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TMI Blog2022 (8) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... and was not in any manner in discharge of any corporate debt in respect of 'his company'. Thus the entire controversy is as to whether criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881, (hereinafter referred to as the "NI Act" or the "Act"), would also remain stayed in terms of Section 96 of the Code, even where the cheque in question was not issued to discharge a 'corporate debt', though issued by a personal guarantor qua a corporate debtor, but is not a cheque qua parties as are adversaries or litigants in any proceedings before the National Company Law Tribunal/Resolution Professional/Interim Resolution Professional. 2. Before going further, a very brief reference to the complaint under the NI Act, filed by the respondent, needs to be made. As per the respondent herein, the petitioner had requested him for a loan of Rs.1,00,000/- for his business requirements, with an offer made to repay the same with interest; and keeping in view their friendly relations, the complainant is stated to have given him a loan, vide a demand draft for an amount of Rs.11,00,000/-, issued by the State Bank of Patiala on 05.03.2008. The petitioner is stated to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an application under Section 94 of the said Code before the Adjudicating Authority for initiation of a personal insolvency resolution process, in December 2020, on account of having became personally insolvent, necessarily all proceedings under Section 138 of the Act of 1881 would remain stayed in terms of the Section 96(1)(b) of the Code, which reads as follows:- "96. Interim-moratorium-(1) When an application is filed under Section 94 or Section 95- (a) an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and (b) during the interim-moratorium period- (i) any legal action or proceedings pending in respect of any debt shall be deemed to have been stayed; and (ii) the creditors of the debtor shall not initiate any legal action or proceedings in r espect of any debt ." (Emphasis applied in this judgment only) 4. Mr. Jagga further submitted that as a matter of fact the trial court, vide the impugned order, has wholly erred in holding that the provisions of the Code of 2016 do not apply to individuals, even in terms of Section 2(g) of the Code, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is otherwise enforceable in civil law. Further, though the ingredients of the offence are contained in the first part of Section 138 when the cheque is returned by the bank unpaid for the reasons given in the Section, the proviso gives an opportunity to the drawer of the cheque, stating that the drawer must fail to make payment of the amount within 15 days of the receipt of a notice, again making it clear that the real object of the provision is not to penalise the wrongdoer for an offence that is already made out, but to compensate the victim. 37. Likewise, under Section 139, a presumption is raised that the holder of a cheque received the cheque for the discharge, in whole or in part, of any debt or other liability. To rebut this presumption, facts must be adduced which, on a preponderance of probability (not beyond reasonable doubt as in the case of criminal offences), must then be proved. Section 140 is also important, in that it shall not be a defence in a prosecution for an offence under Section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that Section, thus making it clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an offence, is really in order to get back through a summary proceeding, the amount contained in the dishonoured cheque together with interest and costs, expeditiously and cheaply. We have already seen how it is the victim alone who can file the complaint which ordinarily culminates in the payment of fine as compensation which may extend to twice the amount of the cheque which would include the amount of the cheque and the interest and costs thereupon. Given our analysis of Chapter XVII of the Negotiable Instruments Act together with the amendments made thereto and the case law cited hereinabove, it is clear that a quasicriminal proceeding that is 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), the moratorium therefore attaching to such proceeding." 8. Thereafter, he referred to a judgment of the Supreme Court in Swiss Ribbon Pvt. Ltd. and another v. Union of India and others AIR 2019 (SC) 739, from which he specifically pointed to paragraphs 11 and 12, which read as follows:- "11. As is discernible, the Preamble gives an insight into what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor's assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends." 9. Mr.Jagga next referred to another judgment of the Supreme Court, in Lalit Kumar Jain v. Union of India and others 2021 (2)Law Herald (SC) 1462, from which he specifically referred to paragraphs 91, 92, 95 and 96, which read as follow:- "91. The close proximity, or inter-relatedness of personal guarantors with corporate debtors, as opposed to individuals and partners in