases are described as “quasi-criminal” in nature, but it can be construed as civil in nature as only the victims can file private complaint and moreover, the courts cannot take note of the offence in its own.
The judgement came on a batch of appeals and the lead petition was filed by one P Mohanraj of a company against whom cheque bounce cases were allowed to be continued.
One company, Shah Brothers Ispat Pvt Ltd, had supplied steel products to one M/s. Diamond Engineering Pvt. Ltd (DEPL) in 2015-16 and later filed two cheque bounce cases against DEPL in Mumbai after several cheques of total value of approximately Rs 25 crore got dishonoured.
However, due to the onset of insolvency proceedings the adjudicating authority under IBC stayed further proceedings in the two criminal complaints pending before the magisterial court.
The National Company Law Appellate Tribunal set aside the moratorium order of the adjudicating authority under IBC and held that cheque bounce case, being a criminal law provision, cannot be held to be a “proceeding” within the meaning of Section 14 of the IBC. SJK Holding that the judicial proceedings in cheque bounce cases are covered under IBC, the apex court said, “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 … Chapter XVII of the Negotiable Instruments Act.”