Section 138, being a criminal law provision, cannot be held to be a “proceeding” within the meaning of Section 14 of the IBC, says SC

Last updated: 05 April 2021

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The Supreme Court has ruled that a criminal case initiated under Section 138 of the Negotiable Instruments Act (dealing with bounced cheques) cannot be considered a 'proceeding' as defined by Section 14 of the Insolvency and Bankruptcy Code (IBC). This distinction is important for how these matters are handled within insolvency proceedings.

Court :
Supreme Court of India

Brief :
Steel products were supplied by the respondent to one M/s.Diamond Engineering Pvt. Ltd. [“the company”] from 21.09.2015 to11.11.2016, as a result of which INR 24,20,91,054/- was due and payableby the company. As many as 51 cheques were issued by the company infavour of the respondent towards amounts payable for supplies, all ofwhich were returned dishonoured for the reason “funds insufficient” on 03.03.2017.

Citation :
CIVIL APPEAL NO.10355 OF 2018

IN THE SUPREME COURT OF INDIA
CIVIL/CRIMINAL APPELLATE JURISDICTION
CIVIL/CRIMINAL ORIGINAL JURISDICTION
CIVIL APPEAL NO.10355 OF 2018

P. MOHANRAJ & ORS. … APPELLANTS

VERSUS

M/S. SHAH BROTHERS ISPAT PVT. LTD. …RESPONDENT

WITH

CRIMINAL APPEAL NO._239___ OF 2021
(@ SPECIAL LEAVE PETITION (CRL.) NO._1955__ OF 2021)
(Diary No.32585/2019)
CRIMINAL APPEAL NO.___240________ OF 2021
(@ SPECIAL LEAVE PETITION (CRL.) NO.10587 OF 2019)
CRIMINAL APPEAL NO.__241______ OF 2021
(@ SPECIAL LEAVE PETITION (CRL.) NO.10857 OF 2019)
CRIMINAL APPEAL NO.__242_______ OF 2021
(@ SPECIAL LEAVE PETITION (CRL.) NO.10550 OF 2019)
CRIMINAL APPEAL NO.__243_______ OF 2021
(@ SPECIAL LEAVE PETITION (CRL.) NO.10858 OF 2019)
CRIMINAL APPEAL NO.___244______ OF 2021
(@ SPECIAL LEAVE PETITION (CRL.) NO.10860 OF 2019)
CRIMINAL APPEAL NO.____245_____ OF 2021
(@ SPECIAL LEAVE PETITION (CRL.) NO.10861 OF 2019)

J U D G M E N T

R.F. Nariman, J.

1. Steel products were supplied by the respondent to one M/s.Diamond Engineering Pvt. Ltd. [“the company”] from 21.09.2015 to11.11.2016, as a result of which INR 24,20,91,054/- was due and payableby the company. As many as 51 cheques were issued by the company infavour of the respondent towards amounts payable for supplies, all ofwhich were returned dishonoured for the reason “funds insufficient” on 03.03.2017. As a result, on 31.03.2017, the respondent issued a statutorydemand notice under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, calling upon the company and its three Directors,the appellants no.1-3 herein, to pay this amount within 15 days of the receipt of the notice.

2. On 28.04.2017, two cheques for a total amount of INR 80,70,133/- presented by the respondent for encashment were returned dishonouredfor the reason “funds insufficient”. A second demand notice dated 05.05.2017 was therefore issued under the selfsame Sections by the respondent, calling upon the company and the appellants to pay this amount within 15 days of the receipt of the notice.

To know more in details find the attachment file

FAQ :

The Supreme Court has clarified that a criminal proceeding under Section 138 of the Negotiable Instruments Act is not a 'proceeding' under Section 14 of the Insolvency and Bankruptcy Code.

Section 138 deals with the criminal offence of dishonouring a cheque due to insufficient funds.

Section 14 of the IBC provides for a moratorium, which is a temporary suspension of all 'proceedings' against the corporate debtor during the insolvency resolution process.

The distinction is important because it determines whether a Section 138 case can be automatically stayed or affected by the moratorium imposed under Section 14 of the IBC.