Inapplicability of Interim Moratorium under Section 96 IBC to Criminal Proceedings under Section 138 of the N.I. Act

This commentary provides an in-depth analysis of the Supreme Court of India’s Judgment in the case RAKESH BHANOT v. M/S GURDAS AGRO PVT. LTD. (2025 INSC 445), delivered on April 1, 2025. The Judgment addresses multiple appeals and instances in which the accused individuals, facing criminal complaints under Section 138 of the Negotiable Instruments Act, 1881 (hereinafter N.I. Act, 1881), sought to stay these proceedings by invoking the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (hereinafter IBC).

The appellants and petitioners filed personal insolvency applications under Section 94 IBC, asserting that once the insolvency proceedings commenced, the interim moratorium under Section 96 would automatically stay any pending legal proceedings, including those sought to be pursued by the aggrieved creditors under Section 138 of the N.I. Act. Through this extensive Judgment, the Supreme Court clarifies the scope and application of the interim moratorium and reiterates that it cannot be used as a shield to avoid criminal liability under the N.I. Act, 1881.

• Background: Multiple appellants, including directors and signatories of dishonored cheques, filed special leave petitions or writ petitions after various High Courts rejected their pleas to stay or halt the Section 138 proceedings.
• Key Issues: Whether the interim moratorium under Section 96 of the IBC can be invoked to stay criminal prosecutions under Section 138 of the N.I. Act, 1881.
• Parties Involved: On one side, the appellants/petitioners seeking to stay the criminal proceedings against them. On the other side, private complainants (creditors) and, in some instances, the State, opposing the stay and arguing that liability under Section 138 remains unaffected.

The Supreme Court dismissed all appeals and the writ petition that sought to stay criminal proceedings under Section 138 of the N.I. Act. The Court held that:

1. The interim moratorium under Section 96 IBC was intended to provide a protective shield to debtors against civil proceedings relating to recovery of debts, not to criminal prosecutions.
2. Proceedings under Section 138 of the N.I. Act, 1881, are penal in nature and primarily seek to uphold the integrity of negotiable instruments; they are not simply proceedings to recover debt.
3. The Court reiterated that directors or signatories of a dishonored cheque do not enjoy the umbrella of interim moratorium for criminal prosecution since the personal criminal liability endures.
4. In clarifying the law, the Court distinguished between corporate insolvency and personal insolvency on one hand and reaffirmed that moratorium provisions under Section 14 or Section 96 of the IBC would not bar criminal liability under the N.I. Act, 1881.

Thus, the Judgment conclusively states that the interim moratorium cannot be resorted to in order to stall or escape Section 138 prosecution.

A. Precedents Cited

The Supreme Court examined and cited several important decisions to reach its conclusion:

1. P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258
   • Concerned the effect of Section 14 IBC moratorium on proceedings under Section 138 of the N.I. Act.
   • Held that the moratorium under Section 14 protects only the corporate debtor from certain lawsuits, but not the personal liability of directors or signatories.
2. State Bank Of India v. V. Ramakrishnan (2018) 17 SCC 394
   • Clarified that a personal guarantor is not automatically protected by the corporate insolvency moratorium under Section 14 IBC.
3. Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. (2023) 10 SCC 545
   • Reiterated that where a corporate debtor goes through insolvency resolution and discharges its liabilities under the resolution plan, the personal liability of signatories/directors to criminal proceedings under Section 138 continues, unaffected by the moratorium.
4. Dilip B. Jiwrajka v. Union of India (2023) SCC OnLine SC 1530
   • Addressed the constitutional validity of Sections 95–100 of the IBC. The Court found these provisions to be valid. However, the Court clarified (in the present Judgment) that this authority does not exempt individuals from Section 138 liability on account of personal insolvency.

B. Legal Reasoning

The core legal question concerned the interpretation of Section 96 of the IBC, which provides an interim moratorium as soon as an application for personal insolvency is filed. The appellants argued that the plain language of Section 96 (“any legal action or proceeding in respect of any debt”) stays all criminal proceedings relating to such debt.

However, the Supreme Court, applying a purposive interpretation, held that the interim moratorium is primarily aimed at civil proceedings for debt recovery. Criminal liability under Section 138 of the N.I. Act, 1881, though it may relate to a “debt,” is penal in nature, intended to punish the drawer of a dishonored cheque for the act of failing to honor a negotiable instrument. Consequently, applying the non-obstante clause of the IBC to bar criminal prosecution would go against the purpose and scheme of both the IBC and the N.I. Act.

The Judgment closely follows P. Mohanraj’s reasoning that the moratorium under Section 14 IBC (designed for corporate debtors) does not extend to bar criminal proceedings against directors. The Court extended the same logic to Section 96 IBC cases, reasoning that an individual’s personal insolvency resolution cannot override the penal provisions of the law for dishonored cheques.

C. Impact

This Judgment sets a definitive precedent regarding the scope of personal insolvency proceedings under the IBC. Key consequences include:

• Clear Demarcation of Civil vs. Criminal Liability: Debtors cannot use the interim moratorium as a strategy to stall or escape criminal liability for cheque dishonor.
• Sustained Efficacy of Section 138 N.I. Act: The penal deterrent for dishonoring cheques remains robust, ensuring commercial certainty and trust in negotiable instruments.
• Insolvency Process Integrity: Personal insolvency under Chapter III of the IBC is confined to reorganizing and settling the civil debt claims. It does not shield individuals from bona fide criminal prosecution arising from the dishonor of cheques.
• Future Legal Clarity: The Judgment reinforces the Supreme Court’s repeated position that criminal responsibility cannot be circumvented by ongoing or impending insolvency proceedings, whether corporate or personal, under the IBC.

The Judgment maneuvers intricate legal principles, but the crux can be broken down into straightforward takeaways:

1. Interim Moratorium (IBC) vs. Criminal Proceedings (N.I. Act): An interim moratorium under Section 96 IBC is designed to pause civil proceedings regarding the recovery of debts, not to bar penal consequences involving dishonored cheques.
2. Vicarious Liability under Section 141 N.I. Act: Directors, partners, or signatories can be prosecuted personally. Their personal insolvency filing does not exonerate them from the underlying penal liability if the cheque bounces.
3. Continuous Criminal Liability: A director or signatory remains on the hook for criminal proceedings, even if the corporate or personal insolvency results in the restructuring or extinguishment of the actual debt in a civil sense.

In concluding this landmark Judgment, the Supreme Court dismissed all appeals and reinforced that Section 138 proceedings under the N.I. Act, 1881, cannot be stayed or terminated solely on the basis of the interim moratorium triggered by Section 96 of the IBC. The Court’s ruling preserves the legislative purpose behind the penal provisions of the N.I. Act—to deter and penalize willful default in honoring cheques. At the same time, it ensures that the personal insolvency framework under the IBC remains an avenue for legitimate debt restructuring rather than a shield for avoiding criminal liability.

Key Takeaway: Individuals cannot rely on personal insolvency proceedings under the IBC to stall or evade criminal prosecutions for dishonored cheques. This decision fortifies commercial confidence in negotiable instruments and upholds the integrity of criminal sanctions designed to deter misuse of cheques in India’s commercial environment.