Parul Chutani

Summary:

This article is a critical analysis of the recent judgment of NCLAT i.e., in the matter of Shah Brothers Ispat Pvt. Ltd. Vs. P. Mohanraj & Ors.-Company Appeal (AT) (Insolvency) No. 61 of 2018 wherein it has been held that moratorium will not be applicable to action under section 138 of the Negotiable Instruments Act, 1881.

Moratorium: Not Applicable to action under Section 138 of Negotiable Instruments Act, 1881

Introduction:

The present article discusses the applicability of moratorium to action taken under section 138 of the Negotiable Instruments Act, 1881. The issue of applicability of moratorium has finally been settled by NCLAT in the matter of Shah Brothers Ispat Pvt. Ltd. Vs. P. Mohanraj & Ors.-Company Appeal (AT) (Insolvency) No. 61 of 2018[1] delivered on 31st July, 2018. However, it is subject to challenge as there are certain observations been made considering the recent judgments of Hon’ble Supreme Court and High Courts. Apart from critically examining the judgment, an attempt has also been made to understand the possible implications of it.

Purview of Moratorium-Limited:

The issue of applicability of moratorium to action taken under section 138 of Negotiable Instruments Act, 1881 i.e., dishonor of Cheque has finally been settled in the recent judgment of NCLAT in the matter of Shah Brothers Ispat Pvt. Ltd. Vs. P. Mohanraj & Ors.-Company Appeal (AT) (Insolvency) No. 61 of 2018 wherein NCLAT by reversing the order of NCLT, Chennai Bench, held that moratorium will not extend to proceedings under section 138 of Negotiable Instruments Act, 1881.

Observations of NCLAT:

  • All proceedings which are criminal in nature are outside the purview of Moratorium.
  • The proceedings under section 138 are criminal in nature (penal provision). Further, it has taken a view that action taken under section 138 of the NI Act, 1881 is not a proceeding or judgment or decree of money claim. Therefore, it is not covered within the purview of section 14 (Moratorium) of the Insolvency & Bankruptcy Code, 2016.

Nature of proceedings under Section 138 of the Negotiable Instruments Act, 1881

The observation of NCLAT is that, the proceedings under section 138 of the Negotiable Instruments Act, 1881 are criminal in nature and therefore, moratorium cannot be made applicable to such proceedings. However, we must understand first the nature of proceedings under section 138 of the NI Act, 1881.

The offence under section 138 is not a natural crime like hurt or murder. It is an offence created by legal fiction in the statute. It is a civil liability transformed into a criminal liability, under restricted conditions by way of an amendment to the NI Act, 1881. It is also stated in the matter of Bhujanpura Cooperative Urban Thrift and Credit Society Ltd. Vs. Sushil Kumar (2014) that proceedings under section 138 of NI Act, 1881 primarily is of quasi-civil and criminal in nature.

In a remarkable judgment passed by the Delhi High Court in the matter of Dayawati v. Yogesh Kumar Gosain (2017), distinction has been drawn between traditional criminal cases and offence under Section 138 of Negotiable Instruments Act, 1881 and while distinguishing the two it has placed reliance upon the observation made by Supreme Court- in Damodar S. Prabhu Vs. Sayed Babalal (2010) 5 SCC 663 wherein it has been stated that the provision is really in the nature of a civil wrong which has been given criminal overtones as the complainant’s interest lies primarily in recovering the money rather than seeing the drawer of the cheque in jail. The threat of jail is only a mode to ensure recovery.

In another Landmark judgment passed by Hon’ble Supreme Court in the matter of: M/s Meters and Instruments Pvt. Ltd. & Anr. Vs. Kanchan Mehta (2017), wherein, certain observations on section 138 of NI Act were made:

  • The offence under section 138 is primarily a civil wrong.
  • The object of the provision is primarily compensatory and punitive element is mainly with the object of enforcing compensatory element.

Therefore, proceedings under section 138 of the NI Act, 1881 are special in nature, in the sense that, these are primarily civil in nature, transformed into criminal with the intent to provide the complainant the amount of cheque i.e., nothing but recovery of money by way of compensation.

However, NCLAT failed to consider the above views and observations made by Hon’ble Supreme Court and various High Courts in respect of the nature of proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881.

Implications of the decision: Pros and Cons:

It will surely prevent the misuse of Section 10 of the Insolvency & Bankruptcy Code, 2016. As chances are that once section 138 proceedings will be included within the purview of the moratorium it will certainly incentivize the corporates to file an application under section 10 of the Code for initiation of insolvency proceedings in order to protect themselves from the initiation of action being taken against them under Section 138 of the Negotiable Instruments Act, 1881. However, the protection will only be for a limited period i.e., 180 days from the date of appointment of Interim Resolution Professional which can further be extended to 90 days and therefore, such misuse is least likely to happen.

The very object of section 14 of the Insolvency & Bankruptcy Code, 2016 is not to stress the assets of Corporate Debtor. The period of moratorium also referred to as a “clam-period” which is intended to provide creditors and debtors time to negotiate the viability of the entity. In the calm period a regulated insolvency professional controls the assets under the supervision of an adjudicating authority. The regulated insolvency professional manages the entity. During insolvency resolution, there is a time bound moratorium against debt recovery actions and any new cases filed. During bankruptcy resolution, the assets are in a trust managed by a regulated insolvency professional. This helps assure creditors and debtor that assets are protected while they negotiate for a viable resolution plan.[2] Therefore, by allowing the initiation of action under section 138 of the Negotiable Instruments Act, 1881 which is nothing but proceeding for recovery of money, the whole purpose of the code will be defeated.

Conclusion:

The present position of law in respect of applicability of moratorium to action taken under Section 138 of the NI Act is that moratorium will not be applicable to proceedings under section 138 of the Act and therefore, those cases which are pending before the admission of application under section 7, 9 or 10 of the Code i.e., before the initiation of insolvency process will not be affected by the moratorium. Further, an action under section 138 of the NI Act, 1881 can be initiated even after the commencement of insolvency process. Albeit, section 14 of the Insolvency & Bankruptcy Code, 2016 does not specifically cover the proceedings under section 138 (dishonour of cheque), the intent of the provision is to cover all such proceedings which are in the nature of recovery of money and to ensure that during this period there is no additional stress on the assets of the corporate debtor. It cannot be denied that the umbrella of moratorium is not wide enough to include criminal proceedings but the proceedings initiated under Section 138 of the NI Act, 1881, which is primarily civil and quasi criminal in nature and the primary object of the provision is nothing but recovery of money. Therefore, it would be completely incorrect to say that action taken under section 138 of the Negotiable Instruments Act, 1881 is criminal in nature. Further, not covering the actions taken under section 138 of NI Act, 1881 within the purview of moratorium is likely to defeat the purpose of moratorium as well as the Insolvency and Bankruptcy Code

[1] Available at www.nclat.nic.in

[2] The report of the Bankruptcy Law Reforms Committee Volume I (November 2015)

(Author is Research Associate at Insolvency and Bankruptcy Board of India)

More Under Corporate Law

One Comment

  1. Subramanian Natarajan says:

    To presume that a borrower would go under section 10 of I&B Code is far fetched since recent proceedings indicate a slow but definite death for criminally inclined borrowers. Not many cases have come under section 10 unless the judge was impressed with the genuineness of the borrower. Can we justify non action under Section 138 of Negotiable instrments act. So, the presumption that a simple threat under the said section can’t even save any lender is not logical.

Leave a Comment

Your email address will not be published. Required fields are marked *