firms was noted by the report of the Working Group, which remarked that it: "recognizes that dynamics, the interwoven connection between the corporate debtor and a guarantor (who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquida- tor or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding. (2) The Adjudicating Authority on receipt of an application under sub-section (1) and, on being satisfied that evidence or action relating to assets under sub-section (1) is required in connection with insolvency resolution process or liquidation or bankruptcy pro- ceeding, may issue a letter of request to a court or an authority of such country competent to deal with such request." XXXXX XXXXX XXXXX 95. The impugned notification authorises the Central Government and the Board to frame rules and regulations on how to allow the pending actions against a personal guarantor to a corporate debtor before the Adjudicating Authority. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quence of the non obstante clause in Section 238, has the result that if any proceeding were to be initiated against personal guarantors it would be under the Code." (Emphasis applied in this judgment only) 10. Mr. Jagga also later referred to Section 79(15)(e) of the Code which reads as follow:- 79. Definitions. In this Part, unless the context otherwise requires- XXXXX XXXXX XXXXX 15. "excluded debt" means - XXXXX XXXXX XXXXX (e) any other debt as may be prescribed; He submitted that there is no exclusion of proceedings under Section 138 of the Act, in any Rules or Regulations promulgated under the Code. 11. On the aforesaid arguments notice of motion was issued to the respondent, with this court having, in the meanwhile, stayed proceedings under the Act of 1881, (qua which the impugned order has been passed). 12. Thereafter, the respondent having put in an appearance through counsel (Mr. B.K. Mehta, Advocate), he had at the outset submitted that the judgment relied upon by learned counsel for the petitioner on the first date, i.e. P. Mohanraj (supra), actually does not hold to the effect as was contended before this court. Mr. Mehta next pointed to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 138/141 proceedings against the said debtor during the corporate insolvency resolution process are interdicted, what is stated in paragraphs 51 and 59 in Aneeta Hada (supra) would then become applicable. The legal impediment contained in Section 14 of the IBC would make it impossible for such proceeding to continue or be instituted against the corporate debtor. Thus, 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. This being the case, it is clear that the 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." (Emphasis applied in this judgment only) 14. Next, Mr. Mehta submitted that though in the next paragraph (78) the Supreme Court disagreed with the judgments of the Bombay High Court and Calcutta High Court in Tayal Cotton Pvt. Ltd. v. State of Maharashtra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oratorium was imposed on 30.10.2018. The impugned judgment dated 16.10.2019 held that a petition under Section 482, CrPC to quash the said proceeding would be rejected as Section 14 of the IBC did not apply to Section 138 proceedings. 3. The impugned judgment is set aside in view of our judgment in Civil Appeal No.10355 of 2018, and the complaint is directed to be continued against the Managing Director and Director, respectively. Criminal Appeal arising out of SLP (Criminal) No.3500 of 2020 1. Leave granted. 2. The complaint in the present case was filed by the respondent on 28.07.2016. An application under Section 7, IBC was admitted by the Adjudicating Authority only on 20.02.2018 and moratorium imposed on the same date. The impugned judgment rejected a petition under Section 482 of the Cr.P.C. on the ground that Section 138 proceedings are not covered by Section 14 of the IBC. 3. The impugned judgment is set aside in view of our judgment in Civil Appeal No.10355 of 2018, and the complaint is directed to be continued against the appellant. Criminal Appeal arising out of SLP (Criminal) No.5638-5651/2020, 5653-5668/2020 Leave granted. In these appeals, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any corporate debt between the petitioner and the respondent herein, the complaint filed by the respondent herein in terms of Section 138 of that Act, has to continue against the petitioner and cannot be stayed even in terms of Sections 96 and 101 of the Code, given the fact that even the aims and objects of the Code are only to protect corporate debtors and have nothing to do at all with regard to a debt incurred wholly in a personal capacity with an individual who is not concerned in any manner with any corporate debt (i.e. the respondent herein). He thus reiterated that simply because the petitioner is a personal guarantor to a corporate debtor in a dispute wholly between banks and companies, with the respondent herein having nothing at all to do with that dispute in any manner, the petitioner cannot be allowed to take undue advantage of the provisions of the Code as actually do not apply at all to the debt he owes the respondent herein. 