Supreme Court Quashes Cheque Bounce Case Against Corporate Debtor

The Supreme Court of India, in its judgment dated 18 November 2021, quashed proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881, against M/s. Nag Leathers Pvt. Ltd. The case, M/s. Nag Leathers Pvt. Ltd. vs. M/s. Dynamic Marketing Partnership, involved a dispute over the enforcement of a cheque issued by the corporate debtor. The Court ruled that proceedings under Section 138 of the Act could not be initiated against a corporate debtor when a moratorium is in place under the Insolvency and Bankruptcy Code (IBC), 2016.

Background of the Case

The dispute arose when M/s. Dynamic Marketing Partnership filed a complaint against M/s. Nag Leathers Pvt. Ltd., alleging that a cheque issued by the appellant had bounced due to insufficient funds. The complainant initiated criminal proceedings under Section 138 of the Negotiable Instruments Act. The appellant, however, challenged the proceedings before the Madras High Court under Section 482 of the Code of Criminal Procedure, arguing that the cheque in question was not enforceable as a legally recoverable debt because of an ongoing moratorium under the IBC.

The Madras High Court rejected the appellant’s plea, holding that the moratorium did not bar proceedings under the Negotiable Instruments Act. Aggrieved by this decision, the appellant approached the Supreme Court.

Petitioner’s Arguments

The petitioner, M/s. Nag Leathers Pvt. Ltd., argued:

A moratorium had been issued by the National Company Law Tribunal (NCLT) on 10 July 2017 in proceedings under the IBC.
Section 14 of the IBC explicitly prohibits the institution or continuation of legal proceedings against a corporate debtor during the moratorium period.
The statutory notice under Section 138 of the Negotiable Instruments Act was issued on 21 December 2017, and a reply dated 2 January 2018 had already disclosed the moratorium.
Since the corporate debtor was undergoing insolvency resolution, no proceedings for recovery of debts, including cheque dishonor cases, could be continued.

Respondent’s Arguments

The respondents, M/s. Dynamic Marketing Partnership, contended:

Proceedings under Section 138 of the Negotiable Instruments Act were criminal in nature and did not fall under the civil remedies prohibited by the IBC.
The moratorium under Section 14 of the IBC did not apply to criminal proceedings against a corporate debtor.
The liability under Section 138 of the Negotiable Instruments Act is distinct from civil debt recovery proceedings and should continue.

Supreme Court’s Observations

The Supreme Court bench, comprising Uday Umesh Lalit and S. Ravindra Bhat, analyzed the impact of a moratorium under Section 14 of the IBC on cheque bounce cases. The Court observed:

A three-judge bench had already settled the issue in P. Mohanraj & Others vs. Shah Brothers Ispat Pvt. Ltd., (2021) 6 SCC 258, where it was held that Section 14 of the IBC bars proceedings under Section 138 of the Negotiable Instruments Act against a corporate debtor.
The judgment in Gimpex Private Ltd. vs. Manoj Goel, 2021 SCC Online SC 925, reaffirmed that a corporate debtor cannot be prosecuted for a cheque bounce case during the moratorium period.
Unlike in P. Mohanraj, where proceedings continued against individuals responsible for the corporate debtor’s affairs, the present case involved only the corporate entity as the accused.
Since no natural persons were arrayed as accused, the exception carved out in P. Mohanraj did not apply.

Final Judgment

The Supreme Court ruled in favor of the corporate debtor and issued the following directives:

The criminal proceedings initiated under Section 138 of the Negotiable Instruments Act against M/s. Nag Leathers Pvt. Ltd. were quashed.
The judgment of the Madras High Court was set aside.
The moratorium under Section 14 of the IBC was held to apply to cheque bounce cases against corporate debtors.
Since no individuals were named as accused, there was no scope for continuing proceedings under Section 138.

Implications of the Judgment

The Supreme Court’s ruling has significant implications for corporate insolvency and cheque bounce cases:

Moratorium Protection for Corporate Debtors: The judgment confirms that once a moratorium is in place under the IBC, proceedings under Section 138 of the Negotiable Instruments Act cannot continue against corporate debtors.
Protection of Corporate Restructuring: By preventing debt recovery through criminal proceedings, the ruling ensures that corporate insolvency resolution processes are not disrupted.
Clarification on Individual Liability: If individuals responsible for the corporate debtor’s financial affairs are named as accused, the prosecution can continue even during the moratorium.
Judicial Consistency: The ruling follows the precedent set in P. Mohanraj and Gimpex Private Ltd., ensuring consistency in the interpretation of the IBC.

The Supreme Court’s judgment in M/s. Nag Leathers Pvt. Ltd. vs. M/s. Dynamic Marketing Partnership reinforces the principle that corporate debtors undergoing insolvency resolution cannot be prosecuted under Section 138 of the Negotiable Instruments Act, thereby strengthening the framework of the Insolvency and Bankruptcy Code.

Petitioner Name: M/s. Nag Leathers Pvt. Ltd..
Respondent Name: M/s. Dynamic Marketing Partnership.
Judgment By: Justice Uday Umesh Lalit, Justice S. Ravindra Bhat.
Place Of Incident: Madras.
Judgment Date: 18-11-2021.

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