India: Applicability Of Moratorium In Cheque Bounce Cases: Conundrum Continues

Last Updated: 13 September 2018
Article by Wasim Beg and Abhishek Goyal

Quite recently, Hon'ble National Company Law Appellate Tribunal ("NCLAT/ Appellate Authority") while deciding the issue, "whether the order of moratorium will cover a criminal proceeding under Section 138 of NI Act...?", in Shah Brothers Ispat Pvt. Ltd. v. P. Mohanraj & Ors., Company Appeal (AT) (Insolvency) No. 306/2018 (dated 31.07.2018), has held that the proceedings under Section 138 of the Negotiable Instruments Act, 1881 ("NI Act") would not fall within the purview of Section 14 of the Insolvency and Bankruptcy Code, 2016 ("IBC/ Code"). The reasoning of the Appellate Authority for reaching such a finding was that the proceedings under Section 138 NI Act are penal in nature, empowering a Court of competent jurisdiction to pass order of imprisonment or fine, which were held not to fall under the category of a proceeding, judgment or decree of money claim. According to the Hon'ble NCLAT, imposition of fine cannot be held to be a money claim or recovery against the Corporate Debtor, nor the order of imprisonment, if passed by the Court of competent jurisdiction on the Directors, held to come within the purview of Section 14 IBC. In fact, as per the Hon'ble NCLAT, no criminal proceeding would be covered under Section 14 IBC.

Strangely enough, the Hon'ble NCLAT despite acknowledging that the only punishment that can be imposed against a Corporate Debtor/ Company for the offence under Section 138 NI Act is that of fine, completely ignored the scope and purpose of Section 14 IBC and the judgment of the Hon'ble Supreme Court of India in M/s. Meters and Instruments Private Limited v. Kanchan Mehta, (2018) 1 SCC 560.

The Hon'ble Supreme Court in the aforesaid judgment, considering a catena of case laws on Section 138 NI Act, had, inter alia, held that the offence under the said section is primarily a civil wrong, burden of proving which vests on the accused in terms of Section 139 of the NI Act. It was further noted by the Hon'ble Supreme Court that the standard of such proof under such cases is of "preponderance of probabilities" and not "proof beyond reasonable doubt". The Hon'ble Supreme Court was cognizant of the fact that the proceedings under Section 138 NI Act cannot be treated as civil suits for recovery, though the object of the provision was held to be primarily compensatory, punitive element being mainly with the object of enforcing the compensatory element. The said judgment of the Hon'ble Supreme Court essentially aimed at deciding the issue as to whether the offence under Section 138 NI Act could be compounded even without the consent of the complainant? In this context, with the aforesaid observations and holding that for compounding of offence under the said section, consent of the complainant was not essential, the Hon'ble Supreme Court went a step ahead to hold that in every complaint under Section 138 NI Act, it would be desirable to give an option to the accused, while issuing summons, to deposit the specified amount, determined by the Court, by a specified date to dispense his appearance before the Court. The Hon'ble Supreme Court further held that if the accused complies with such summons and informs the Court and the complainant by email, the Court can ascertain the objection, if any, of the complainant and close the proceedings unless it becomes necessary to proceed with the case. To the same effect, as early as the year 2011, the Hon'ble Supreme Court in Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593 had held that the gravity of a complaint under the NI Act cannot be equated with an offence under the provisions of the Indian Penal Code, 1860 ("IPC") or other criminal offence. As per the Hon'ble Supreme Court, "an offence under Section 138 NI act is almost in the nature of a civil wrong, which has been given criminal overtones."

The object of moratorium under Section 14 IBC is to keep the Corporate Debtor's assets together during the corporate insolvency resolution process and to facilitate orderly completion of the entire process. Moratorium ensures that the company continues as a 'going concern', as long as the creditors take a view on the resolution of default. Point No. 1 of Para 5.3.1 of the report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (November, 2015) provides, "The motivation behind the moratorium is that it is value maximising for the entity to continue operations even as viability is being assessed during the IRP. There should be no additional stress on the business after the public announcement of the IRP. The order for the moratorium during the IRP imposes a stay not just on debt recovery actions, but also any claims or expected claims from old lawsuits, or on new lawsuits, for any manner of recovery from the entity. The moratorium will be active for the period over which the IRP is active."

In distinction, the object underlying Section 138 NI Act is to promote and inculcate faith in the efficacy of the banking system and its operation, giving credibility to Negotiable Instruments in business transaction, thereby creating an element of trust and faith. The Hon'ble Supreme Court in this context, in Lafarge Aggregates and Concrete India P. Ld. v. Sukarsh Azad and Ors., (2014) 13 SCC 779 has held, "The object of bringing Sections 138 to 142 of the Negotiable Instruments Act on statute appears to be to inculcate faith in the efficacy of banking operations and credibility in transacting business of negotiable instruments. Despite several remedy, Section 138 of the Act is intended to prevent dishonesty on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in his account maintained by him in a bank and induces the payee or holder in due course to act upon it." Similarly, in M/s. Meters and Instruments Private Limited v. Kanchan Mehta, (2018) 1 SCC 560, the Hon'ble Supreme Court observed that the object of introducing Section 138 and other provisions of Chapter XVII in the NI Act was to enhance the acceptability of cheques in settlement of liabilities. Considering several previous case laws, the Hon'ble Supreme Court further observed, "Dishonour of cheque causes incalculable loss, injury and inconvenience to the payee and credibility of business transactions suffers a setback. [Goa Plast (P) Ltd. v. Chico Ursula D'Souza, (2004) 2 SCC 235]....The intention of the provision was to ensure that the complainant received the amount of cheque by way of compensation...The object of the provision is not merely penal but to make the accused honour the negotiable instruments. [Lafarge Aggregates & Concrete India (P) Ltd. v. Sukarsh Azad, (2014) 13 SCC 779]"

Reading in conjunction, the scope of the two aforesaid provisions and the judgment of the Hon'ble Supreme Court, the obvious question that comes to one's mind that where an option of compounding is provided for the offence under Section 138 NI Act by submission of the specified amount, even at the stage of summons, would payment of such an amount not effectively increase the stress of a Corporate Debtor during the continuation of insolvency resolution process? Also, whether it is correct to say that proceeding under Section 138 NI Act are criminal in nature, especially when the Hon'ble Supreme Court suggests otherwise? As can be seen from above, the object of moratorium is to put in place, an environment of a "calm period" with a definite time of closure of the resolution process. However, under such situation, considering the proceedings under Section 138 NI Act as purely criminal in nature and continuing with the trial would certainly have an effect of causing turbulence in the "calm period". No doubt the proceedings under Section 138 NI Act are not recovery suits, however, considering the object of Section 14 IBC in conjunction with the fact that an option of removing funds from Company (Corporate Debtor), either as fine or specified amount for compounding, exists if such trials are permitted to continue, the mechanical reasoning of Hon'ble NCLAT in Shah Brothers Ispat Pvt. Ltd. v. P. Mohanraj & Ors. does not seem to be quite convincing. A larger question that still needs to be considered is whether the meaning of word 'proceedings' under Section 14 IBC would exclude all criminal proceedings against a Corporate Debtor, when in such cases the only punishment which may be imposed on a 'company' is that of fine (Standard Chartered Bank and Others v. Directorate of Enforcement and Others, (2005) 4 SCC 530 and Iridium India Telecom Limited v. Motorola Incorporated and Others, (2011) 1 SCC 74). Certainly, all such questions have to be decided by the Hon'ble Supreme Court in times to come.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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