Sec.138 of NI Act is not hit by Section 14 of I&B Code

This post is about the judgement of Hon’ble National Company Law Appellate Tribunal (NLCAT) in  Shah Brothers Ispat Pvt. Ltd v. P. Mohanraj & Ors. (Order dt.31.7.2018). The order is under challenge before Hon’ble Supreme Court.

It may be recalled that upon the admission of matter for corporate insolvency resolution process (u/Ss. 7 or 9 or 10) of the IBC, moratorium u/s.14 of the IBC is declared and it prevents the institution of suits or continuance of pending suits or proceedings against the Corporate Debtor (Company or LLP), including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority.

Shah Brothers Ispat Pvt. Ltd. preferred an appeal before the Hon’ble National Company Law Appellate Tribunal (NCLAT), challenging an order passed by the Chennai Bench of the National Company Law Tribunal dated 24th May 2018. In this case, the NCLAT held that no criminal proceeding is barred by Section 14 of  I&B Code. Thus, while there may be moratorium u/s.14 of IBC, existing and new criminal proceedings can survive.

The Hon’ble National Company Law Tribunal (NCLT), Chennai Bench, had directed the Shah Brothers Ispat Pvt. Ltd. to withdraw a complaint case filed under Section 138 of Negotiable Instrument Act treating it as a proceeding hit by sec.14 of IBC as it was filed post commencement of the Corporate Insolvency Resolution Process (as moratorium was declared vide order dated 6th June 2017). And, according to NCLT, proceeding u/s.138 of NI Act is prevented by sec. 14 of IBC.

The question for consideration in this appeal was whether the order of moratorium (u/s.14 of IBC) will cover a criminal proceeding initiated under Section 138 of NI Act. And if so, proceedings u/s.138 cannot be continued, if already commenced or cannot be instituted during the period of moratorium.

The NCLAT held that the Company cannot be imprisoned, therefore punishment under Section 138 of NI Act cannot be imposed against the company (Corporate Debtor). However, fine can be imposed by a court of competent jurisdiction on the Company (Corporate Debtor), if found guilty. Also, it was observed that as section 138 is a penal provision, which empowers the court of competent jurisdiction to pass an order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim. Hence, the criminal proceedings cannot fall within the purview of Section 14 of IBC. Accordingly, the appeal was allowed.


Since section 138 proceedings are excluded from the purview of the moratorium under  IBC, it shall have the following repercussions.

1. It prevents Corporate Debtors who approach the adjudicating authority under Section 10,  to take shelter of the moratorium to escape proceedings under Sec.138 of the N.I. Act.

2. The assets of the Corporate Debtor are maintained and in the custody of the Resolution Professional during the moratorium period. Therefore, the creditors are assured that the assets of the Corporate debtor are safe while they discuss the viability and possible resolution plan of the Corporate Debtor. As section 138 NI Act proceedings are held to be not included in the ambit of section 14 of the Code it threatens the Creditor that the complainant may recover his dues from the Corporate Debtor.

3. Any recovery by the Complainant pursuant to sec.138 of NI Act from the Corporate Debtor may lead to preferential treatment under section 43 of the IBC. The proviso to Sec.43(3) states “Any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor”. However, one need to wait for jurisprudence on this aspect.


From the above analysis, it is crystal clear that  moratorium will not be applicable to proceedings under section 138 of the Act and therefore, those cases which are pending before the admission of application under section 7, 9 or 10 of the Code i.e., before the initiation of insolvency process will not be affected by the moratorium. Further, an action under section 138 of the NI Act, 1881 can be initiated even after the commencement of the insolvency process. Albeit, section 14 of the Insolvency and Bankruptcy Code, 2016 does not specifically cover the proceedings under section 138 (dishonour of cheque), the intent of the provision is to cover all such proceedings which are in the nature of recovery of money and to ensure that during this period there is no additional stress on the assets of the Corporate Debtor.   

In a nutshell, exclusion of proceedings under Section 138 of the Negotiable Instrument Act, from the purview of the moratorium has been allowed by the Hon’ble Appellate Tribunal. However, we need to keep an eye on what the Hon’ble Supreme Court decides as the decision of NCLAT is appealed and pending before it.

