SC On Application U/S 34 Of Arbitration Act

KEY TAKEAWAYS

• In the case of P. Mohanraj and Ors v. Shah Brothers Ispat Pvt. Ltd., the Apex Court decided “whether the institution or continuation of a proceeding under Section 138 and Section 141 (cheque bounce cases) of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of IBC."
• It opined that 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.
• The Court disagreed with the contrary view taken by the Bombay and the Calcutta High Courts taken in this regard.

INTRODUCTION

The Supreme Court heard the case of P. Mohanraj and Ors v. Shah Brothers Ispat Pvt. Ltd. on Monday and was faced with the legal question whether "the institution or continuation of a proceeding under Section 138 and Section 141 (cheque bounce cases) of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of IBC."

“A Section 34 proceeding is a proceeding against the Corporate Debtor in a court of law pertaining to a challenge to an arbitral award and would be covered just as an appellate proceeding in a decree from a suit would be covered,” the Court stated with regard to the case.That is to say that the limitation under Section 34 of the Arbitration Act is covered under the moratorium of Insolvency and Bankruptcy Code, 2016.

In the 120 page judgement, the Court in a three judge division bench led by Justice RF Narayan and comprising of Justice KM Joseph and Justice Navin Sinha said that criminal proceedings against a corporate debtor cannot be initiated under the Negotiable Instruments Act if the National Company Law Tribunal has already passed an order of moratorium under the Insolvency and Bankruptcy Code.

BACKGROUND

One M/s. Shah Brothers Ispat Pvt. Ltd. had supplied steel products to M/s. Diamond Engineering Pvt. Ltd. towards which an amount of INR 24,20,91,054/- was due and payable to Shah Brothers. A total of 51 cheques were issued by Diamond Engineering Pvt. Ltd. towards such payment and all of them were dishonoured due to insufficient funds.

Upon such dishonour, a statutory demand notice was issued under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, calling upon the company and its three Directors, to pay this amount within 15 days of the receipt of the notice.

A second statutory notice was issued on two cheques further dishonoured and same terms were demanded.

Upon observing no responsiveness from the end of Diamond Engineering Pvt. Ltd. towards either of the statutory notices issued to them, two criminal complaints were filed against the Company and its directors.

In the meanwhile, pursuant to a notice under Section 8 of the Insolvency and Bankruptcy Code, an order was passed by the Adjudicating Authority admitting the application under

Section 9 of the IBC and directing commencement of the corporate insolvency resolution process with respect to the company, a moratorium in terms of Section 14 of the IBC was ordered. As a result, the two criminal complaints were stayed by the Adjudicating Authority.

Shri Jayant Mehta, learned Advocate appearing on behalf of the respondent, referred to the Report of the Insolvency Law Committee of February 2020 to establish that the object of Section 14 being a limited one, a criminal proceeding could not possibly be included within it.

The National Company Law Tribunal (NCLT), Chennai had initiated Corporate Insolvency Resolution Process (CIRP) against Diamond Engineering Chennai Limited (Corporate Debtor) on June 6, 2017 on a petition by Shah Brothers Ispat Private Limited (Respondents in Supreme Court) and moratorium was imposed.
The Madras High Court had held that since Section 138 NI Act was a criminal proceeding, the moratorium under Section 14 IBC will not affect it. "The Section 138 of Negotiable Instruments Act is a penal provision which empowers the court of competent jurisdiction to pass the order of imprisonment or fine. It is not the civil proceedings and even fine imposed by the criminal court cannot held to be a money claim or recovery against Corporate Debtor. It is seen from the above provision, the criminal proceedings is not covered under the prohibition and as such the petitioner cannot have a shelter under Section 14 of Insolvency and Bankruptcy Code", a single bench of Justice G K Ilanthiraiyan of Madras HC had held.

The NCLT directed Shah Brothers to withdraw the complaint under Section 138 of NI Act treating it as a proceeding filed after order of moratorium with observation that such action amounts to misuse of the process of law.

The NCLAT was moved by the aggrieved party, who approved continuation of parallel proceedings under Section 138 of the Negotiable Instruments Act even as the resolution process under the IBC was under way against the company subjected to moratorium.

The case was heard in the Supreme Court in an appeal against the National Company Law Appellate Tribunal (NCLAT) order passed in July 2018. The bench led by Justice Nariman 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.

It distinguished between criminal and civil contempt and commented that though the proceedings in cheque bounce cases under the Negotiable Instrument Act 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 suo motu.

THE JUDGEMENT

"We hold that a Section 138/141 NI Act proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC", Justice RF Nariman said while reading out the 120 page judgement.

The top court also held that it was disagreeing with the views taken by Bombay and Calcutta High Courts. The Court observed that Section 138 NI Act was a "quasi criminal proceeding" which is meant to enforce a civil remedy and therefore it amounts to a "proceeding" within the meaning of Section14(1)(a).

The Court went on to say that “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.”

The Court observed that the objective of moratorium is to "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", the bench further observed.

CONCLUSION

The Supreme Court in the case of P. Mohanraj and Ors v. Shah Brothers Ispat Pvt. Ltd. heard by a three judge division bench held that once a Corporate Insolvency Resolution Process (CIRP) has been initiated against an entity, simultaneous criminal procedures cannot be initiated or continued against body corporates. But such protection is not extended to ‘natural persons’ involved in such case.

The bench was faced with the legal issue whether "the institution or continuation of a proceeding under Section 138 and Section 141 (cheque bounce cases) of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of IBC."

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