MORATORIUM UNDER IBC & CHEQUE BOUNCE: NOSCITUR A SOCIIS
MORATORIUM UNDER IBC & CHEQUE BOUNCE: NOSCITUR A SOCIIS
P. MOHANRAJ & ORS v. M/S.
SHAH BROTHERS ISPAT PVT LTD. 01.03.2021, APEX COURT
Shubham
budhiraja[1]
COVERAGE
-
SECTION 14 IBC
-
SECTION 138 NI
-
COMPOUNDING UNDER NI & CRPC
INTER-RELATION
-
MEANING OF CIVIL & CRIMINAL PROCEEDINGS
-
OBJECTIVE OF MORATORIUM
-
CASES WHERE EJUSDEM GENERIS AND NOSCITUR A
SOCIIS CANNOT BE MADE APPLICABLE
CONCLUSION
-
Objective of Section 14 IBC is to keep the
business of corporate debtor alive
-
Rule of ejesdum genersis is a rule of construction
and cannot be made applicable in all case. It has some limitations
-
The Language of Section 14 made reference to
transactions which is much wider than debt mentioned under Section 85. The term
transaction includes debt.
-
Also, the term proceedings are not prefixed by
legal. The transactions under Section 14(1)(a) to (d) are inclusive of debts as
so mentioned under Section 81, 85, 96 & 100
-
Compensation is heart of 138 NI because 5K is
minimum amount through summary trial. The evidence is taken on affidavit like
civil proceedings, mode of service of summon is also like civil cases
-
Offence under 138 NI is compoundable without any
intervention of court under 320 CRPC
-
Character of proceedings is not determined by
the tribunal before which relief is claimed but by the nature of right which is
violated. Civil proceeding not necessarily to mean only those which start with
filling of suit and ending with decree. It includes revenue matters, Writs
also.
-
So even though the term proceedings before suits
may seem like giving indication to civil nature proceedings only and not
criminal but if we look overall objective of section 14 moratoriums which is to
keep the business of corporate debtor as going concern and to keep its assets
in breathe conditions, it is clear that the term “proceeding” will not give
color of civil nature mere because of term “suits” because these rules of
construction have some limitations and they cannot be used without looking at
overall objective and intention of law maker
-
Section 138 proceeding can be said to be a
“civil sheep” in a “criminal wolf’s” clothing because it has obviated the need
of creditor to move two different forum for relief
-
138 NI case cannot be filed against directors
etc. without impleading the company. But the moratorium is applicable only on
corporate debtor and not natural persons such as directors, etc. Therefore,
pending proceedings under 138 NI will not be stayed against them
FACTS
A and B enter into a transaction where A supply goods to B and B issued
2 cheque as mode of payment. Both of cheque got dishonored and A served 138 NI
Notice and on failure of its honor, criminal case filed against B before ACMM
and summon issued to B & directors.
Meanwhile, Section 8 IBC Demand Notice also served by A to B and NCLT
passes order of admission u/s 9 and issued moratorium and also stayed 138 NI
proceedings
NCLAT set aside the moratorium against 138 NI proceedings holding that
138 NI proceedings are not proceedings u/s 14 IBC
ISSUE
Whether the institution or
continuation of a proceeding under Section 138/141 of the Negotiable
Instruments Act can be said to be covered by the moratorium provision, namely,
Section 14 of the IBC
LANGUAGE OF
SECTION 14
Section 14 has 4 sub-sections
whereby sub-section (1) is subject to sub-section (2) & (3) and also gives
a list of 4 kinds of transactions on which moratorium would apply namely
(a) Institution
of suit, proceedings including execution
(b) Transferring
of any interest in assets of corporate debtor
(c) Action
to recover, etc. of security interest under SARFESI
(d) Recovery
of property from possession of corporate debtor
Explanation to Section 14(1) is
clarification in nature which states that any application for license etc.