16. On query by this court in terms of Section 79 (15) (e) of the Code, i.e. as to whether the term "excluded debt" would cover any loan taken by one individual from another, Mr. Mehta had very fairly submitted that as far as he has been able ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof, being applicable to any complaint pending under the provisions of Section 138 of the Negotiable Instruments Act, 1881, till either admission of the petition filed by the petitioner before the adjudicating authority/NCLT, or at least upto its rejection (without admission), under Section 100 thereof. 20. He next submitted that though the ratio of the judgment in P. Mohanraj and others v. M/s Shah Brothers Ispat Pvt. Ltd. (Civil Appeal no.10355 of 2018, decided on March 01, 2021), may not strictly apply to the case of the petitioner, in view of the fact that the petitioner is a guarantor in his personal capacity as a Director of the company as is now in insolvency/ liquidation proceedings, that judgment being one pertaining to only corporate debtors, i.e. companies as were in bankruptcy/liquidation proceedings etc.; yet, while dealing with the issue, the Supreme Court has also referred to Sections 94 and 96 contained in Part III of the Code, which are the provisions pertaining to 'personal debtors'; in the context of which he pointed to paragraphs 5, 26, 27 and 38 of the said judgment, with him specifically stressing on what is contained in Paragraph 5, which reads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rotected at the relevant time if the assets of the petitioner are to be distributed to his creditors. 23. Having considered the matter the three essential facts that first need to be noticed from the arguments of learned counsel for the respondent as are not denied by learned counsel for the petitioner, are that:- i. That the complaint filed by the respondent herein against the petitioner under the provisions of Section 138 of the NI Act (copy Annexure P-1), is seen to be dated 21.03.2012 and with summons having been issued to the petitioner by the learned trial court (JMIC, Jalandhar), on 28.05.2012 (copy Annexure P-2). ii. The application made by the petitioner before the National Company Law Tribunal (Chandigarh Bench) (hereinafter referred to as the Tribunal), under the provisions of Section 94 (1) of the Code (copy Annexure P-17), is seen to be dated 04.02.2021, though the written communication from the proposed Interim Resolution Professional (as proposed by the petitioner) in terms of Rule 9(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, is seen to be accompanied by a receipt issued by the office of the Tribunal on 14.12.2020. ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of the petitioner, no provision of the Code would apply to any proceedings arising out of such liability of the petitioner, including proceedings under Section 138 of the NI Act. 25. First and foremost, the following provisions of the Code need to be reproduced, as are germane to the controversy:- "Section 2. The provisions of this Code shall apply to- (a) any company incorporated under the Companies Act, 2013 (18 of 2013) or under any previous company law; (b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act; (c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008(6 of 2009); (d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; [(e) personal guarantors to corporate debtors; (f) partnership firms and proprietorship firms; and (g) individuals, other than persons referred to in clause (e)] in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 2[liquidation or bankruptcy proceeding of a corporate guarantor or personal guarantor, as the case may be, of the corporate debtor] pending in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor. (4) The National Company Law Tribunal shall be vested with all the powers of the Debt Recovery Tribunal as contemplated under Part III of this Code for the purpose of sub-section (2). (5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of- (a) any application or proceeding by or against the corporate debtor or corporate person; (b) any claim made by or against the corporate debtor or corporate person,including claims by or against any of its subsidiaries situated in India; and (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code. (6) Notwithstanding anything contained in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harged insolvent; (4) "bankruptcy" means the state of being bankrupt; (5) "bankruptcy debt", in relation to a bankrupt, means- (a) any debt owed by him as on the bankruptcy commencement date; (b) any debt for which he may become liable after bankruptcy commencement date but before his discharge by reason of any transaction entered into before the bankruptcy commencement date; and (c) any interest which is a part of the debt under section 171; (6) "bankruptcy commencement date" means the date on which a bankruptcy order is passed by the Adjudicating Authority under section 126; (7) "bankruptcy order" means an order passed by an Adjudicating Authority