IBC Section 96 Moratorium Does Not Bar NI Act Section 138 Proceedings: Supreme Court Clarifies Scope in Cheque Dishonor Cases (2025)

Date of the Judgment: April 01, 2025
Citation: 2025 INSC 445
Judges: J.B. Pardiwala, J., R. Mahadevan, J.

Can a personal guarantor facing cheque dishonor charges under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) avoid prosecution by claiming protection under the interim moratorium granted by Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC)? The Supreme Court of India addressed this critical question in a recent judgment, settling the legal position on the interplay between these two important legislations. The court clarified that the moratorium under Section 96 of the IBC, which comes into effect upon filing an application for personal insolvency resolution, does not bar criminal proceedings initiated under Section 138 of the NI Act. This judgment, delivered by a bench comprising Justices J.B. Pardiwala and R. Mahadevan, provides clarity on the extent of protection offered by the IBC to personal guarantors and reinforces the integrity of cheque transactions.

Case Background

The case arose from a complaint filed by M/s Gurdas Agro Pvt. Ltd. against M/s Arjun Mall Retail Holdings Pvt. Ltd. and its directors, including Rakesh Bhanot, under Section 138 of the NI Act. The complaint alleged that the accused had issued four cheques, each for Rs. 50,00,000, which were dishonored due to “Funds Insufficient.” After a legal notice was issued and payment was not made, the complainant initiated proceedings under Section 138 of the NI Act.

During the pendency of these proceedings, Rakesh Bhanot filed an application under Section 94 of the IBC before the National Company Law Tribunal (NCLT), Chandigarh Bench, seeking a personal insolvency resolution. He then applied to the trial court to adjourn the Section 138 proceedings indefinitely, citing the interim moratorium under Section 96 of the IBC. The trial court rejected this application, and the High Court of Punjab and Haryana upheld the rejection. Rakesh Bhanot then appealed to the Supreme Court.

Timeline

Course of Proceedings

The trial court rejected Rakesh Bhanot’s application for adjournment, and the High Court of Punjab and Haryana dismissed his criminal petition under Section 482 of the Criminal Procedure Code (Cr.P.C). The High Court’s decision led to the appeal before the Supreme Court.

Legal Framework

The judgment revolves around the interpretation and interplay of the following key legal provisions:

• Section 138 of the Negotiable Instruments Act, 1881: This section deals with the dishonor of a cheque for insufficiency of funds. It states:
  

  “Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence…”

  This provision criminalizes the act of dishonoring a cheque when it is issued for the discharge of a legally enforceable debt or liability.

• Section 14 of the Insolvency and Bankruptcy Code, 2016: This section provides for a moratorium during the corporate insolvency resolution process. It prohibits:
  

  “(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority…”

  However, sub-section (3)(b) clarifies that the moratorium does not apply to “a surety in a contract of guarantee to a corporate debtor.”

• Section 94 of the Insolvency and Bankruptcy Code, 2016: This section allows a debtor to apply for initiating the insolvency resolution process.
• Section 96 of the Insolvency and Bankruptcy Code, 2016: This section deals with the interim moratorium that commences when an application is filed under Section 94 or 95. It states:
  

  “(b) during the interim moratorium period— (i) any legal action or proceeding 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 respect of any debt.”

• Section 101 of the Insolvency and Bankruptcy Code, 2016: This section provides for a moratorium after the application under Section 94 is admitted.

Arguments

Arguments on behalf of the Appellants / Petitioners:

• The appellants argued that Section 96 of the IBC imposes a complete bar on the continuation of proceedings under the NI Act once insolvency proceedings are initiated.
• They emphasized the distinction between Corporate Insolvency Resolution Process (CIRP) and Personal Insolvency Resolution Process, arguing that the interim moratorium under Section 96(1)(b) of the IBC should stay all further proceedings under Section 138 of the NI Act.
• The legislative intent behind the IBC is to provide a structured framework for debt resolution, ensuring debtors have a fair opportunity to reorganize their financial affairs. The moratorium is designed to prevent creditors from taking coercive actions that could further destabilize the debtors’ financial situation.
• They contended that the High Court erroneously relied on the P. Mohanraj case, which was concerned with Section 14 of the IBC and not Section 96.
• Once an application under Section 94 or 95 of the IBC is admitted, Section 101 of the IBC imposes an express bar on the individual/director/signatory/cheque from making any payment in relation to the dishonored cheque.
• The IBC must prevail over Section 138/141 of the NI Act due to the non-obstante provision of Section 238 of the IBC.

Arguments on behalf of the Applicants / Intervenors:

• The applicants argued that the IBC was enacted to consolidate and amend laws relating to reorganization and insolvency resolution, with the object of maximizing the wealth of the person undergoing insolvency proceedings.
• They contended that on initiation of insolvency proceedings, the moratorium under Sections 96 and 101 of the IBC should prevent the initiation of legal proceedings for recovery of any debt, including proceedings under Section 138 of the NI Act.
• They argued for similar protection under Section 96 of the IBC for individuals under personal insolvency as is available to companies under Section 14 of the IBC on the initiation of the insolvency process.
• The proceedings under Section 138/141 of the NI Act qua the Directors are civil in nature and should be considered as such for cases under Section 96/101 of the IBC.