pending for approvals before authorities will not come within ambit of
moratorium unless there is pending dues
Section 14(2) states that just
because there is a moratorium does not mean that supply of essential goods or
services to the corporate debtor will also be stayed
Section 14(2A) is in addition to
Section 14(2) whereby RP/ IRP can consider those supplies also which are
substantial for keeping corporate debtor as going concern and moratorium will
not be applicable to them. However if there is pending dues then moratorium
will apply
Section 14(3) provides that
moratorium will not be applicable
(a) Transactions
or agreement as Govt. Notify
(b) Surety/
guarantee to contract
Section 14(4) clarify that
moratorium would cease either in case of
-
Completion of CIRP process
-
Approval of Resolution plan by NCLT u/s 31
-
Order of liquidation by NCLT u/s 33
COURT OBSERVATIONS
The Central Government, in
consultation with experts, may state that the moratorium provision will not
apply to such transactions as may be notified. This is of some importance as Section 14(1)(a) does
not indicate as to what the proceedings contained therein apply to. Sub- 14
section 3(a) provides the answer – that such “proceedings” relate to
“transactions” entered into by the corporate debtor pre imposition of the
moratorium
State Bank of India v. V. Ramakrishnan,
(2018) 17 SCC 394 (at paragraph 20)
Section 3(33) defines transaction.
This definition
being an inclusive one is extremely wide in nature and would include a
transaction evidencing a debt or liability. This is made clear by
Section 96(3) and Section 101(3) which contain the same language as Section
14(3)(a), these Sections speaking of ‘debts’ of the individual or firm. Equally
important is Section 14(3)(b), by which a surety in a contract of guarantee of
a debt owed by a corporate debtor cannot avail of the benefit of a moratorium
as a result of which a creditor can enforce a guarantee, though not being able
to enforce the principal debt during the period of moratorium
LANGUAGE OF
SECTION 14(1)(a)
The expression “or” occurs twice in the first part of Section 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 sweep
of the provision 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.
Therefore, it is clear that the
expression “institution of suits or
continuation of pending suits” is to be read as one category
and the disjunctive “or” before
the word “proceedings” would make it
clear that proceedings
against the corporate debtor would be a separate category
The expression “proceedings” is the expression “any judgment, decree or order” and “any court of law, tribunal, arbitration
panel or other authority”.
The criminal proceedings under
the Code of Criminal Procedure, 1973 [“CrPC”] are conducted before the courts
mentioned in Section 6, CrPC, it is clear that a Section
138 proceeding being conducted before a Magistrate would certainly be a proceeding in a court of law
in respect of a transaction which relates to a debt
owed by the corporate debtor
EJUSDEM GENERIS
AND NOSCITUR A SOCIIS
In Jagdish Chander Gupta v. Kajaria Traders (India) Ltd., (1964) 8
SCR 50
The court has to interpret whether
the expression “or other proceeding” occurring in Section 69(3) of the Indian
Partnership Act, 1932 would include a proceeding to appoint an arbitrator under
Section 8(2) of the Arbitration Act, 1940
In Rajasthan State Electricity Board v. Mohan Lal, (1967) 3 SCR 377
The Court had to decide whether
the expression “other authorities” in Article 12 of the Constitution of India
took its color from the preceding expressions used in the said Article, making
such authorities only those authorities who exercised governmental power. This
was emphatically turned down by a Constitution Bench of this Court
In CBI v. Braj Bhushan Prasad, (2001) 9 SCC 432
The Court was asked to construe
Section 89 of the Bihar Reorganization Act with reference to noscitur a sociis
which was turned down by the court
In Godfrey Phillips India Ltd. v. State of U.P., (2005) 2 SCC 515
This Court had to construe the
meaning of the expression “luxury” in Entry 62 of List 2 of the Seventh
Schedule to the Constitution of India. In this context, the rule of noscitur a
sociis was applied by the Court, the Court also pointing out how a court must
be careful before blindly applying the principle
“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. It can also be applied where the meaning of the words of wider import
is doubtful; but, where the object of the legislature in using wider words is
clear and free of ambiguity, the rule of construction in question cannot be
pressed into service”
In Vikram Singh v. Union of India, (2015) 9 SCC 502
The Court was asked to construe
the expression “government or any other person” contained in Section 364-A of
the Indian Penal Code, 1860 with reference to ejusdem generis. This Court
refused the contention.
