P.MOHANRAJ & ORS (APPELLANTS)
M/S SHAH BROTHERS ISPAT PRIVATE LIMITED (RESPONDENTS)
FACTS OF THE CASE
Steel products were supplied by the Respondents to M/s Diamond Engineering Private limited (Appellants) as a result of which INR 24,20,91,054 were due and payable by the Appellants. Cheques were issued in favor of the Respondents which were returned dishonored due to insufficient funds. Respondents issued demand notice under Section 138 r.w. Section 141 of the Negotiable Instrument Act, 1881 (“NIA 1881”) against the company and its directors. No payments were made and criminal complaints were filed against the Appellants u/s 138 r.w. sec 141 of NIA,1881.
Being a statutory notice, application was admitted by the Adjudicating Authority (“AA“) (NCLT) u/s 9 of the Indian Bankruptcy Code 2016 (“IBC 2016” or “Code“) and order of moratorium was ordered u/s 14 of the Code. AA further stays the criminal proceedings against the Appellants. In an appeal by the Respondents, National Company Law Appellate Tribunal (“NCLAT“) set aside AA order staying proceeding, holding that Section 138, being a criminal law provision cannot be held to be a proceeding within the meaning of Section 14 of the Code. Appeal was filed in the Supreme Court against NCLAT order .
– Whether the institution or continuation of proceedings under Section 138 r.w. Section 141 of the NIA, 1881 can be said to be covered under the provision of moratorium given under Section 14 of the IBC 2016
-Whether the expression “proceeding” can be cut down to mean civil proceedings in strict sense by using rule of interpretation such as “Ejusdem generis or noscitur a sociis”
-The nature of proceeding under Chapter XVII of the NIA 1881
It was argued that object of Section 14 of the Code is to preserve the assets of Corporate debtor during Corporate Insolvency Resolution Process. It would be incongruous to hold that Section 138 proceeding which although is criminal proceeding, whose essence is to recover money be kept out of the word “proceedings” in Section 14 Further it was argued that Section 14(1)(a) is extremely wide and is ought not to be cut down by the judicial interpretation given the expression “ANY” occurring twice in Section 14(1)(a). Therefore no rule of construction be it “Ejusdem Generis or noscitur a sociis” can be used to cut down the plain meaning of the words given u/s 14.
Rebutting claims of the Appellants counsel, the Respondent referred to Insolvency Committee Report of Feb 2020 to drive his point about the object of Section 14 of the code. Being a limited one cannot include a criminal proceeding within its meaning. Reliance was also placed upon the rule of “Noscitur a sociis/Ejusdem generis” construction and consistent view of High Court that “Section 138 being a criminal law provision cannot be covered by Secion 14, Additional Solicitor General (“ASG”) relied on the rule of “Noscitur a sociis” to state that expression “proceeding” contained in Section 14(1)(a) is preceded by the expression “Suits” and followed by the words “Execution” and it has to be read in a sense analogous to civil proceedings dealing with private rights of action as contrasted with criminal proceedings.
Court held that Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the code. However , the statutory bar under Section 14 of the code shall be applicable only to corporate debtor i.e. The company only and not to natural persons that is to say proceedings against the natural person such as Director, officer mentioned u/s 141 of the NIA,1881 can continue and would not be covered by the provisions of moratorium.
-The court while interpreting Section 14 of the Code held that the sweep of the provision is very wide. Court said that the expression “Continuation of suits, continuation of pending suits” is to be read as one category and the disjunctive “OR” before the word proceeding would make it clear that proceeding against the corporate debtor would be a separate category
-The court relied on various judgments to see whether rule of “Ejusdem generis/Noscitur a sociis” can be applied in current situation and held that “ there must be a distinct genus or category running through the bodies already named to invoke rule of Ejusdem generis
-While dealing with rule of “Noscitur a sociis” the Hon’ble court relying on Mazdoor Sabha case : It must be borne in mind that “Noscitur a sociis” is merely a rule of construction and it cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined word correspondingly wider. It is only where the intention of the legislature in associating wider words with words of narrower significance is doubtful, or otherwise not clear that the present rule of construction can be usefully applied
-Given the object sought to be achieved by moratorium provisions, it is impossible to discern any difference between the impact of a suit and a Section 138 proceeding, insofar as the corporate debtor is concerned, on its getting the necessary breathing space to get back on its feet during the CIRP.
-It is difficult to accept that “Noscitur a sociis or ejusdem generis” should be used to cut down the width of the expression “proceedings” so as to make such proceedings analogous to civil suits.
-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 Bench further noted that “mens rea” was not an ingredient of the offence. It also took note of the fact that there is a departure from the procedure under the Code of Criminal Procedure for cheque cases. First and foremost, no court is to take cognizance of an offence punishable under Section 138 except on a complaint made in writing by the payee or the holder in due course of the cheque – the victim.
This article has been authored by Mr Shikhar Pandey, a qualified Company Secretary.The author can be contacted on firstname.lastname@example.org. The entire contents of this article are solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation by the author.