The Supreme Court ruled that proceedings under section 138 or 141 of Insolvency and Bankruptcy Code against Directors can not be initiated or continued without the corporate debtor
Steel products were supplied by the respondent, M/s Shah Brothers Ispat to one M/s. Diamond Engineering Pvt. Ltd. as a result of which INR 24,20,91,054 was due and payable by the company. As many as 51 cheques were issued by the company in favor of the respondent towards amounts payable for supplies, all of which were returned dishonored for the reason “funds insufficient”.
As a result the respondent issued a statutory demand notice under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, calling upon the company and its three Directors to pay this amount within 15 days of the receipt of the notice.
Since no payment was forthcoming pursuant to the two statutory demand notices, two criminal complaints, being Criminal Complaint were filed by the respondent against the company and the appellants under Section 138 read with Section 141 of the Negotiable Instruments Act before the Additional Chief Metropolitan Magistrate (ACMM), Kurla, Mumbai. Summons were issued by the ACMM to the company and the appellants in both the criminal complaints.
The important question that arises in this appeal is whether the institution or continuation of a proceeding under Section 138 or 141 of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of the IBC.
Mr. Jayanth Muth Raj, Senior Advocate appearing on behalf of the appellants, argued that the object of Section 14 being hat the assets of the corporate debtor be preserved during the corporate insolvency resolution process, it would be most incongruous to hold that a Section 138 proceeding, which, although a criminal proceeding, is in essence to recover the amount of the bounced cheque, be kept out of the word “proceedings” contained in Section 14(1)(a) of the IBC.
It was further urged that given the object of Section 14, there is no reason to curtail the meaning of the expression “proceedings”, which would therefore include all proceedings against the corporate debtor, civil or criminal, which would result in “execution” of any judgment for payment of compensation.
The three judge bench of Justices R.F.Nariman, Navin Sinha and K.M.Joseph concluded that a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC.
The court while allowing the appeal observed that as far as the Directors/persons in management or control of the corporate debtor are concerned, a Section 138/141 proceeding against them cannot be initiated or continued without the corporate debtor because Section 141 of the Negotiable Instruments Act speaks of persons in charge of and responsible to the company for the conduct of the business of the company, as well as the company.