Our Comments:

Whether proceedings under Section 138 of the Negotiable Instrument Act be considered as civil or criminal in nature. 

The nature of proceedings under N.I. Act is still under a grey patch and ambiguous owing to the different views of the Court. 

Hon’ble Delhi High Court in the matter of Bhajanpura Cooperative Urban Thrift and Credit Society Ltd. Vs. Sushil Kumar, MANU/DE/2084/2014 held that proceedings under section 138 of NI Act, 1881 primarily is of quasi-civil and criminal in nature.

In M/s Meters and Instruments Pvt. Ltd. & Anr. v. Kanchan Mehta, (2018) 1 SCC 560, the Supreme Court observed that the offence under section 138 is primarily a civil wrong and the purpose of the provision is predominantly compensatory. The penal element is mainly for the purposes of enforcing the compensatory element. 

The Hon’ble Supreme Court in Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593 had held that the gravity of a complaint under the NI Act cannot be equated with an offence under the provisions of the Indian Penal Code, 1860 (“IPC”) or other criminal offences. As per the Hon’ble Supreme Court, “an offence under Section 138 NI act is almost in the nature of a civil wrong, which has been given criminal overtones.”

In Damodar S. Prabhu v. Sayed Babalal, it was held by the Apex Court that section 138 is actually in the nature of a civil wrong which has been given criminal implications. This is because the interest of the complainant is the recovery of the money and not sending the accused behind bars. 

Whether provisions of section 14 of IBC is akin to section 446 of the Companies Act 1956?

The division bench of Hon’ble Bombay High Court, in Indorama Synthetics (I.) Ltd. Vs. State of Maharashtra, 2016 (4) Mh.L.J. 249, while interpreting sub-section (1) of section 446 of the Companies Act, 1956 held that the words “suit or other proceedings” exclude criminal complaints filed under section 138 of the NI Act. However, it is relevant to note that in the judgement it was observed that ‘The provisions of section 446(1) of the Companies Act are to be invoked judiciously only when it has got any concern with either the winding-up proceedings or with the assets of the Company. The expression “suit or other proceedings”, therefore, as used in section 446(1) of the Companies Act, has to be construed accordingly and not to be interpreted so liberally and widely so as to include each and every proceeding of whatsoever nature initiated against the Company, including even the criminal proceedings like for the offence under section 138 of N.I. Act, which has got no bearing on the winding-up proceedings of the Company and are not concerned with, directly with the assets of the Company, but are mainly dealing with the penal and personal liability of the Directors of the Company.’. Prior to this, there was a conflicting view on the matter of two single benches of Bombay High Court. Comment: However, in our view, IBC is on a totally different plateau and cannot be compared with Sec.446 of the Companies Act 1956. 

Recently, Hon’ble Bombay High Court in Tayal Cotton P Ltd vs State of Maharashtra (2019) 1 Mah LJ 312 held “However, in my considered view, the aim and object behind providing the bar under Sub Section 1 of Section 446 of the Companies Act and that of Section 14 of the Code are similar and therefore, though not strictly as a precedent, the decision in the case of Indorama is not applicable to the matter in hand, the reasonings and the logic in interpreting the provision contained in Sub Section 1 of Section 446 of the Companies Act laid down therein can easily be pressed into service even in the matter in hand.” And further applying the principle of ejusdem generis held that “the word ‘proceedings’ used therein and even the words ‘order’ and ‘in Court of law’ will have to be interpreted as a proceeding arising in the nature of a suit and orders passed in such proceedings and suits. Apart from the fact that the Legislature has not conspicuously used the words ‘criminal’ as an adjective to the word ‘proceedings’ and as an adjective to the noun ‘Court of law’, it must be assumed that the Legislature in its wisdom has consciously omitted to use such adjectives since it must have intended to prohibit only the suits and execution of the judgments and decrees or a proceeding of the like nature. “

It seems that Hon’ble NCLAT has not been presented with the above rulings. Had attention of Hon’ble NCLAT been drawn to aforesaid rulings, perhaps judgement could have been different.

The order is under challenge before Hon’ble Supreme Court and it will be interesting to note how the Apex Court determines the issue.