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The Top Court, in its judgment dated March 1, 2021 held that Section 138/141 proceeding against a corporate debtor, not being a natural person, is covered by Section 14(1)(a) of the IBC.

A Full Judge Bench of Justice R.F. Nariman, Justice Navin Sinha and Justice K.M. Joseph, while hearing a batch of petitions, held, “The sweep of the provision (Section 14 IBC) is very wide indeed as it includes institution, continuation, judgment and execution of suits and proceedings. It is important to note that an award of an arbitration panel or an order of an authority is also included. This being the case, it would be incongruous to hold that the expression ‘the institution of suits or continuation of pending suits’ must be read disjunctively as otherwise, the institution of arbitral proceedings and proceedings before authorities cannot be subsumed within the expression institution of ‘suits’ which are proceedings in civil courts instituted by a plaint.” 

Issue: Whether the institution or continuation of a proceeding under Section 138 or Section 141 of the Negotiable Instruments Act,1881 can be said to be covered by the moratorium provision of Section 14, IBC?

Shri Jayanth Muth Raj, Learned Senior Advocate appearing on behalf of the appellants, submitted that considering the object of Section 14, that is, preservation of assets of the Corporate Debtor during Corporate Insolvency Resolution Process, it would be erroneous to deduce that a Section 138 proceeding aiming at recovery of amount, fall outside the scope of ‘proceedings’ contained in Section 14(1)(a) IBC. According to the learned Senior Advocate, Section 14(1)(a) is extremely wide and ought not to be cut down by judicial interpretation, given the expression ‘any’ occurring twice in the said provision. Reliance was further placed on the language of Section 14(1)(b) to argue that, no rule of construction, be it ejusdem generis or noscitur a sociis can be used to cut down the plain meaning of the words used in Section 14(1)(a).

Shri Jayant Mehra, Counsel for the respondents, argued that since the expression ‘proceedings’ takes its colour from the expression ‘suits’, such proceedings must necessarily be civil in nature. Reliance was placed on judgments which were construed like expressions contained in Section 22(1) of the Sick Industrial Companies Act, 1985 and Section 446(2) of the Companies Act, 1956. Learned Counsel further argued that the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process, as per Section 32A, shall cease in certain circumstances. “This provision would have been wholly unnecessary if Section 14(1)(a) were to cover criminal offences as well.”

Shri Aman Lekhi, Learned Additional Solicitor General, on behalf of the Union argued that, offence under Section 138 is of a purely criminal nature resulting in imposition of a jail sentence or fine or both, and hence, does not fall within ‘proceedings’ contemplated by Section 14 of the IBC. He further states that since compounding under criminal law can only take place at the instance of the complainant/injured party, a subordinate criminal court has no inherent power to terminate proceedings under Section 138/141 upon ‘payment of compensation to the satisfaction of the court’. 

He further relied upon the rule of noscitur a sociis to state that since the expression ‘proceedings’ contained in Section 14(1)(a) of the IBC is preceded by the expression ‘suits’ and followed by the expression ‘execution’, it has to be read analogous to civil proceedings dealing with private rights of action as contrasted with criminal proceedings which deal with public wrongs. 

Answering the issue in affirmative, the Court made the following observations.

1. ‘Ejusdem Generis’ and ‘Noscitur a Sociis’ being rules of Construction, cannot be applied to nullify the meaning of words used in a statute if they are designedly used in a wide sense. Where a residuary phrase is used as a catch-all expression to take within its scope what may reasonably be comprehended by a provision, noscitur a sociis cannot be used to stultify the object so purportedly. [Jagdish Chander Gupta v. Kajaria Traders (India) Ltd., (1964) 8 SCR 50, Rajasthan State Electricity Board v. MohanLal, (1967) 3 SCR 377, CBI v. Braj Bhushan Prasad, (2001) 9 SCC 432, Godfrey Phillips v. State of UP, (2005) 2 SCC 515, Vikram Singh v. Union of India, (2015) 9 SCC 502]
2. Quasi-criminal proceeding in the nature of S.138 Negotiable Instruments would result in depletion of the assets of the corporate debtor and directly impact CIRP in the same manner as the institution, continuation or execution of a decree in a Civil Court.
3. Considering Sections 14, 81, 85, 96 and 101, the Court said, “A legal action or proceeding in respect of any debt would, on its plain language, include a Section 138 proceeding.” [Macquarie Bank v. Shilpi Cable Technologies, (2018) 2 SCC 674 and Giriraj Garg v. Coal India Ltd., (2019) 5 SCC 192]

Legal proceeding, even indirectly relatable to recovery of any debt would be covered.

4. Quasi-criminal proceeding contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section 14 of the IBC, amount to a ‘proceeding’ within the meaning of Section 14(1)(a); “… a Section 138 proceeding can be said to be a ‘civil sheep’ in a ‘criminal wolf’s’ clothing, as it is the interest of the victim that is sought to be protected, the larger interest of the State being subsumed in the victim alone moving a court in cheque bouncing cases.” 
5. Moratorium provision contained in Section 14 of the IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141 continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act,1881.

Case Title: P. Mohanraj v. Shah Brothers | Civil Appeal No. 10355 of 2018