Do Proceedings u/s 138 of NI Act abate when proceedings under Insolvency and Bankruptcy Code 2016 are set in motion?

It is common notion that once a business entity applies for insolvency under the provisions of Insolvency and Bankruptcy Code 2016, continuance of all new and pending proceedings are prohibited by law. It is therefore believed that once provisions of IBC are set into motion, proceedings u/s 138 of Negotiable Instruments Act, 1881 automatically abate.

Before deliberating on the subject, it would be relevant to reproduce Section 14(1) IBC which reads as under:

1. Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:
   
   1. the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
   2. transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein
   3. any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
   4. the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

It is also worthwhile to reproduce Section 96 of the IBC, which reads as under:

1. When an application is filed under section 94 or section 95:
   
   1. an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and
   2. during the interim-moratorium period:
      
      1. any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and
      2. the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.
2. Where the application has been made in relation to a firm, the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application.
3. The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

It would be apropos to reproduce Section 138 of The Negotiable Instruments Act, 1881, which reads as under:
138 Dishonour of cheque for insufficiency, etc., of funds in the account.:
Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless:

1. the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
2. the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, 20 [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
3. the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation:
For the purposes of this section, "debt or other liability" means a legally enforceable debt or other liability.]

It would be trite to refer to a recent Apex Court judgment in Ajay Kumar Radheyshyam Goenka vs Tourism Finance Corporation of India Ltd. decided on 15 March, 2023 in Criminal Appeal No. 170, 171 & 172 of 2023 which dealt with similar controversy and has declared Binding law in this regard.

In this case both the Metropolitan Magistrate & the High Court in Criminal Revision Petition held that Section 138 of NI Act is a penal provision, which empowers the court of competent jurisdiction to pass order of imprisonment or fine, which cannot be held to be proceedings or any judgment or decree of money claim. Thus, it would not come within the purview of Section 14 of the IBC and, thus, the proceedings under Section 138 of the NI Act, 1881 could continue simultaneously.

Before the Apex Court, the Appellant urged that the trigger of Section 138 of the NI Act, is the non-payment of legally enforceable debt. Once the debt is itself extinguished, either under Section 31 or in process from Sections 38 to 41 and 54 of IBC, the basis of Section 138 of the NI Act disappears. It was also urged that the term 'Debt' means 'legally enforceable debt' under the Explanation to Section 138 of the NI Act and this should be read with Sections 2(6) and 2(8) of the IBC.

It was also pleaded that the nature of the proceedings under Section 138 of the NI Act is primarily compensatory in nature and the punitive element is incorporated at enforcing the compensatory provisions and once Liquidation Process recovery is made partly by the receipt of money and partly by waiver, Section 138 of the NI Act should not be permitted to be continued. It was urged that if the debt of the company is resolved then the payment would be governed under the Resolution Plan. If the debts are not resolved, then the assets of the company are to be distributed in terms of Section 53 of the IBC.

The only issue before the Apex Court was whether during the pendency of the proceedings under the said Code which have been admitted, the present proceedings under the N.I. Act can continue simultaneously or not. The Apex Court after due deliberations held thus :

16. We have no hesitation in coming to the conclusion that the scope of nature of proceedings under the two Acts are quite different and would not intercede each other. In fact, a bare reading of Section 14 of the IBC would make it clear that the nature of proceedings which have to be kept in abeyance do not include criminal proceedings, which is the nature of proceedings under Section 138 of the N.I. Act.

We are unable to appreciate the plea of the learned counsel for the Appellant that because Section 138 of the N.I. Act proceedings arise from a default in financial debt, the proceedings under Section 138 should be taken as akin to civil proceedings rather than criminal proceedings. We cannot lose sight of the fact that Section 138 of the N.I. Act are not recovery proceedings. They are penal in character. A person may face imprisonment or fine or both under Section 138 of the N.I. Act. It is not a recovery of the amount with interest as a debt recovery proceedings would be. They are not akin to suit proceedings.

17. It cannot be said that the process under the IBC whether under Section 31 or Sections 38 to 41 which can extinguish the debt would ipso facto apply to the extinguishment of the criminal proceedings. No doubt in terms of the Scheme under the IBC there are sacrifices to be made by parties to settle the debts, the company being liquidated or revitalized......

18. We are unable to accept the plea that if proceedings against the company come to an end then the Appellant as the Managing Director cannot be proceeded against. We are unable to accept the plea that Section 138 of the N.I. Act proceedings are primarily compensatory in nature and that the punitive element is incorporated only at enforcing the compensatory proceedings.

The criminal liability and the fines are built on the principle of not honouring a negotiable instrument, which affects trade. This is apart from the principle of financial liability per se. To say that under a scheme which may be approved, a part amount will be recovered or if there is no scheme a person may stand in a queue to recover debt would absolve the consequences under Section 138 of the N.I. Act, is unacceptable."

Thus after declaration of law in this regard, it is no longer Res Integra that proceedings u/s 138 of NI Act do not abate on triggering of the provisions of IBC. However, with due respect to the Hon'ble Apex Court, such an interpretation would be against the very spirit & purpose of IBC. It cannot be denied that the nature of proceedings under Section 138 of the NI Act is primarily compensatory and the punitive element is incorporated at enforcing the compensatory provisions. The proceedings u/s 138 of NI Act are not purely criminal but quasi- criminal and therefore
Section 138 of the NI Act should not be permitted to be continued in such circumstances. Permitting two proceedings to continue would therefore defeat the purpose & intent of IBC.

It would be worthwhile to reproduce the Preamble of IBC, 2016 which reads as under:
"consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto".

From the plain reading of the preamble, it is explicit that such an interpretation, as given by the Apex Court, would not in anyway promote Entrepreneurship as envisaged in the preamble to IBC. It would be imperative that either the Apex Court should reconsider the said dictum or the Parliament should enact specific provisions to mandate abatement of proceedings u/s 138 of NI Act once the provisions of IBC are brought in action.

Written By: Inder Chand Jain
Email: [email protected], Ph no: 8279945021