MORATORIUM UNDER IBC AND CHAPTER XVII OF NIA: A PROLONGED TUSSLE

[By Nimisha Sharma and Uddhav Tiwari]

The authors are students at the National Law Institute University, Bhopal.

INTRODUCTION

Moratorium under Insolvency and Bankruptcy Code, 2016 (“IBC”) has been subjected to multiple legislative amendments and judicial enhancements.  Recently, the Hon’ble Supreme Court (“SC”) in P. Mohanraj & Others v. M/s. Shah Brothers Ispat Pvt. Ltd.[i] solved the conundrum about the applicability of moratorium under §14 of IBC to proceedings under §138/141 of Negotiable Instruments Act, 1881 (“NIA”).

FACTUAL BACKGROUND

The respondent filed two criminal complaints against the corporate debtor (“CD”) and its three directors (appellants) under §138 read with §141 of NIA. Meanwhile, an application under §9 of IBC was allowed by the Adjudicating Authority (“AA”), which resulted in the initiation of the Corporate Insolvency Resolution Process (“CIRP”) and imposition of moratorium upon the CD. The AA stayed further proceedings under the pending criminal complaints. The National Company Law Appellate Tribunal (“NCLAT”) reversed the order of AA and held that §138 of NIA, being a criminal law provision, cannot be held to be a proceeding within the meaning of §14 of IBC.

The sole issue that arose in this matter was whether the initiation or continuation of a proceeding under §138/141 of NIA would be covered by the moratorium provision.

OBSERVATIONS AND REASONING

The analysis given by the court can be summarised under the following heads:

Interpretation of Section 14 – Noticeably, the expression “or” occurs twice in the first part of §14(1)(a) – first, between the expressions “institution of suits” and “continuation of pending suits” and second, between the expressions “continuation of pending suits” and “proceedings against the corporate debtor…”.

The usage of the word “or” before the word “proceedings” by the legislature makes its intention clear regarding the treatment of “institution of suits or continuation of pending suits” and “proceedings against the corporate debtor” as distinct categories. The word “proceedings” under §14(1)(a) is ‘all-inclusive’ on account of the usage of expressions such as “any judgment, decree or order” and “any court of law, tribunal, arbitration panel, or other authority”. The proceeding under §138 of NIA, being criminal in nature and conducted as per the mandate under §6 of CrPC, is a ‘proceeding’ in a court of law regarding transactions inclusive of debts owed by CD. [ii]

The object sought to be achieved by §14 of the IBC is to see that there is no depletion of CD’s assets during the CIRP so that it can be kept running as a going concern during this time, thus maximizing value for all stakeholders.[iii] The same has been reiterated in Swiss Ribbons (P) Ltd. v. Union of India.[iv]

Considering this objective, a ‘proceeding’ under §138 of NIA would adversely affect the assets of CD, because the defaulter would have to compensate for the ‘institution, continuation or execution of a decree in a civil suit for recovery of debt or any other liability. Thereby, making the protection granted to CD under §14(1)(a) and (b) futile and affecting the object of §14 which enables the CD to rehabilitate itself as a going concern.

Application of the Noscitur A Sociis Rule of Interpretation and ejusdem generis – The Noscitur A Sociis and ejusdem generis, being rules as to the construction of statutes, cannot be applied to restrain the ambit of expressions if they are specifically designed to provide a wide sense. Importantly, in the event where a residuary phrase is used as a catch-all expression to subsume within it the reasonable comprehension of the provision, regard has to be sort to its object and setting. These rules should be used cautiously and should not color an otherwise wide expression, which trammels and frustrate the object of a statutory provision.

The objective of Section 14

Section 14 and other moratorium provisions in IBC – When the language of §81, 85, 96, and 101 of IBC are juxtaposed against the language of §14, it is conspicuous that the scope of §14 is wider.

The protection of moratorium through §85 of IBC is only in respect of ‘debts’, whereas the moratorium in §14 is in respect of ‘transactions’, being provided by §14(3)(a). The word “transaction” is a broader concept than “debt”, and inclusive of it. With the exclusion of the word “legal” as a prefix to “proceedings” in §14(1)(a) as used in the moratorium provisions qua individuals and firms, the intention of the legislature is quite clear. §138 is a legal proceeding “in respect of” a debt. “In respect of” is a phrase that is wide and includes anything done directly or indirectly.[v]Thereby, attracting application of §138 of NIA in a legal proceeding regarding any debt and allowing any indirect legal proceeding relating to debt. Also, the moratorium under §14 provides protection to the CD against the transactions mentioned in clauses (a) to (d), inclusive of transactions relating to debts, as are contained in §81, 85, 96, and 101.

The interplay between Section 14 and 32A of IBC – Referring to the recent judgment of SC in Manish Kumar v. Union of India[vi] and the ILC Report of February 2020,[vii] the court observed that §32A and 14(1)(a) are independent of each other. §32A primarily aims at extinguishment of criminal liability of the CD, from the date of approval of resolution plan by the AA, in order to give a fresh start to the CD. Declaration of moratorium under §14 just casts a shadow on the proceedings that have already been initiated, which could be resuscitated once the moratorium period comes to an end. It was further observed that the expression “proceedings” under §32A(1) refers to criminal proceedings filed through a First Information Report or complaint filed by investigating authority and not to complaints filed by private persons. If the quasi-criminal proceedings such as those under §138/141 of NIA are initiated against CD, they would defeat the object of imposition of the moratorium and the object of §32A, barring all criminal proceedings against the CD.

