Whether Moratorium During Personal Guarantor Insolvency Resolution Process Applies to Proceedings Under Section 138 of the Negotiable Instruments Act, 1881? Supreme Court refers issue to larger bench
In Dineshchand Surana v. UCO Bank 2026 INSC 579, the Supreme Court examined whether cheque bounce proceedings under Section 138 of the Negotiable Instruments Act (“NI Act”) can be stayed during personal insolvency and bankruptcy proceedings under Part III of the Insolvency and Bankruptcy Code (“IBC”).
The case arose after the former Managing Director of Surana Power Ltd., who was undergoing personal insolvency proceedings, sought protection from ongoing cheque dishonour prosecution initiated by UCO Bank. The key argument was that the moratorium under Sections 96, 101, 124 and 128 of the IBC should suspend Section 138 proceedings because they relate to “any debt.”
The Hon’ble Court identified the following issues to be determined:
- Whether the proceedings under Section 138 of the NI Act are in the nature of legal action for recovery of money?
The Hon’ble apex court divided the proceedings under Section 138 of the NI Act into 2 tiers: Tier I pertaining to the mandatory criminal aspect of Section 138; and Tier II pertaining to the discretionary compensatory aspect of the provision.
- Whether the proceedings under Section 138 of the NI Act are protected during the moratorium period provided under Part-III of the IBC?
The Court held that proceedings under Section 138 of the Negotiable Instruments Act are only partly protected during the moratorium period under Part III of the Insolvency and Bankruptcy Code (IBC). It clarified that Section 138 has both a criminal aspect (punishment such as imprisonment or fine) and a compensatory aspect (recovery of compensation to the complainant). The moratorium cannot bar the criminal consequences of cheque dishonour because liability to pay fines is expressly excluded from protected debts under Section 79(15) of the IBC. However, the compensatory or recovery-related part of the proceedings, being civil in nature and capable of depleting the debtor’s assets, would be covered by the moratorium. Therefore, whether Section 138 proceedings are stayed depends on the stage and nature of the proceedings involved.
- Whether director(s) liable under Section 141 of the NI Act would enjoy the benefit of moratorium in respect of Section 138 proceedings, while undergoing personal insolvency?
The Court reaffirmed that the moratorium under Part III of the IBC applies only to the compensatory aspect of Section 138 NI Act proceedings and not to their criminal aspect. It held that directors who become liable to pay compensation on behalf of a company should also receive the protection of moratorium if they themselves are undergoing insolvency or bankruptcy proceedings, as denying such protection would unfairly harm both the debtor and creditors. The Court further distinguished between different moratorium provisions under the IBC, explaining that Sections 96 and 101 use the broader term “any debt” to protect debtors from enforcement actions during insolvency proceedings, regardless of whether the debt is personal. In contrast, Sections 124 and 128 apply specifically during bankruptcy proceedings to protect the debtor’s property from actions aimed at recovering bankruptcy debts. Accordingly, moratorium under Sections 96 and 101 extends to directors facing compensatory liability, while Sections 124 and 128 stay proceedings against the debtor’s assets for enforcement of bankruptcy debts.
Conclusion
The Hon’ble Supreme Court, through an extensive analysis of the scheme and object of Section 138 of the NI Act, clarified that cheque dishonour proceedings possess a dual character, comprising both criminal and compensatory elements. While the genesis of a Section 138 proceeding lies in a commercial debt transaction, the dishonour of a cheque is statutorily treated as a ‘deemed criminal offence’ intended to preserve the credibility and sanctity of negotiable instruments in commercial dealings. The Court therefore emphasized that proceedings under Section 138 cannot be viewed as a mere debt recovery mechanism.
The Hon’ble Court also highlighted that cheque dishonour proceedings carry a strong deterrent purpose. Allowing individuals to use insolvency proceedings as a blanket shield against criminal prosecution could undermine trust in commercial dealings and weaken the sanctity of negotiable instruments.
Recognising the substantial legal and practical implications arising from this intersection, the Court held that the issue requires authoritative determination by a larger bench.
Accordingly, the matter has been directed to be placed before the Hon’ble Chief Justice of India for constitution of an appropriate three-Judge Bench to consider, inter alia, the following questions:
- Whether the provisions of Section 138 of the NI Act and the objective underlying the enactment thereof indicate that it is quasi-criminal in nature with a tilt towards the criminal side?
- Whether the moratorium provisions under Part III of the IBC should be made applicable on the entire proceedings under Section 138 of the NI Act or only to the compensatory aspect thereof?
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