SC: Moratorium Under S. 14 IBC Applies to Cheque-Bounce Complaints

Cheque-Bounce Cases Under NI Act Cannot Proceed Against Corporate Debtor During Moratorium. Image Credit: Noirathsi’s Eye (Flickr)

The Supreme Court of India has held that the moratorium under section 14 of the Insolvency and Bankruptcy Code (IBC) is applicable to cheque-dishonour complaints against the corporate debtor under the Negotiable Instruments (NI) Act ( P. Mohanraj vs. M/s Shah Brothers Ispat Pvt. Ltd., AIRONLINE 2021 SC 103).

But there is little to cheer for those at the helm of such a corporate debtor at the time of the offence under section 138 of the NI Act. The court clarified the moratorium is not with respect to any such person who can be freely proceeded against under the Act (specifically under s. 141 which makes them liable along with the company).

The main argument against this position was based on the ejusdem generis and noscitur a sociis principles — rules of construction that courts employ to narrow down the scope of general words based on more specific language in their vicinity. The respondents in the case argued that the term “proceedings” in section 14(1)(a) of the IBC must be interpreted using said principles, and when so interpreted, it can only be read as a reference to purely civil proceedings in the nature of a “suit.”

This interpretation would have banished cheque-dishonour complaints against the corporate debtor from the purview of Section 14(1)(a), enabling such complaints to be instituted and continued despite the moratorium. However, it was not be.

The court laid waste to the argument by holding that the term “proceedings” has been used in a wide sense advisedly, regard being had to the object of S. 14, which is to prevent any further depletion of the corporate debtor’s financial resources. The court ruled that principles of construction such as ejusdem generis and noscitur a sociis cannot be allowed to subvert the very object of a provision.

“Importantly, where a residuary phrase is used as a catch-all expression to take within its scope what may reasonably be comprehended by a provision, regard being had to its object and setting, 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,” the court opined.

Upon analysing section 138 of the NI Act, the court took the view that proceedings under that provision are effectively geared towards the recovery of money from the offender (up to twice the cheque amount). It added that such proceedings carry the risk of diminution of corporate debtor’s financial value — just like a civil suit for recovery of money — and cannot therefore be allowed during the moratorium under Section 14(1)(a).

It was next argued that proceedings under Sections 138 are not quasi-criminal but criminal in nature. The court made short work of the contention, pulverising it under the weighty combination of common sense and judicial opinions to the contrary.

The judgement is significant for its championing of purposivism and for being a reminder that no canon of construction can be invoked in the teeth of clear legislative intent.

That is not to say there are no problems with the judgement. But that is an article for another day.

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Originally Published by The Law Syndicate on April 12, 2021.

Delhi-based advocate who practices before the Supreme Court of India, various High Courts and different tribunals.