By Anish Sinha & Saloni Verma
Supreme court of India on 1.3.2021, gave the inter alia judgment on case P. Mohanraj & Ors. Vs M/s. Shah Brothers Ispat Pvt. Ltd and related matter and held in the judgement that the order of moratorium coming under the ambit of Section 14 of the Insolvency and Bankruptcy Code, 2016 can be appeal even to the court proceedings commenced under Section 138 of the Negotiable Instruments Act, 1881, against the corporate mortgagor. So in this article author Attempts to explain the judgement and prior, scrutinizing the judgement, Author also looks briefly at the history of the Negotiable Instruments Act, 1881 and the consecutive amendments so that the reader can understand the reason for introduction of Section 138 to the Act and also the compliance factor associated with the matter.
HISTORY OF THE NEGOTIABLE INSTRUMENTS ACT, 1881
The Act was Authentically drafted back (1961-64) in 1866 by the 3rd Indian Law Commission, headed by Mr. Justice J. L. Kapur and was introduced in December 1867 in the assembly. After which, it was referred to a Select Committee and also placed in public domain for public view and opinions. Several objections were raised by the business clique to the numerous divergency from English Law. So resultantly Bill was reintroduced and redrafted in later 1877, which again failed to pass parliament and was, therefore, further re revised by a Select Committee. Again due to inconsistencies the revised Bill was also rejected by various authorities as adequate. Later in 1880 by the special order of the principal Secretary of State, the Bill was then referred to a new Law Commission. And later on the recommendation of the new Law Commission, the Bill was re-drafted and sent to a Select Committee for further scrutiny, which was later adopted after passing through Hercules recommendations made by the new Law Commission. The bill drafted was prepared on the fourth attempt was introduced in the Council and was enacted as law in 1881.
WHAT NEGOTIABLE INSTRUMENT IS ABOUT AND FOR?
According to black law dictionary Negotiable Instruments Act, 1881 nowhere defines a negotiable instrument and merely states that “a negotiable instrument means a promissory note, bill of exchange or cheque payable either way to order or bearer. (Section 13). … Therefore, these are called Negotiable Instruments by Statute too. In orderly form ‘Negotiable’ means ‘transferable by delivery’ and the term ‘instrument’ means ‘a written document by which a right is generated in favor of some person’.
N.I act to ease the procedure of settlement of payments in business transactions as they proceed deliberately from one holder to another effortlessly, due to easy transferability of the value of the instrument. N.I act, dispense and bestow legal protection to different business instruments.
N.I act seeks to provide special procedure in such case the obligations which have to discharge under the instruments. regulates the different types of negotiable instruments which include Promissory notes, Bills of Exchange and Cheques.
NEGOTIABLE INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS) ACT, 2002
According to the act the punishment prescribed under Section 138 of the Act had proved to be inadequate and the procedure, embodied for the Courts to tackle such matters was found to be cumbersome and perplexing. Due to these hurdles there was high demand felt to formulate certain changes to the Act for better implication and result. Resultantly, the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 was passed, and Sections 143 to 147 were introduced. In order to resolve some of the objects that were sought to be achieved were:
- To increase the punishment embodied under the N.I Act from 1 year to 2 years;
- To advice procedure for service of summons to the accused or witness by Court through speed post or empanelled private couriers for rapid charge up
- To bestow summary trial of the cases under the Act with a view to speed up disposal of cases;
- To make the offence compoundable under the Act.
Supreme Court of India in the case of P. Mohanraj & Ors. Vs. M/S Shah Brothers Ispat Pvt. Ltd delivered the judgement and held that the declaration of a moratorium using power of Section 14 of the Insolvency and Bankruptcy Code, 2016 covers criminal proceedings for dishonour of cheque under Section 138 of the Negotiable Instruments Act, 1881.
While citing the judgement, the Supreme Court also broadened and resolved the scope of the applicability of Section 14 of the IBC under such proceedings.
FACTS OF THE CASE
In the above mentioned case somewhere 51 cheques were sanctioned by diamond stone Designing Pvt. Ltd (“Organization”) for the respondent M/S Shah brother Ispat Pvt. Ltd. (“Respondent”) were returned shamed by reason of deficient assets. Subsequently, the Respondent gave a legal interest notice under Area 138 and 141 of the NI Act, calling upon the Organization and its chiefs to pay the extraordinary sums. From there on, two checks for an aggregate sum of around Rupees Eighty-Lakh were returned, shamed for deficient assets. A subsequent interest notice was along these lines given by the Respondent under the NI Act. Therefore, two criminal protests were documented by the Respondent against the Organization before the Extra Boss Metropolitan Justice, Kurla, Mumbai (“ACMM”). In the meantime, a legal notification under Segment 8 of the IBC had been given by the Respondent to the Organization and the Respondent had documented a Segment 9 request under the steady gaze of the Public Organization Law Court (“NCLT”). The application was conceded by the NCLT, coordinating initiation of corporate indebtedness goal measure as for the Organization and a ban was pronounced under Segment 14 of the IBC. From there on, the NCLT continued further procedures in the two criminal grumblings forthcoming before the ACMM. In an allure documented by the Respondent to the Public Organization Law Re-appraising Court (“NCLAT”), the NCLAT put away this request while holding that Part 138 being a criminal law arrangement, can’t be held to be a ‘procedure’ inside the significance of Area 14 of the IBC. From that point, the NCLT endorsed the goal plan because of which the ban request stopped to have an impact.
The issue tabled before the court was whether the institution or continuation of a legal proceeding under Section 138 and 141 of the NI Act can be said to be covered by the moratorium provision under the IBC.
Court in the judgement contrasted on section 14 of IBC
- The Supreme Court argued the objective of the provision on moratorium under the IBC and ruled that the main aim is to see that there is no draining of a corporate debtor’s assets during the insolvency resolution process so that it can be kept processing as a going concern during such unprecedented time.
- In perspective on the over, a semi criminal proceeding which would bring about the resources of the corporate debt holder being drained because of paying pay which can add up to twice the measure of the watch that has bobbed, would straightforwardly affect the corporate indebtedness goal measure in a similar way as the organization, continuation, or execution of a pronouncement in such suit in a common court for the measure of obligation or other responsibility
- Since criminal procedures under the Code of Criminal procedure, 1973 (“CRPC”) are directed under the watchful eye of the courts referenced in the CRPC, unmistakably a Segment 138 continuing being led before a Justice would unquestionably be a procedure in an official courtroom in regard of an exchange which identifies with an obligation owed by the corporate debt holder. The High Court further proceeds to dissect whether the articulation ‘procedures’ can be chopped down to mean common procedures by the utilization of rules of translation.
The Supreme Court ruling that Section 138 of NI act proceeding can be said to be a ‘civil sheep’ in a ‘criminal wolfs’ clothing as it is the benefit of the victim that is sought to be protected, the larger interest of the ruling being embodied in the victim alone approaching the court in cheque bounce or cheque return cases. Further, the Supreme Court clarified that the moratorium provisional period would apply only to the corporate or executive debtor and that the statutory liability of the natural persons specified in Section 141 of the NI Act i.e. the persons responsible for the conduct of the business of the corporate debtor shall continue to be applicable.
The influence of this judgement is that the criminal proceedings against any cheque bounce or return under Section 138 of the NI Act shall remain against the registered company during the period of applied moratorium applicable to insolvency proceedings of any company.
It is however highly appropriate to note that the proceedings would continue against the board of directors and other responsible authorities of the company who are accused in cheque fraud proceedings.