Arguments on behalf of the Respondents:

• The respondents argued that the IBC is meant to resolve genuine financial distress, not to shield individuals from criminal liability.
• The interim moratorium under Section 96 of the IBC is intended to operate in respect of debt as opposed to a debtor, and the purpose is to restrain the initiation or continuation of legal action or proceedings against the debt.
• The interim moratorium under Section 96 of the IBC will not apply to criminal proceedings under Section 138 of the NI Act.
• Section 138 of the NI Act was enacted to enhance the credibility of cheques in commercial transactions and penalize the willful dishonor of such instruments.
• Proceedings under Section 138/141 of the NI Act are distinct and operate independently of insolvency proceedings.

Issues Framed by the Supreme Court

The central issue before the Supreme Court was:

1. Whether proceedings initiated under Section 138 read with Section 141 of the NI Act should be stayed in view of the interim moratorium under Section 96 of the IBC.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. ((2021) 6 SCC 258): This case clarified that the moratorium under Section 14 of the IBC applies only to the corporate debtor and does not extend to criminal proceedings. The court relied on this case to emphasize that the IBC’s objective is to address the corporate debtor’s financial distress and should not be misconstrued as a means to avoid personal criminal accountability.
• Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. ((2023) 10 SCC 545): This judgment held that no provision of the IBC bars the continuation of criminal prosecution initiated against the Directors and officials.
• State Bank of India v. V. Ramakrishnan ((2018) 17 SCC 394): While adjudicating on the applicability of moratorium under Section 14 IBC to personal guarantors, it was held by this Court that personal guarantors are covered by the moratorium under Section 96 IBC, while stating the protection of moratorium under these sections 96 and 101 IBC is far greater than the moratorium under section 14 IBC.
• Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co. & Ors. ((2000) 5 SCC 694): Which made it clear that income-tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors, who are private persons.
• Dilip B. Jiwrajka vs. Union of India ((2023) SCC OnLine SC 1530) : (2024) 5 SCC 435): wherein, while upholding the constitutional validity of Sections 95-100 IBC, this court explained the concept of a moratorium under Section 14 of Part II vis-à-vis interim moratorium under Section 96 of Chapter III of Part III. Ultimately, it was inter alia concluded that the purpose of the interim moratorium under section 96 is to protect the debtor from further legal proceedings.
• Narinder Garg and Others v. Kotak Mahindra Bank Ltd., and Others ((2022) SCC OnLine SC 517): This Court reiterated that the IBC’s moratorium does not bar criminal proceedings under Section 138 of the NI Act.

Authorities Considered by the Court

Judgment

The Supreme Court dismissed the appeals and the writ petition, holding that the interim moratorium under Section 96 of the IBC does not bar proceedings under Section 138 of the NI Act.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. ((2021) 6 SCC 258): The court cited this authority to reinforce that the moratorium under the IBC does not extend to criminal proceedings.
• Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. ((2023) 10 SCC 545): The court cited this authority to reinforce that no provision of the IBC bars the continuation of criminal prosecution initiated against the Directors and officials.
• Narinder Garg and Others v. Kotak Mahindra Bank Ltd., and Others ((2022) SCC OnLine SC 517): The court cited this authority to reinforce that the IBC’s moratorium does not bar criminal proceedings under Section 138 of the NI Act.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The intent of the IBC is to resolve financial distress, not to provide a shield against criminal liability.
• The proceedings under Section 138 of the NI Act are distinct from corporate insolvency proceedings and aim to uphold the integrity of commercial transactions.
• Allowing the moratorium under Section 96 of the IBC to bar Section 138 proceedings would undermine the purpose of the NI Act.

Fact:Law Ratio

Logical Reasoning

Key Takeaways

• The interim moratorium under Section 96 of the IBC does not protect individuals from criminal proceedings under Section 138 of the NI Act.
• Directors and signatories of companies cannot evade prosecution under Section 138 of the NI Act by citing insolvency proceedings.
• The judgment reinforces the importance of maintaining the integrity and credibility of commercial transactions.

Development of Law

The ratio decidendi of the case is that the interim moratorium under Section 96 of the IBC does not bar criminal proceedings under Section 138 of the NI Act. This clarifies the scope of the moratorium and reinforces the principle that individuals cannot evade criminal liability by citing insolvency proceedings.

Conclusion

The Supreme Court’s judgment clarifies that the interim moratorium under Section 96 of the IBC, which comes into effect upon filing an application for personal insolvency resolution, does not bar criminal proceedings initiated under Section 138 of the NI Act. This decision reinforces the integrity of cheque transactions and ensures that individuals are held accountable for their actions, regardless of insolvency proceedings.