Proceedings u/s 138 of NI Act are quasi criminal in nature: SC

The Supreme Court has observed that criminal proceedings for the dishonour of cheque u/s 138 of Negotiable Instruments Act are quasi-criminal in nature.

The Court also stated that proceedings u.s 138 can be termed civil sheep in a wolf’s clothing.

A three-judge Bench made the above-mentioned observations while deciding whether moratorium declared u/s 14 of Insolvency Bankruptcy Code (IBC) would bar Section 138 proceeding against corporate debtors.

Another issue before the Court was a case under Section 138 Act would come under the purview of the term proceeding as used in Section 14 of IBC. According to many High Courts of the country, as Section 138 proceedings were criminal in nature, it will not be hit by Section 14.

Observations of the Court

Hon’bleHon’ble Court opined that the real object of Section 138 proceedings is to compensate the victim and not to penalise the wrongdoer for an offence that is made out. The Court also noted that mens rea was not an ingredient of the offence.

As per the Bench, no court has to take cognisance of an offence u/s 138 except the victim( holder or payee) makes a complaint. The COurt noted that 2018 amendments to NI Act, which introduced interim compensation, points towards the civil nature of proceedings.

The Court referred to CIT vs Ishwarlal Bhagwandas, wherein the Court has observed that a civil proceeding is generally not a proceeding that starts with the filing of a suit and ends in decree execution.

Contentions

ASG Aman Lekhi objected to Section 138 proceedings being termed quasi-criminal and argued since the punishment for the offence is mentioned u/s 53 of IPC, it can’t be called quasi-criminal.

The Court rejected this line of argument and stated that there are many examples of punishable acts with fine or imprisonment or both and have been described as quasi-criminal like Breach of Company Act provisions and criminal contempt.

Decision: 

The Court ruled that Section 138 proceedings against a corporate debtor would come under the ambit of Section 14 of IBC.

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