The Supreme Court ruled that the Moratorium order under Section 14 IBC bars parallel proceedings against Corporate Debtors under Section 138 of Negotiable Instruments Act.
The National Company Law Tribunal (NCLT), Chennai had initiated Corporate Insolvency Resolution Process (CIRP) against Diamond Engineering Chennai Limited (Corporate Debtor) on June 6, 2017 on a petition by Shah Brothers Ispat Private Limited (Respondents in Supreme Court) and moratorium was imposed.
Shah Brothers Ispat Private Limited (respondents in Supreme Court) had earlier filed a complaint under Section 138 before the Metropolitan Magistrate Court, Kurla Mumbai against the appellants P Mohanraj and others (Appellants/Directors of Corporate Debtor). It was filed prior to the initiation of CIRP against the Corporate Debtor. Another complaint under Section 138 of NI Act was also filed after June 6, 2017, i.e. after the order of moratorium.
The Appellant-Directors moved the NCLT and argued that during the period of moratorium, petition under Section 138 of NI Act was not maintainable.
The NCLT directed Shah Brothers to withdraw the complaint under Section 138 of NI Act treating it as a proceeding filed after order of moratorium with observation that such action amounts to misuse of the process of law.
Shah Brothers appealed to the NCLAT against the NCLT order. The question before the NCLAT was whether the order of moratorium will cover a criminal proceeding under Section 138 of NI Act.
The NCLAT ruled that Section 138 is a penal provision, which empowers the court of competent jurisdiction to pass order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim.
The three judge bench of Justices Rohinton Nariman, Navin Sinha and KM Joseph ruled that when an order of moratorium is passed under the Insolvency and Bankruptcy Code (IBC), parallel proceedings under Section 138 of the Negotiable Instruments Act (NI Act) against the Corporate Debtor cannot be allowed to continue as the same will be covered by the bar under Section 14 of the IBC.
As per Section 14(1)(a) of IBC provides that when an order declaring moratorium is passed, the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel will be prohibited.
The Court held that the sweep of Section 14 of IBC is “very wide indeed as it includes institution, continuation, judgment and execution of suits and proceedings”.
“It is important to note that an award of an arbitration panel or an order of an authority is also included. This being the case, it would be incongruous to hold that the expression “the institution of suits or continuation of pending suits” must be read disjunctively as otherwise, the institution of arbitral proceedings and proceedings before authorities cannot be subsumed within the expression institution of “suits” which are proceedings in civil courts instituted by a plaint,” the judgment said.
The court in its judgment also went on to describe Section 138 proceedings as “civil sheep” in a “criminal wolf’s clothing, “It is clear that a Section 138 proceeding can be said to be a “civil sheep” in a “criminal wolf’s” 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 a court in cheque bouncing cases,” the Court opined.
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