In Pioneer Urban Land and Infrastructure Ltd. v. Union of India,
(2019) 8 SCC 416
The Court laid down the limits of
the application of the rule of construction that is contained in the expression
“noscitur a sociis” and held that noscitur a sociis being a mere rule of
construction cannot be applied in the present case as it is clear that wider
words have been deliberately used in a residuary provision, to make the scope
of the definition of “financial debt” subsume matters which are not found in
the other sub-clauses of Section 5(8)
Therefore,
ejusdem generis and noscitur a sociis, being rules as to the construction of
statutes, cannot be exalted to nullify the plain meaning of words used in a
statute if they are designedly used in a wide sense. Importantly, where a
residuary phrase is used as a catch-all expression to take within its scope
what may reasonably be comprehended by a provision, regard being had to its
object and setting, noscitur a sociis cannot be used to colour an otherwise
wide expression so as to whittle it down and stultify the object of a statutory
provision
OBJECT OF SECTION
14 IBC & NOSCITUR A SOCIIS OR EJUSDEM GENERIS
Report of the Insolvency Law Committee of February, 2020
The objective of section 14 is
that here is no depletion of a corporate debtor’s assets during the insolvency
resolution process so that it can be kept running as a going concern during
this time, thus maximising value for all stakeholders. The idea is that it
facilitates the continued operation of the business of the corporate debtor to
allow it breathing space to organise its affairs so that a new management may
ultimately take over and bring the corporate debtor out of financial sickness,
thus benefitting all stakeholders, which would include workmen of the corporate
debtor
Therefore, a quasi-criminal
proceeding which would result in the assets of the corporate debtor being
depleted as a result of having to pay compensation which can amount to twice
the amount of the cheque that has bounced would directly impact the corporate
insolvency resolution process in the same manner as the institution,
continuation, or execution of a decree in such suit in a civil court for the
amount of debt or other liability. Judged from the point of view of this
objective, 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 corporate insolvency resolution process. Given this fact, 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
MORATORIUM UNDER
SECTION 14 & OTHER PROVISIONS
When the language of Section 14
and Section 85 are contrasted, it becomes clear that though the language of
Section 85 is only in respect of debts, the moratorium contained in Section 14
is not subject specific. The only light thrown on the subject is by the
exception provision contained in Section 14(3)(a) which is that “transactions”
are the subject matter of Section 14(1). “Transaction” is, as we have seen, a
much wider expression than “debt”, and subsumes it. Also, the expression
“proceedings” used by the legislature in Section 14(1)(a) is not trammeled by
the word “legal” as a prefix that is contained in the moratorium provisions qua
individuals and firms. Likewise, the provisions of Section 96 and Section 101
are moratorium provisions in Chapter III of Part III dealing with the
insolvency resolution process of individuals and firms, the same expression,
namely, “debts” is used as is used in Section 85.
