A three-member bench of the Apex Court, in a landmark judgment dated 1st March 2021, unequivocally and comprehensively ruled that Continuation/ Institution of “Proceedings “ under S 138/S 141 of the NI Act, shall be covered under the relief of the moratorium offered by S 14(1) (a) of the IBC. In other words, during the pendency of a CIRP process under IBC, such proceedings can neither be instituted nor continued against the Corporate Debtor who may have allegedly committed the offense of cheque dishonour as envisaged by the provisions said S 138/141 of the Ni Act cited supra
But somewhat paradoxically, and in the same breath, the judgment also held that this relief under S 14(1) (a) will not apply to the “natural persons “ in charge of the affairs of the Co ( MD/Director /Manager, etc) but will only apply to the corporate entity or the artificial juristic person the natural persons manage . In their order on a series of Criminal Appeals and even Art 32 petitions filed by the affected directors,(that were tagged with the main SLP), this Hon’ble Bench allowed the relief to the corporate entity but ruled that the S 138/141 proceedings continue against the directors, This article concentrates only this second limb of the judgment.
11.11.2016 Cheques issued to respondent
03.03.2017 Cheques dishonoured
21.03.2017 Issued Demand Notice U/s 8 of IBC
06.06.2017 CIRP of the corporate Debtor ( CD) M/s. Diamond Engineering Pvt. Ltd. initiated
31.03.2017 Issue statutory demand notice under Section 138 read with Section 141 of the NI Act, 1881
28.04.2017two cheques presented by the respondent for encashment were returned
dishonoured for the reason “funds insufficient”
05.05.2017 Second demand notice u/s 138
17.05.2017 &21.06.2017:Two criminal complaints under Section 138 read with Section 141 of the NI Act before the Additional Chief Metropolitan Magistrate
12.02.2018 Issued summons
24.05.2018AA ( NCLT) stayed further proceedings in the two criminal complaints pending before the ACMM
.In an appeal filed to the NCLAT, the NCLAT set aside this NCLT order, 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, & does not qualify for the relief of the moratorium stipulated vide S 14(1)(a) of the IBC.
The NCLAT orders led to the appeals and SLPs before the Apex Court
S 138 allows a criminal complaint to be filed against the accused ( allegedly guilty of causing the cheque dishonour ) , if the ingredients of S 138 are satisfied and the procedure prescribed therein are followed .
Punishment as per S 138 of the NI Act :
If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.
However, the natural persons in charge of the management of the company may escape punishment /conviction if he can prove that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.
The Hon’ble Bench has declared that Continuation/ Institution of “Proceedings “ under S 138/S 141 of the NI Act, shall be covered under the relief of the moratorium offered by S 14(1) (a) of the IBC. In other words, during the pendency of a CIRP process under IBC. Simultaneously, the judgment also held that this relief under S 14(1) (a) will not apply to the “natural persons “ in charge of the affairs of the Co ( MD/Director /Manager, etc) but will only apply to the corporate entity or the artificial juristic person the natural persons manage. The proceedings under S 138/142 can continue against the natural persons.
Para 77 of the judgment discusses whether natural persons can be included in the scope of the moratorium offered under S 14 of the IBC, and answers the question in the negative. No reasoning seems to have been given in the para for arriving at the same conclusion, except that there cannot be any proceeding against the corporate debtor per se ( the corporate entity ) in the moratorium period, due to the play of S 14 of IBC. In other words, this para of the judgment seems to be implying that since proceedings cannot continue against the Corporate entity, (but ostensibly must still continue against someone), to mete out punishment by the wheels of justice for the offence where its commission is not in dispute) , by default, the recipient of the inescapable punishment must the natural persons in question, in the absence of any other recipient. This inference becomes evident by the following extract from the said para 77 cited supra “….Thus, for the period of moratorium, since no Section 138/141 proceeding can continue or be initiated against the corporate debtor because of a statutory bar, such proceedings can be initiated or continued against the persons mentioned in Section 141(1) and (2) of the Negotiable Instruments Act. This being the case, it is clear that the moratorium provision contained in Section 14 of the IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141 continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act….”
The above-cited rationale in para 77 seems to contradict, rather than draw support from, the earlier SC judgment in the case of Aneeta Hada vs Godfather Travels & Tours -Manu /SC/0335/2012, which has been extensively quoted and relied upon in para 77 supra of this judgment. This is because the short point in the ratio decidendi of Aneeta Hada is that, impleadment of the Company is a sine qua non or a condition precedent, for the indictment of the natural persons in charge of the Company. They cannot be delinked as respondents. This is evident from para 43 of Aneeta Hada “ …..In view of our aforesaid analysis, we arrive at the irresistible conclusion that for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative. The other categories of offenders can only be brought in the dragnet on the touchstone of vicarious liability as the same has been stipulated in the provision itself. ……”
In this current judgment, on the other hand, S 141 proceedings against the Corporate entity have been delinked from the proceedings against the natural persons in charge of the Company. Proceedings against the former are eligible for the relief of moratorium per S 14 of IBC but not the proceedings against the latter
The potential incongruous situations that may arise , can be best illustrated with an example as below
XYZ Pvt Ltd, as Corporate Debtor, bounced a cheque of Rs 1 Cr signed by its MD Mr. X. S 138/141 proceedings commenced against both XYZ Ltd and Mr. X . Thereafter, during the pendency of proceedings, CIRP commenced against XYZ Ltd, as AA admitted the CIRP application by a creditor
What May now happen as Per the Ratio Decidendi of the subject SC Judgment
Since many more questions like this may arise before lower Courts creating a web of confusion, it may be useful if the Hon’ble SC reviews its judgment and provides adequate clarifications to pre-empt and prevent misuse of its judgment and unintended miscarriage of justice.
Shouvik K Roy is an Advocate, CA, IP, Finance Tax & Legal Consultant
Support our journalism by subscribing to Taxscan AdFree. We welcome your comments at info@taxscan.in
