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Section 138 NI Act a civil sheep in a criminal’s wolf clothing: SC

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New Delhi, March 1, 2021-
The Supreme Court said on Monday that Section 138 of the NI Act proceeding can be termed as “civil sheep” in a criminal wolf’s clothing.

The top court made these observations while upholding that the declaration of moratorium under Section 14 of the IBC covers criminal proceedings connected with dishonour of cheque under Section 138 of NI Act against corporate debtor.

A bench comprising Justices R.F. Nariman, Navin Sinha and K.M. Joseph said: “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, as has been seen by us in the analysis made hereinabove of Chapter XVII of the Negotiable Instruments Act.”

The top court emphasised that for the period of moratorium, since no Section 138/141 proceeding can continue or be initiated against the corporate debtor because of a statutory bar, such proceedings can be initiated or continued against the persons mentioned in Section 141(1) and (2) of the Negotiable Instruments Act.

“We hold that Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC,” said the top court in its 120-page verdict.

The apex court said that Section 138/141 proceedings in this case will continue both against the company as well as the appellants (directors), as the insolvency resolution process does not involve a new management taking over. “We may also note that the moratorium period has come to an end in this case,” said the top court.

In June 2017, the National Company Law Tribunal (NCLT), Chennai, had initiated Corporate Insolvency Resolution Process (CIRP) against Diamond Engineering Chennai Limited (Corporate Debtor), on a plea by Shah Brothers Ispat Private Limited and moratorium was imposed.

Shah Brothers Ispat Private Limited (respondents in the Supreme Court) had filed a complaint under Section 138 before the Metropolitan Magistrate’s Court, Mumbai, against petitioner P. Mohanraj and others (appellants/directors of corporate debtor). It was filed prior to the initiation of CIRP against the appellants. Another complaint under Section 138 of NI Act was also filed after June 6, 2017, following the order of moratorium.

The appellants moved the NCLT contending that during the period of moratorium, petition under Section 138 of NI Act was not maintainable.

The NCLT directed Shah Brothers to withdraw the complaint under Section 138 of NI Act. The respondents moved to NCLAT, which said that no criminal proceeding is covered under Section 14 of IBC. The appellants then moved the top court.

“All these writ petitions have to be dismissed in view of the fact that such proceedings can continue against erstwhile directors/persons in charge of and responsible for the conduct of the business of the corporate debtor,” said the top court while concluding the verdict. (Agency)

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