Nature of proceedings under Section 138/141 of NIA – The court observed that though §138 of NIA is deemed to be a criminal offense due to the punishment imposed, it is a hybrid provision as its ultimate objective is to compensate the victim and not to penalize the wrongdoer. Apart from that, the civil law principles like the preponderance of probability and strict liability are attached with the offense, instead of the criminal law principles of beyond reasonable doubt and mens rea. It is evidenced by §142 and the further amendments under the chapter that the legislature has consistently departed from the procedure under CrPC.

Relying upon the decision of the SC in CIT v. Ishwarlal Bhagwandas[viii], the court observed that the involvement of larger interest of the state is a sine qua non for criminal proceedings. Thus, the court concluded that §138/141 proceedings can be said to be a “civil sheep in a criminal’s wolf’s clothing” as its ultimate objective is to protect the interests of the victim, under whom the interest of the state vests. Finally, after the analysis of Chapter XVII of NIA, it was held by the court that the proceedings under this chapter are ‘quasi-criminal’ in nature and given the object and context of §14 of IBC, would amount to “proceeding” under §14(1)(a), and the provisions of the moratorium will be attached to it.

Applicability of Section 14 to natural persons – Relying upon the decision of SC in Aneeta Hada v. Godfather Travels and Tours (P) Ltd.,[ix] the court observed that the proceedings under §138/141 of NIA cannot be continued or initiated against the directors/persons in management or control of the CD, without the CD. The language of §141 of NIA clearly speaks of both the company as well as the persons in charge of and responsible for the business of the company. Since the moratorium under §14 squarely includes the CD, §138/141 proceedings cannot be instituted or continued against the CD. The moratorium provisions won’t be applicable to natural persons mentioned under §141 of NIA and hence, they would continue to be statutorily liable under Chapter XVII of NIA.

JUDGMENT

Disagreeing with the views passed by the Bombay and Calcutta High Court in Tayal Cotton Pvt. Ltd. v. State of Maharashtra[x] and M/s MBL Infrastructure Ltd. v. Manik Chand Somani[xi] respectively, this court held that proceedings under §138/141 of NIA against the CD is covered by §14 of IBC. As the moratorium period came to end, the court held that proceedings would now continue both against the company and the appellants.

ANALYSIS AND CONCLUSION

Though broadly the present judgment seems to be based on sound logic and principles of law authors hold an alternate perspective regarding the issue. As laid down in a number of judgments, §138 is a penal provision[xii] that empowers the court of competent jurisdiction to pass an order of imprisonment or fine. Since a company cannot be ordered to be imprisoned,[xiii] therefore punishment of imprisonment would be excluded for CD. Further, it was held that the fine cannot be regarded as a proceeding or any judgment or decree of money claim.[xiv] Therefore, a fine would not be imposed as a money claim against the CD, but an order of imprisonment can be issued against the Directors since they do not come within the ambit of §14.

In addition, §14 of IBC has four dimensions. Each of them talks about commercial aspects as a whole. There is no mention of penal actions such as fines and/or imprisonment. Hence, the protection granted under §14 is purely commercial in nature.

In furtherance of this, the authors believe that there is another facet of the coin which hasn’t been sufficiently addressed by the court. It is regarding the position of directors who can still be held personally liable for the cheque issued by the company, as the moratorium affects only the CD. The SC has reiterated in a number of cases[xv] about the option of paying reasonable compensation to the cheque holder by compromise, putting an end to the proceedings under Section 138. But this option gets suspended, once a moratorium is imposed, which halts all the proceedings against the CD. The management of the company gets suspended and the affairs of the company are managed by the IRP/RP thereof, thus the directors will be personally liable to face the proceedings for the cheque bounced.

Allowing these proceedings against the directors, the promoters/directors would be hung out to dry. Even if the directors honor these as personal guarantors, they cannot recover it back from the CD, because the right of recovery is extinguished by moratorium under Section 14 of the code.

[i] 2021 SCC OnLine SC 152.

[ii] Id at para 14.

[iii] Para 8.2, The Report of the Insolvency Law Committee of February 2020.

[iv] (2019) 4 SCC 17.

[v] Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., (at page 709) and Giriraj Garg v. Coal India Ltd., (2019) 5 SCC 192 (at pages 202-203).

[vi] 2021 SCC OnLine SC 30.

[vii] The Report of the Insolvency Law Committee of February 2020.

[viii] AIR 1965 SC 1818.

[ix] (2012) 5 SCC 661.

[x] 2018 SCC OnLine Bom 2069.

[xi] CRR 3456/2018 (Calcutta High Court, decided on 16.04.2019).

[xii] NEPC Micon Ltd. v. Magma Leasing Ltd., (1999) 4 SCC 253.

[xiii] Carew and Company Ltd. v. Union of India (UOI), (1980) 1 SCC 470.

[xiv] Ajay Kumar Bishnoi v.Tap Engineering, 2020 (2) CTC 190.

[xv] Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560; Damodar S. Prabhu v. Sayed Babalal H., (2010) 5 SCC 663.

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