Supreme Court: Quashing of Proceedings Under Section 138 of Negotiable Instruments Act, 1881
Supreme Court: Quashing of Proceedings Under Section 138 of Negotiable Instruments Act, 1881 Against Director For Lack Of Cause Of Action Before Issue Of Moratorium Under Ibc, 2016 Vishnoo Mittal V. M/S Shakti Trading Company (Arising Out Of Slp (Crl) No. 1104 Of 2022)
The Supreme Court in the judgment titled Vishnoo Mittal V. M/s Shakti Trading Company had set aside an impugned order passed by the Punjab and Haryana High Court wherein a petition under Section 482 of CrPC was filed by the Appellant seeking to quash proceedings under Section 138 of the Negotiable Instrument Act, 1881 (the “NI Act”) and the consequential summoning order dated 07.09.2018, which were dismissed by the High Court.
Factual Background:
The Appellant was director of M/s Xalta Foods and Beverages Pvt. Ltd. (i.e the “Corporate Debtor”). The Appellant during his business engagement with M/s Shakti Trading Company (i.e the “Respondent”) had drawn 11 cheques in favour of the respondent, in capacity of director of the Corporate Debtor. All the cheques upon presentation were dishonoured and legal proceedings were initiated under Section 138 NI Act, a demand notice was issued to the Appellant and thereafter a complaint was filed before the appropriate court against the Appellant in September 2018 for failure to remit the amount to the respondent after issue of demand notice.
Simultaneously, separate proceedings emanating from insolvency process were initiated against the Corporate Debtor before the NCLT. A moratorium under Section 14 of the Insolvency and the Bankruptcy code, 2016 (IBC) was issued and Interim Resolution Professional (IRP) was appointed on 25.07.2018.
However, the demand notice under Section 138 NI Act was issued to the Appellant after imposition of the moratorium against the Corporate Debtor. Consequently, summons were issued to the Appellant by the appropriate court in September 2018 to proceed with the complaint under Section 138 of NI Act.
A quashing petition filed by the Appellant against the summoning order was dismissed by the High Court of Punjab and Haryana, wherein the court declined to set aside the proceedings under Section 138 NI Act.
Issue:
- When does the cause of Action to initiate complaint under the offence of Section 138 NI Act arise?
- Whether proceedings initiated under Section 138 NI Act could be quashed after moratorium is imposed and operational under Section 14 of the IBC arising from the insolvency proceedings, when the cause of action to file complaint under Section 138 NI Act arises after the imposition of moratorium?
- Whether proceedings under section 138 NI Act can be initiated and continued against natural person during imposition of the moratorium, in view of the immunity being granted to only the Corporate Debtor under Section 14 of the IBC?
Observations:
The Supreme Court delved into and decided upon the following aspects of the matter:-
- It was held that the cause of action under Section 138 of NI Act arose after commencement of insolvency process against the Corporate Debtor, since the demand notice under NI Act was issued to the Appellant after the imposition of moratorium under the IBC i.e after 25.07.2018.
- It was further elaborated that mere “return of the cheques dishonoured simplicitor does not create the offence under Section 138 of NI Act, clarifying that cause of action arises only when “demand notice is served and payment is not made pursuant to such demand notice within the stipulated fifteen-day (15) period”
- The ingredients of offence of Section 138 NI Act, laid down in Jugnesh Sehgal v. Shamsher Singh Gogi (2009) 14 SCC 68 were also elaborated upon by the Hon’ble court to further clarify the aspect of cause of action and when it arises.
- The High Court, while dismissing the quashing petition of the Appellant had relied upon Mohan Raj V. M/s Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258 as per which the immunity granted on issue of moratorium under Section 14 of IBC can be obtained by the Corporate Debtor and not by a “natural person”, who in the present case is the appellant. The view that proceedings under Section 138 NI Act could still be initiated against the natural person (i.e the Appellant) pursuant to bar on proceedings against the Corporate Debtor after issue of moratorium was negated by the Supreme Court.
- The Supreme Court held High Court’s reliance on P. Mohan Raj case to be erroneous due to factual difference vis-à-vis the occurrence of cause of action under Section 138 NI Act. While in P. Mohan Raj, the cause of action had arisen prior to the issue of moratorium, in the instant case, the cause of action (i.e issue of demand notice and non-payment of dues thereafter) arose after commencement of moratorium.
- The incapacity of the appellant (as the director of Corporate Debtor) to fulfil the demand raised on issue of demand notice under Section 138 of NI Act was also considered, since the IRP after his appointment on 25.07.2018 was conferred with powers that were previously vested in the board of directors of Corporate Debtor. As a result, the appellant as on the date of receipt of demand notice under Section 138 NI Act was suspended from his position and all bank accounts of the Corporate Debtor were now operated under the instructions of the IRP as per Section 17 of the IBC.
Decision:
The impugned order passed by the High Court of Punjab and Haryana was overturned and set aside by the Supreme Court in favour of the Appellant.
The complaint case filed under Section 138 NI Act pending before the relevant district court and the summoning order were quashed.
Concluding Thoughts:
In a departure from its previous stance in P. Mohan Raj V. M/s Shah Brothers Ispat Pvt. Ltd., the Supreme court quashed proceedings against the Appellant, initiated against him in his personal capacity on the following grounds:-
1.Lack of cause of action under NI Act prior to the issue of moratorium;
2. Incapacity of the appellant to repay the subject amount due to appointment of IRP
The decision therefore absolved the Appellant from a potential personal penal liability had the proceedings under Section 138 of the NI Act continued against the Appellant.
While the rationale for imposition of moratorium is to safeguard the assets of the Corporate Debtor by suspending legal claims against the Corporate Debtor during such moratorium. Yet, proceedings under Section 138 NI Act have continued in the past against natural persons despite barring such proceedings on Corporate Debtor.
Section 141 sub-section (1) of Negotiable Instruments Act 1881 holds every person to be vicariously liable when such individuals are in-charge of and are responsible for the conduct of business of a company at the time of occurrence of the offence. While Section 141 sub-section (2) imposes liability when such individuals are found to have given their consent, acted in connivance or are negligent, leading to occurrence of offence under Section 138 NI Act.
The Supreme Court in a plethora of judgments has upheld personal penal liability of such directors/ signatories under Section 138 NI Act, thus the decision to exonerate the Appellant from personal liability appears to be a contradiction from its previous stance in several judgements.
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