SHAH BROTHERS ISPAT (P) LTD. V. P. MOHANRAJ

 

SHAH BROTHERS ISPAT (P) LTD. V. P. MOHANRAJ, 2018 SCC ONLINE NCLAT 415.

 

BRIEF FACTS

1. NCLT’S VERDICT

The appellant herein the Shah Brothers Ispat Private Ltd filed a Complaint to the National Company Tribunal of Chennai ("NCLT") against M/s Diamond Engineering Chennai Private Ltd herein the "Corporate debtors" for the debts of Rs.24, 80, 33, 430/-. In view of the failure of P. Mohan raj the "defendant" to repay the debt, the NCLT made a decision on June 6, 2017, approving the company's motion and appointing an interim Resolution Professional.

Furthermore, the bankruptcy settlement process known as CIRP (corporate insolvency resolution process) was initiated against the company's debtors. Before initiating CIRP, the appellant submitted a complaint (CC No. 552/SS/2017) to the Metropolitan Magistrate of Court No. 59 in Kurla, Mumbai. After CIRP was initiated, the appellant submitted a complaint (CC No. 690/SS/2017).

Consequently, the Respondents submitted MA/102/IB/2018 and CP/507/IB/2017 the NCLT made a decision on May 24, 2018, considering the circumstances, ordered that the Appellant having the knowledge of the moratorium order dated June 6, 2017, has filed the proceeding against the Corporate Debtor. The Tribunal instructed to take down the said complaints because this approach constitutes a violation of the principle of moratorium invested under IB Code.

 

2. NCLAT’S VERDICT

On being aggrieved with the decision of NCLT, the Appellant approached the National Company Law Appellate Tribunal ("NCLAT") which declared that the procedural aspect of The Negotiable Instruments Act, 1881 is considered a criminal proceeding provided that the magnitude of the moratorium will not constitute and cover the ambit of the Negotiable Instruments Act, 1881. The Appellate body allowed the contentions of the appellant as in the proceeding are of dualistic distinct nature and allowed the corresponding prolongation of proceeding by keeping aside the order passed by the NCLT.

 

3. SUPREME COURT’S VERDICT

Finally, the appeal reached the Supreme Court of India and an important legal question was raised, namely whether the institution or continuation of proceeding under Section 138 and 141 of the NI Act can be covered under section 14 of the IB Code.

The Supreme Court of India in the aforesaid case held that the principle of the moratorium invested under section 14 of IB Code covers the proceedings under the magnitude of the NI Act.

 

      I.         The Court while deciphering the underlying context of section 14 (1) (a) ascertained that the expression "or" appears twice in the first part of Section 14 (1) (a). The phrase "institution of suits or continuation of pending suits" should be understood as a category and "proceedings against the corporate debtor" would be a separate category. It is important to note that these categories are unglued by a disjunctive "or". Also, the second category is roughly worded and includes "any judgment, decree or order" and "any court, tribunal, arbitral tribunal or other authority".

    II.         The Court also rejected the applicability of Ejusdem Generis and noscitur a sociis as they cannot limit the scope of a broad provision that can otherwise be reasonably understood from the terminology used in the provision

  III.         The gravity of a complaint under the Negotiable Instruments Actcannot be equated with an offence under the provisions of the Penal Code, 1860or other criminal offences. An offence Under Section 138 of the NegotiableInstruments Act, 1881, is almost in the nature of a civilwrong which has beengiven criminal overtones.This is the clearest enunciation of a Section 138 proceeding being a "civil sheep" in a"criminal wolf's" clothing.[PARA-47]

  IV.         The Court also held that the rationale behind moratorium is to keep the assets of the corporate debtor's secure with no reduction in numbers during the bankruptcy settlement process CIRP. In the light of 'Quasi-Criminal' Proceedings under the NI Act, the court observed that the liability here is of civil nature but considered a criminal offense, as such liability is penalized by law.

 

CONCLUSION

Hence it was held that, the proceedings under Section 138 of the NI Act are not purely criminal in nature with the provision for incarceration and fine provided only to pressurise the accused debtor to repay the debt owed to the complainant. When all types of civil proceedings are suspended, allowing continuation of proceedings under Section 138 of the NI Act results in defeating the object of resolution process. Also, the resolution process and the resolution plan cater to the claims of all creditors since under Section 31 of the IB Code once a resolution plan is approved, it binds all the creditors. By allowing independent recovery process to the drawee complainant, the entire process of resolution stands undermined.

Therefore, it was decided that the proceeding under the magnitude of the NI Act against the corporate debtors will be covered by the principle of the moratorium. Regarding the personal liability of the director, the court ruled that the proceedings against the directors would continue even if the proceedings against the corporate debtor were followed by an ongoing moratorium period.