Moratorium order under section 14 of the Insolvency and Bankruptcy Code, 2016 bars

parallel proceedings against corporate debtor under section 138 of Negotiable

Instrument Act, 1881: Supreme Court of India

By: Jyoti A Singh & Nishi Agrawal

AJA Legal and Associates

Picture credits: Pixabay.com

Recently in P. Mohanraj & Ors. v. M/S. Shah Brothers Ispat Pvt. Ltd. 1 decided by Hon’ble
Supreme Court of India (“Supreme Court”/ “SC”) on March 1, 2021, the Full Bench
comprising of Mr. Justice Rohinton Fali Nariman, Mr. Justice Navin Sinha and Mr. Justice K.M.
Joseph rules that Moratorium order under section 14 of the Insolvency and Bankruptcy Code,
2016 (“IBC”) bars parallel proceedings against corporate debtor under section 138 of
Negotiable Instrument Act, 1881 (“NI Act”).
The present appeal was filed against the order dated July 31, 2018, 2 passed by the National
Company Law Appellate Tribunal, New Delhi (“NCLAT”) where it set aside the order dated
May 24, 2018, 3 passed by National Company Law Tribunal (“Adjudicating Authority”/
“NCLT”), Chennai Bench holding that section 138 of NI Act being a criminal law provision,
cannot be held to be a ‘proceeding’ within the meaning of section 14 of IBC.
Under the present case, Supreme Court was presented with three issues - (i) whether the
institution or continuation of a proceeding under section 138/141 of NI Act can be said to be
covered by section 14 of IBC; (ii) whether the proceedings under section 138 of NI Act, 1881
are purely criminal in nature and; (iii) whether such bar applies to natural persons responsible
for the management of the corporate debtor?
The Hon’ble Court observed that under section 14(1)(a), the expression ‘or’ occurs twice, first
between the “institution of suits and continuation of pending suits” and second, between the
expression “continuation of pending suits and proceedings against the corporate debtor…”.
The Court held that both the expressions must be read disjunctively as otherwise and to be
read as a separate category. The Court threw light on the width of the expression ‘proceedings’
which means “any judgment, decree or order” and “any court of law, tribunal, arbitration panel
or other authority” and observed that since section 138 proceedings were conducted before

1
P. Mohanraj & Ors. v. M/S. Shah Brothers Ispat Pvt. Ltd. Civil Appeal No.10355 of 2018
2
Company Appeal (AT) (Insolvency) No. 306 of 2018
3
Company Petition No. 507/IB/2017

1
the magistrate courts as per section 6 of Criminal Procedure Code ("Cr. P.C") the same will
fall under the meaning of proceedings.
The Hon’ble Court while analysing the ambit of the term ‘proceeding’, applied the rules of
interpretations, noscitur a sociis 4 and ejusdem generis 5 to decide as to whether a narrow
meaning can be given to the term proceeding to in include only civil proceedings. After the
analyses of various judgments which used the same rules of interpretations, the Court
concluded that the rules of interpretation cannot be used to nullify the plain meaning of words
used in a statute to give it a wider meaning. The same is done with an intention to include all
the expressions within the scope of what may be reasonably comprehended by the provisions
keeping in mind the object of the statute. The Court further held as follows- “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.”
While interpreting the scope of section 14 of IBC, the Court emphasised on paragraphs 8.2
and 8.11 of the Report of the Insolvency Law Committee of February 2020, 6 to highlight the
objective of section 14 which is to ensure that there should not be any depletion in the assets
of the corporate debtor during the insolvency resolution process, so that it can keep running
as a going concern. The Court also placed reliance on the judgment of Swiss Ribbons (P) Ltd.
v. Union of India, 7 and held that section 138 being a quasi-criminal proceeding will result in
the depletion of assets of the corporate debtor in the same manner as the institution,
continuation or execution of a decree passed by civil court under civil suit for recovery of debt
or other liability will do. The Court drew an analogy and stated that section 138 proceedings
will also result into paying compensation which can be twice the amount of the cheque that
has bounced and the same would severely impact the insolvency resolution process. Further,
section 14(1) also makes it clear that any transfer, encumbrance, alienation or disposal by the
corporate debtor of any of its assets or any legal right or beneficial interest therein is barred.
The Court while referring to section 14(1)(a) and 14(1)(b) stated that these sections act as a
scheme that shields the corporate debtor from pecuniary attacks during moratorium which
provides it with a breathing space to ultimately rehabilitate itself.
The Court emphasized that the object of section 14 is to protect the corporate debtor from any
event which would cause an adverse consequence to its asset. The Court also placed reliance
on some other sections related to moratorium under the IBC such as sections 85, 96 and 101
in Part III of IBC which deals with the insolvency resolution and bankruptcy of individuals and
partnership firms and observed that the language used in these sections are very different.
Although, sections 85, 96 and 101 are only pertaining to the ‘debts’ whereas, section 14 is not
specific to any subject and is related to the ‘transaction’ which is much wider in expression as
compared to the term ‘debt’. The term ‘transaction’ subsumes the word ‘debt’ and hence
section 14 is of much wider interpretation. Further, section 14 imposes moratorium on
whatever is mentioned under sub-clauses (a) to (d) of section 14 thereof in respect of
transactions entered into by the corporate debtor, which also includes the transactions relating
to debts, as referred under sections 81, 85, 96, and 101 of IBC.
The Court also analysed the interplay between section 14 and 32A of IBC and stated that
section 32A cannot be used to interpret the scope of section 14(1)(a) as the same is nowhere

