India: Insolvency And Bankruptcy Code, 2016 - Proceedings Under 138/141 Of NI Act Would Amount To Admission Of Debt

Last Updated: 21 November 2018
Article by AMLEGALS  

IN NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI
Sudhi Sachdev  v. Appl Industries Ltd.
[Company Appeal (AT) (Insolvency) No. 623 of 2018]
dated: 13.11.2018

FACTS

The Appellant is a Promoter of 'M/s Auto Décor Pvt. Ltd.' who is the Corporate Debtor.

The Honorable National Company Law Tribunal [NCLT] - New Delhi Bench, by an order dated 2nd August, 2018, admitted an application under Section 9 of I&B Code preferred by the Respondent – 'APPL Industries Ltd.' (Operational Creditor), and also passed an order of moratorium.

The Appellant's contention was that there was an existence of a dispute as the Respondent had already instituted cases under Section 138/141 of Negotiable Instruments Act, 1881.

These cases were pending in the court of Metropolitan Magistrate, Gurgaon and during the proceeding, the Corporate Debtor had already paid Rs. 31,85,525/-, reducing the outstanding balance to Rs. 34,25,251/-.

ISSUES BEFORE NCLAT

The issue for consideration before the Honorable NCLAT in the instant appeal was that whether an application under Section 9 of I&B Code is maintainable during pendency of proceeding under Section 138 of Negotiable Instruments Act, 1881.

OBSERVATION

NCLAT reasoned by reiterating the principle propounded in Innoventive Industries Ltd. Vs. ICICI Bank and Ors. (2018)1 SCC 407, that:

"29. The scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. Under Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand notice or copy of the invoice mentioned in sub-section (1), bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre-existing – i.e. before such notice or invoice was received by the corporate debtor. The moment there is existence of such a dispute, the operational creditor gets out of the clutches of the Code."

In the present case, the Appellant had taken the guise of proceedings under Section 138/141 of the Negotiable Instruments Act as 'dispute' under Section 8 and hence, requested for the rejection of the Section 9 application of the Operational Creditor.

CONCLUDING VIEW

The Appellant's contention was as follows:

"......proceeding under Section 138 is really a civil case of recovery of the money as per Supreme Court's judgement in R. Vijayan vs. Baby and Anr. (2012) 1 SCC 260, and thus, in view of the pendency of such case, application under section 9 of I&B Code is not maintainable"

While dismissing the above contention and consequently the appeal, the NCLAT held that:

"......The pendency of the case under Section 138/141 of the Negotiable Instruments Act, 1881, even if accepted as recovery proceeding, it cannot be held to be a dispute pending before a court of law. Thereby we hold that the pendency of the case under Section 138/441 of Negotiable Instruments Act, 1881 actually amounts to admission of debt and not an existence of dispute."

AMLEGALS REMARKS

The NCLAT has held that such pendency of proceedings under NI Act, cannot be considered as an existence of a dispute with respect to the IBC proceedings.

However, the bone of contention would be the following part in the judgment that can create confusion for future cases:

"Thereby we hold that the pendency of the case under Section 138/441 of Negotiable Instruments Act, 1881 actually amounts to admission of debt......"

The aforesaid finding of Honorable NCLAT is giving out an altogether a different meaning and interpretation that as soon as the proceedings are initiated under Section 138/141, it would make the debt (or the allegation of debt) admissible and hence, proceedings under Section 9 of the Code can be admitted.

AMLEGALS with due respect to the order must reiterate the trite law that a proceeding under Section 138 per se is not an admissibility of a debt but various elementary aspects need to be satisfied first even under Section 138 to the effect that there was a real transaction, liability was there, etc., as mere cheque bounce does not create a liability unless all the sine qua non are established beyond the shadow of a doubt that there was a payment that was required to be made from one party to another and only then the proceedings under Section 138/141 could succeed.

The interpretation preferred by the NCLAT could create havoc as every person who has proceedings pending under Section 138/141 would now approach the NCLT and get its application admitted by taking this case as the governing precedence towards "all disputed amount suo motu converted to an admitted zone".

We are afraid that till it is revised, reversed or modified it would create a confusing precedence for future litigations.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Reade should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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