Supreme Court clarifies the effect of moratorium on Section 138 Negotiable Instruments Act cases: Narinder Garg & Others vs. Kotak Mahindra Bank Ltd. & Others (28 March 2022)

Date of the Judgment: 28 March 2022
Citation: [Not Available in Source]
Judges: Uday Umesh Lalit, S. Ravindra Bhat, Pamidighantam Sri Narasimha, JJ.

Can a corporate debtor facing insolvency proceedings be prosecuted under Section 138 of the Negotiable Instruments Act, 1881, for cheque bounce? The Supreme Court addressed this crucial question, clarifying the interplay between insolvency moratoriums and criminal liability for dishonored cheques. This judgment clarifies the extent to which a moratorium under the Insolvency and Bankruptcy Code, 2016, impacts proceedings under the Negotiable Instruments Act, 1881. The bench comprised Justices Uday Umesh Lalit, S. Ravindra Bhat, and Pamidighantam Sri Narasimha.

Case Background

The case involves a writ petition filed by Narinder Garg and others against Kotak Mahindra Bank Ltd. and others. The petitioners sought to quash criminal complaints filed against them under Section 138 of the Negotiable Instruments Act, 1881. These complaints were related to dishonored cheques issued by the petitioner company, which was undergoing insolvency proceedings.

The petitioners argued that the approval of a resolution plan under Section 30(4) of the Insolvency and Bankruptcy Code, 2016 should nullify the pending criminal complaints. They also contended that complaints initiated after the imposition of a moratorium should not be allowed to proceed.

Timeline

Course of Proceedings

The petitioners’ case was initially part of a larger batch of cases being considered in P. Mohanraj & other connected matters. However, it was later de-tagged. The Supreme Court had previously addressed similar issues in P. Mohanraj & Others v. Shah Brothers Ispat Private Limited, (2021) 6 SCC 258. In that case, the court clarified that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, applies only to the corporate debtor and not to natural persons like directors, who remain liable under Section 141 of the Negotiable Instruments Act, 1881.

Legal Framework

The core legal issue revolves around the interpretation of Section 14 of the Insolvency and Bankruptcy Code, 2016, which imposes a moratorium on legal proceedings against a corporate debtor undergoing insolvency. The court also considered Sections 138 and 141 of the Negotiable Instruments Act, 1881, which deal with the offense of dishonoring cheques and the liability of company directors, respectively. The relevant provisions are:

• Section 14 of the Insolvency and Bankruptcy Code, 2016:
  This section provides for a moratorium period, during which no legal proceedings can be initiated or continued against the corporate debtor.
• Section 138 of the Negotiable Instruments Act, 1881:
  This section criminalizes the dishonor of a cheque due to insufficient funds in the account.
• Section 141 of the Negotiable Instruments Act, 1881:
  This section extends the liability for offences under Section 138 to the directors and other persons in charge of the company’s affairs.

Arguments

Petitioners’ Arguments:

• The petitioners argued that the acceptance of a resolution plan, which includes the dues of the original complainant, should extinguish any pending trials under Sections 138 and 141 of the Negotiable Instruments Act, 1881.
• They also contended that criminal complaints initiated after the moratorium was imposed should not be allowed to proceed.

Respondents’ Arguments:

The respondents argued that the decision in P. Mohanraj is clear on the point that the moratorium applies only to the corporate debtor and not to the directors. Thus, the proceedings against the directors should continue.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in this order. However, the main issue before the court was:

1. Whether the acceptance of a resolution plan under the Insolvency and Bankruptcy Code, 2016, nullifies pending criminal complaints under Section 138 of the Negotiable Instruments Act, 1881, against the corporate debtor and its directors.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authority:

Judgment

How each authority was viewed by the Court?

The Court relied on P. Mohanraj & Others v. Shah Brothers Ispat Private Limited, (2021) 6 SCC 258 to clarify that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, applies only to the corporate debtor and not to the natural persons mentioned in Section 141 of the Negotiable Instruments Act, 1881. The court reiterated that the directors would continue to be statutorily liable under the provisions of the Act.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by its previous ruling in P. Mohanraj. The court emphasized the distinction between the liability of the corporate debtor and the liability of its directors under the Negotiable Instruments Act, 1881. The court was clear that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, is intended to protect the corporate debtor from legal proceedings during the insolvency process, but it does not extend to individuals who are held liable under Section 141 of the Negotiable Instruments Act, 1881. This distinction was crucial in the court’s reasoning, ensuring that the directors remain accountable for their actions under the NI Act, even when the company is undergoing insolvency.

Fact:Law Ratio

Logical Reasoning

The court’s decision was based on the principle that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, is specific to the corporate debtor and does not shield the directors from their liability under Section 141 of the Negotiable Instruments Act, 1881. The court reasoned that the criminal liability of the directors is separate from the corporate debtor’s insolvency proceedings. The court stated, “The decision rendered in P. Mohanraj is quite clear on the point and, as such, no interference in this petition is called for.”

The court also observed that, “the moratorium provisions contained in Section 14 of the Insolvency and Bankruptcy Code, 2016 would apply only to the corporate debtor and that the natural persons mentioned in Section 141 of the Act would continue to be statutorily liable under the provisions of the Act.”

The court further clarified that, “the effect of such acceptance would be to obliterate any pending trial under Sections 138 and 141 of the Act”, but it was only in the context of the corporate debtor and not the directors.

Key Takeaways

• The moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, applies only to the corporate debtor and not to its directors.
• Directors of a company remain liable under Section 141 of the Negotiable Instruments Act, 1881, even if the company is undergoing insolvency proceedings.
• The acceptance of a resolution plan does not automatically extinguish criminal proceedings against directors under Section 138 of the Negotiable Instruments Act, 1881.

Directions

No specific directions were issued by the Supreme Court in this order.

Development of Law

The ratio decidendi of this case is that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, does not extend to the directors of a corporate debtor who are liable under Section 141 of the Negotiable Instruments Act, 1881. This judgment reinforces the legal position established in P. Mohanraj, ensuring that directors remain accountable for their actions, even during corporate insolvency.

Conclusion

The Supreme Court dismissed the writ petitions, reiterating that the moratorium under the Insolvency and Bankruptcy Code, 2016, does not protect company directors from criminal liability under Section 138 of the Negotiable Instruments Act, 1881. The court’s decision ensures that directors remain accountable for dishonored cheques, even when their company is undergoing insolvency proceedings. This ruling clarifies the interplay between insolvency law and criminal liability, providing important guidance for future cases.