In a recent judgment delivered by the Supreme Court of India (“Supreme Court“) in the case of P. Mohanraj & Ors. Vs. M/S Shah Brothers Ispat Pvt. Ltd1, it has been held that the declaration of a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC“) covers criminal proceedings for dishonour of cheque under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act“). In doing so, the Supreme Court has widened and settled the scope of the applicability of Section 14 of the IBC.

Brief Facts of the Case

In the present case, about fifty-one cheques issued by Diamond Engineering Pvt. Ltd (“Company“) in favour of the respondent M/S Shah Brother Ispat Pvt. Ltd. (“Respondent“) were returned dishonoured by reason of insufficient funds. As a result, the Respondent issued a statutory demand notice under Section 138 and 141 of the NI Act, calling upon the Company and its directors to pay the outstanding amounts. Thereafter, two cheques for a total amount of approximately Rupees Eighty-Lakh were returned dishonoured for insufficient funds. A second demand notice was thereby issued by the Respondent under the NI Act. Subsequently, two criminal complaints were filed by the Respondent against the Company before the Additional Chief Metropolitan Magistrate, Kurla, Mumbai (“ACMM“). Meanwhile, a statutory notice under Section 8 of the IBC had been issued by the Respondent to the Company and the Respondent had filed a Section 9 petition before the National Company Law Tribunal (“NCLT“). The application was admitted by the NCLT, directing commencement of corporate insolvency resolution process with respect to the Company and a moratorium was declared under Section 14 of the IBC. Thereafter, the NCLT stayed further proceedings in the two criminal complaints pending before the ACMM. In an appeal filed by the Respondent to the National Company Law Appellate Tribunal (“NCLAT“), the NCLAT set aside this order while holding that Section 138 being a criminal law provision, cannot be held to be a 'proceeding' within the meaning of Section 14 of the IBC. Thereafter, the NCLT approved the resolution plan as a result of which the moratorium order ceased to have effect.

Issue before the Supreme Court

The issue that arose in the appeal before the Supreme Court was whether the institution or continuation of a proceeding under Section 138 and 141 of the NI Act can be said to be covered by the moratorium provision under the IBC.


Scope of Section 14 of the IBC:

  • In deciding the scope of the provision of moratorium under Section 14 of the IBC, the Supreme Court analyses the language of the Section, stating that the sweep of the provision is very wide as it includes institution, continuation, judgment and execution of suits and proceedings within its ambit.
  • Further, what throws light on the width of the term '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 the CRPC, 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 Supreme Court further goes on to analyse whether the expression 'proceedings' can be cut down to mean civil proceedings by the use of rules of interpretation.
  • In doing so, the Supreme Court is of the view that ejusdem generis and noscitur a sociis, being rules as to the construction of statutes cannot be exalted to nullify the plain meaning of the words used in a statute if they are designedly used in a wide sense. Where a residuary phrase is used as a catch-all expression to take within its scope what may reasonably be comprehended by a provision, regard being had to its object and setting, noscitur a sociis cannot be used to colour an otherwise wide expression so as to whittle it down and stultify the object of a statutory provision.

Objective of Section 14 of the IBC:

  • The Supreme Court further discusses the objective of the provision on moratorium under the IBC and states that the objective 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 such time.
  • In view of the above, a quasi-criminal proceeding which would result in the assets of the corporate debtor being depleted as a result of having to pay compensation which can amount to twice the amount of the cheque that has bounced, 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.
  • Therefore, 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. Given this fact, it is difficult to accept that noscitur a sociis or ejusdem generis should be used to cut down the width of the expression 'proceedings' so as to make such proceedings analogous to civil suits.
  • A legal action or proceeding of any debt would, on its plain language, include a Section 138 proceeding.
  • The moratorium provision does not extinguish any liability, civil or criminal but only casts a shadow on proceedings already initiated and on proceedings to be initiated, which shadow is lifted when the moratorium period comes to an end.

Reasoning & Holding

The Supreme Court accordingly states that a Section 138 proceeding can be said to be a 'civil sheep' in a 'criminal wolfs' 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 the court in cheque bouncing cases. Further, the Supreme Court clarifies that the moratorium provision would apply only to the corporate debtor and that the statutory liability of the natural persons mentioned in Section 141 of the NI Act i.e. the persons in charge of the conduct of the business of the corporate debtor shall continue to be applicable.

The implication of this judgement is that the criminal proceedings against cheque bouncing under Section 138 of the NI Act shall remain stayed against the company during the period of moratorium applicable to insolvency proceedings of any company. It is however pertinent to note that the proceedings would continue against the directors and other officials of the company who are made accused in cheque bouncing proceedings.


1 Civil Appeal No.10355 OF 2018

Originally Published by Obhan & Associates, March 2021

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