under section 126; (8) "bankruptcy process" means a process against a debtor under Chapters IV and V of this Part; (9) "bankruptcy trustee" means the insolvency professional appointed as a trustee for the estate of the bankrupt under section 125; (10) "Chapter" means a chapter under this Part; (11) "committee of creditors" means a committee constituted under section 134; (12) "debtor" includes a judgment-debtor; (13) "discharge order" means an order passed by the Adjudicating Authority discharging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is part as a resolution professional for conducting the fresh start process or insolvency resolution process; (22) "undischarged bankrupt" means a bankrupt who has not received a discharge order under section 138." xxxx xxxx xxxx xxxx "Section 94. Application by debtor to initiate insolvency resolution process.- 1) A debtor who commits a default may apply, either personally or through a resolution professional, to the Adjudicating Authority for initiating the insolvency resolution process, by submitting an application. 2) Where the debtor is a partner of a firm, such debtor shall not apply under this Chapter to the Adjudicating Authority in respect of the firm unless all or a majority of the partners of the firm file the application jointly. 3) An application under sub-section (1) shall be submitted only in respect of debts which are not excluded debts. 4) A debtor shall not be entitled to make an application under sub-section (1) if he is - a) an undischarged bankrupt; b) undergoing a fresh start process; c) undergoing an insolvency resolution process; or d) undergoing a bankruptcy process. 5) A debtor shall not be eligible to apply under subsec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one hundred and eighty days beginning with the date of admission of the application or on the date the Adjudicating Authority passes an order on the repayment plan under section 114, whichever is earlier. (2) During the moratorium period- (a) any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed; (b) the creditors shall not initiate any legal action or legal proceedings in respect of any debt; and (c) the debtor shall not transfer, alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest therein; (3) Where an order admitting the application under section 96 has been made in relation to a firm, the moratorium under sub-section (1) shall operate against all the partners of the firm. (4) The provisions of this section shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator." xxxx xxxx xxxx xxxx "Section 179 Adjudicating authority for individuals and partnership firms- (1) Subject to the provisions of section 60, the Adjudicating Authority, in relation to insolvency matters of individuals and firms shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t-III of the Code commences from Section 78 and continues till Section 187 thereof. The heading of Part-III reads as follows:- "Insolvency Resolution and Bankruptcy for individuals and partnership firms." It is also necessary to notice at this stage that the petitioner having filed the application before learned NCLT as a personal guarantor to a corporate debtor, the term 'personal guarantor' is defined only in Section 5(22) of the Code which is again reproduced here:- "5. Definitions In this Part, unless the context otherwise requires,- (22) "personal guarantor" means an individual who is the surety in contract of guarantee to a corporate debtor;" Thus, the said provision is defined only in Part-II of the Code relating to insolvency resolution and liquidation proceedings in respect of corporate persons and is not seen to be defined anywhere in Section 79 of the Code, which comes within the ambit of Part III and which pertains to such process for individuals and partnership firms. Section 79 thus contains the definitions as would seem to be relevant to Part-III whereas Section 5 contains definitions as would be relevant to Part-II. 29. Having thus looked at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssor, where such property is occupied by or in possession of the individual or firm can be recovered during the moratorium period, unlike the property of a corporate debtor. For all these reasons, therefore, given the object and context of Section 14, the expression "proceedings" cannot be cut down by any rule of construction and must be given a fair meaning consonant with the object and context. It is conceded before us that criminal proceedings which are not directly related to transactions evidencing debt or liability of the corporate debtor would be outside the scope of this expression." 