A legal action or proceeding in
respect of any debt would, on its plain language, include a Section 138
proceeding. This is for the reason that a Section 138
proceeding would be a legal proceeding “in respect of” a debt. “In respect of”
is a phrase which is wide and includes anything done directly or indirectly
The width of
Section 14 is even greater, given that Section 14 declares a
moratorium prohibiting what is mentioned in clauses (a) to (d) thereof in
respect of transactions entered into by the corporate debtor, inclusive of
transactions relating to debts, as is contained in Sections 81, 85, 96, and
101. Also,
Section 14(1)(d) is conspicuous by its absence in any of these Sections
SECTION 14 &
SECTION 32A
Apex court in Manish Kumar v. Union of India, 2021 SCC
OnLine SC 30, upheld the constitutional validity of this provision
Section 32A cannot possibly be
said to throw any light on the true interpretation of Section 14(1)(a) as the
reason for introducing Section 32A had nothing whatsoever to do with any
moratorium provision
NATURE OF
PROCEEDINGS UNDER SECTION 138 NI
Section 143, it is lawful for a
Magistrate to pass a sentence of imprisonment for a term not exceeding one year
and a fine exceeding INR 5,000/- summarily. This provision is again an important
pointer to the fact that the payment of compensation is at the heart of the
provision in that a fine exceeding INR 5000/-, the sky being the limit, can be
imposed by way of a summary trial which, after application of Section 357 of
the CrPC, results in compensating the victim up to twice the amount of the
bounced cheque. Under Section 144, the mode of service of summons is done as in
civil cases, eschewing the mode contained in Sections 62 to 64 of the CrPC.
Likewise, under Section 145, evidence is to be given by the complainant on
affidavit, as it is given in civil proceedings, notwithstanding anything
contained in the CrPC. Most importantly, by Section 147, offences under this
Act are compoundable without any intervention of the court, as is required by
Section 320(2) of the CrPC. Also, the hybrid nature of these provisions gets a
further tilt towards a civil proceeding, by the power to direct interim
compensation under Sections 143A and 148
CIVIL PROCEEDINGS
v. CRIMINAL PROCEEDINGS
The
expression “civil proceeding” is not defined in the Constitution, nor in the
General Clauses Act. The expression in our judgment covers all proceedings in which a party asserts the existence of a civil right
conferred by the civil law or by statute, and claims relief for breach thereof. A criminal proceeding on the other hand is ordinarily one in which
if carried to its conclusion it may result in the imposition of sentences such
as death, imprisonment, fine or forfeiture of property. It also
includes proceedings in which in the larger interest of the State, orders to
prevent apprehended breach of the peace, orders to bind down persons who are a
danger to the maintenance of peace and order, or orders aimed at preventing
vagrancy are contemplated to be passed. But the whole area of proceedings,
which reach the High Courts is not exhausted by classifying the proceedings as
civil and criminal. There are certain proceedings which may be regarded as neither
civil nor criminal.
For instance, proceeding for
contempt of court, and for exercise of disciplinary jurisdiction against
lawyers or other professionals, such as Chartered Accountants may not fall
within the classification of proceedings, civil or criminal. But
there is no warrant for the view that from the category of civil proceedings,
it was intended to exclude proceedings relating to or which seek relief against
enforcement of taxation laws of the State. The primary object of a taxation statute is to collect
revenue for the governance of the
State or for providing specific services and such laws directly affect the
civil rights of the tax-payer. If a person is called upon to pay tax which the
State is not competent to levy, or which is not imposed in accordance with the
law which permits imposition of the tax, or in the levy, assessment and
collection of which rights of the tax-payer are infringed in a manner not
warranted by the statute, a proceeding to obtain relief whether it is from the
tribunal set up by the taxing statute, or from the civil court would be
regarded as a civil proceeding. The character of the proceeding,
in our judgment, depends not upon the nature of the tribunal which is invested
with authority to grant relief, but upon the nature of the right violated and
the appropriate relief which may be claimed. A civil proceeding is,
therefore, one in which a person seeks to enforce by appropriate relief the
alleged infringement of his civil rights against another person or the State, and
which if the claim is proved would result in the declaration express or implied
of the right claimed and relief such as payment of debt, damages, compensation,
delivery of specific property, enforcement of personal rights, determination of
status etc.
Thus, a civil
proceeding is not necessarily a proceeding which begins with the filing of a
suit and culminates in execution of a decree. It would include revenue
proceeding as well as a writ petition filed under Article 226 of the
Constitution, if the reliefs therein are to enforce rights of a civil nature.