4
Meaning: meaning of doubtful words may be ascertained by reference to the meaning of words
associated with it, Principles of Statutory Interpretation, Justice G.P. Singh, 8th Edn., Syn. 8, at p.
379.
5
Meaning: when general words follow particular and specific words of the same nature, Kavalappara
Kottarathil Kochuni v. The State of Madras and Others, 1960 AIR 1080
6
Report of the Insolvency Law Committee, February 2020, Ministry of Corporate Affairs, accessed via
link- https://www.ibbi.gov.in/uploads/whatsnew/4e94077d49f9dbd49c875097dbdcf791.pdf
7
Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17

2
related to moratorium provision. Section 32A is for the extinguishment of criminal liability of
the corporate debtor from the date of resolution plan being approved by the Adjudicating
Authority. The rationale behind the same is to provide a clean slate to the new management
of the corporate debtor, on the other hand, section 14 does not extinguish any liability of the
corporate debtor but only grant a stay to provide a calm period for insolvency resolution of
corporate debtor.
The Supreme Court also decided the nature of the section 138 proceedings by referring to it
as a ““civil sheep” in a “criminal wolf’s” clothing.” The Court remarked that the proceedings are
otherwise a civil liability but deemed to be an offence as it is made punishable by law. The
Court observed that the primary focus of such proceedings is to safeguard the interest of the
victim and under section 138 proceedings, the greater interest of the state is represented by
the victim only.
The Court pointed out that under such proceedings, mens rea is not an ingredient unlike in
criminal proceedings. Further, the expression ‘cause of action’ under section 138(c) is a civil
term and is a foreigner to the criminal jurisprudence as it is used in civil cases for the recovery
of the money. Through the Amendment Act of 2002, 8 under section 143, a proviso was added
to empower the Magistrate to pass a sentence of imprisonment for a term not exceeding 1
year and a fine exceeding INR 5000/- summarily, the main focus of the legislature is to provide
compensation to the complainant and not imprisonment. Further, there is no maximum value
for fine is given, unlike imprisonment. Likewise, under section 145, evidence has to be given
by the complainant on affidavit as it is given under civil proceedings. Further, the nature of the
provisions under NI Act has been titled towards the civil side and the same can be confirmed
by the recent Amendment Act of 2018. 9 The Court held that since the nature of proceedings
under the NI Act are quasi-criminal, the same would fall under the ambit of section 14 of IBC
and amounts to proceedings within the meaning of section 14(1)(a) of IBC.
The Court lastly made a distinction between the personal liability of a director of the corporate
debtor and the corporate debtor itself. The Court clarified that the personal liability of such
persons would not come within the scope of the moratorium under IBC. The Court referred to
the case of Aneeta Hada v. Godfather Travels & Tours (P) Ltd, 10 and held that the proceedings
can be initiated or continued against the ‘persons’ mentioned in section 141(1) and (2) of the
NI Act because section 141 also 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 but since
proceedings against the corporate debtor is barred under the moratorium, such proceedings
cannot be initiated or continued against corporate debtor mentioned in section 141(1) and (2)
of the NI Act.

8
The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002, No.55 of 2002
dated December 17, 2002.
9
The Negotiable Instruments (Amendment) Act, 2018, No.20 of 2018 dated August 02, 2018.
10
Aneeta Hada v. Godfather Travels & Tours (P) Ltd, (2012) 5 SCC 661.