30. Thereafter in paragraph 29 of P. Mohanraj, their Lordships referred to paragraphs 26 and 26.1 of an earlier judgment of the Supreme Court in State Bank of India versus V. Ramakrishnan and another (2018) 17 SCC 394. Those paragraphs read as follows and are extremely significant in the context of Sections 96 and 101 when juxtaposed with Section 14 of the Code:- "26. We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rector. In the aforesaid background the only judgment of the Supreme Court as has been referred to by learned counsel for the parties (actually for the petitioner), as has been pronounced on the subject after the amendment of the Code in 2018, is that in Lalit Kumar Jains' case (supra). From that judgment, other than the paragraphs specifically referred to by learned counsel for the petitioner, what needs to be referred to by this court is that part of paragraph 86 as reproduces sub-section (2) of Section 60 of the Code, with that provision again being reproduced here, by highlighting what is considered necessary by this court for the purpose of the present petition:- "86. XXXXX XXXXX XXXXX The amended Section 60(2) reads as follows:- "(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the procedure laid down in the Code, with that application having been allowed and with the Resolution Professional himself having been appointed as the Liquidator on 18.05.2020. Subsequently, Mr. Jagga also produced an order dated 11.05.2022, (after the matter had been put up for rehearing by this court), also passed by the Tribunal, taking on record the progress report in the liquidation proceedings and with the next date of hearing in those proceedings before the Tribunal now being 19.07.2022. Hence, as regards the basic maintainability of the application of the petitioner in view of the already pending proceedings initiated against the corporate debtor, the application would be maintainable (though of course with no comment made by this court as to whether the application under Section 94 (1) should be accepted on merits or rejected, by the Tribunal). 34. Consequently, the two questions now before this court are:- (1) Whether in such circumstances the complaint under Section 138 of the Act of 1881 would also fall within the ambit of the phrases "all the debts" and "any legal actions or proceedings pending in respect of any debt" as occur in clauses (a) and (b)(i) of sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by the application filed under Section 94 by the personal guarantor to a corporate debtor and consequently the complaint filed by the respondent herein under Section 138 of the Act can continue wholly independently of the proceedings before the Adjudicating Authority/NCLT. 36. To further try and understand as to which of the aforesaid two interpretations would apply, the following part of the judgment of the Supreme Court (in paragraph 26.1) of V. Ramakrishnans' case (supra) would need to be looked at again:- ".......... and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor -- often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 5(22) falling in Part II thereof and not in Part III. Yet, the rule making authority under Section 239 of the Code (the Central Government) promulgated the Rules of 2019 by invoking jurisdiction under the said provision as also under the other provisions referred to in the preamble to the rules, and stipulated in Rule 6 therein that an application to be made by such a guarantor under the provisions of Section 94(1) would be submitted in terms of the procedure laid down under that Rule. Thus, the application to be made by a personal guarantor to a corporate debtor, even though such a person/individual is referred to in Section 5(22) and Section 60, both falling in Part II of the Code and not in Part III thereof, is to be made under Section 94(1) falling within Part III and with the said application to be made before the NCLT, in terms of Section 60(1) which falls under Part II of the Code. Now in the aforesaid background, if one is to consider Mr. Jaggas' argument that the petitioner having sought his own insolvency under Section 94, all his debts would necessarily have to be considered by the Tribunal, that would seem to be in consonance with what has been observed in par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... away therefrom. 39. As regards the second question posed to itself by this court in paragraph 34 (supra), it would have to be held that by virtue of the term "any legal action or proceedings pending in respect of any debt (as per Section 96), proceedings under Section 138 of the Act, would be deemed to be stayed irrespective of the fact that such proceedings were initiated far before the application under Section 94 of the Code was filed by the personal guarantor to a corporate debtor. In that very context, as regards the dismissal by the Supreme Court of other appeals and writ petitions as were heard with P. Mohanrajs' case (as have been pointed to by Mr. Mehta, learned counsel for the respondent), the dismissal would seem to be on account of the fact that the proceedings under Section 138 against the Dire7ctors of the companies as were corporate debtors in those cases, were firstly held to be independent of the proceedings under the Code against the corporate debtor itself and further, there is no interim moratorium referred to in Section 14, with the moratorium mentioned in that provision, being one as has to be declared by the Adjudicating Authority; and consequently the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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