Interestingly, criminal proceedings are stated to be proceedings in which the
larger interest of the State is concerned.
Given these tests, 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
R. Vijayan v. Baby, (2012) 1 SCC 260
Its object appears to be both
punitive as also compensatory and restitutive, in regard to cheque dishonor
cases. Chapter XVII of the Act is a unique exercise
which blurs the dividing line between civil and criminal jurisdictions. It has obviated the need for the creditor to move two
different fora for relief
147 NI
PROCEEDINGS & COMPOUNDING UNDER CRPC
In our country also when the
Criminal Procedure Code, 1861 was enacted it was silent about the compounding
of offence. Subsequently, when the next Code of 1872 was introduced it
mentioned about compounding in Section 188 by providing the mode of
compounding. However, it did not contain any provision declaring what offences
were compoundable. The decision as to what offences were compoundable was
governed by reference to the exception to Section 214 of the Penal Code. The
subsequent Code of 1898 provided Section 345 indicating the offences which were
compoundable but the said section was only made applicable to compounding of
offences defined and permissible under the Penal code. The present Code, which
repealed the 1898 Code, contains Section 320 containing comprehensive
provisions for compounding.
There is no other statutory
procedure for compounding of offence under the NI Act. Therefore, Section 147
of the NI Act must be reasonably construed to mean that as a result of the said
section the offences under the NI Act are made compoundable, but the main principle of such compounding, namely, the
consent of the person aggrieved or the person injured or the complainant cannot
be wished away nor can the same be substituted by virtue of Section 147 of the
NI Act.
Damodar S. Prabhu v. Sayed Babalal H., (2010) 5 SCC 663
Section 147 was inserted by way
of an amendment to a special law, the same will override the effect of Section
320(9) CrPC, especially keeping in mind that Section 147 carries a non obstante
clause.” Unlike that for other forms of crime, the punishment here (insofar as
the complainant is concerned) is not a means of seeking retribution, but is
more a means to ensure payment of money. The complainant's interest lies
primarily in recovering the money rather than seeing the drawer of the cheque
in jail. The threat of jail is only a mode to ensure recovery
The compounding
of the offence at later stages of litigation in cheque bouncing cases has also
been held to be permissible in a recent decision of this Court,
reported as K.M. Ibrahim v. K.P.
Mohammed [(2010) 1 SCC 798 : (2010) 1 SCC (Cri) 921 : (2009) 14 Scale
262]
138 NI QUASI CRIMINAL JUST LIKE CIVIL CONTEMPT
PROCEEDINGS
Given the hybrid nature of a
civil contempt proceeding, described as “quasi-criminal” by several judgments
of this Court, there is nothing wrong with the same appellation
“quasi-criminal” being applied to a Section 138 proceeding for the reasons
given by us on an analysis of Chapter XVII of the Negotiable Instruments Act
It is clear that a quasi-criminal
proceeding that is contained in Chapter XVII of the Negotiable Instruments Act
would, given the object and context of Section 14 of the IBC, amount to a
“proceeding” within the meaning of Section 14(1)(a), the moratorium therefore
attaching to such proceeding.
It is the
resolution professional alone who
is now to preserve and protect the assets of the corporate debtor in this
interregnum, the resolution professional therefore is to represent
and act on behalf of the corporate debtor in all judicial, quasi-judicial, or
arbitration proceedings, which would include criminal proceedings.
Here again, the word “judicial” cannot
be construed noscitur a sociis so as to cut down its plain meaning, as
otherwise, quasi-judicial or arbitration proceedings, not being
criminal proceedings, the word “judicial” would then take color from them
WHETHER NATURAL
PERSONS ARE COVERED BY SECTION 14 OF THE IBC
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 – see Aneeta Hada (supra).
This is 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.
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.
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