Introduction
The intersection of insolvency law and criminal liability for dishonoured cheques represents one of the most complex and evolving areas of Indian commercial jurisprudence. The Insolvency and Bankruptcy Code, 2016 (IBC) and the Negotiable Instruments Act, 1881 (NI Act) serve distinct yet occasionally overlapping functions in India’s financial ecosystem. While the IBC provides a comprehensive framework for insolvency resolution aimed at maximizing value for stakeholders, the NI Act maintains commercial morality by criminalizing dishonour of cheques due to insufficient funds [1]. The fundamental tension between these legislative schemes becomes particularly pronounced when examining Section 96 of the IBC, which provides for interim moratorium in individual insolvency proceedings, and Section 138 of the NI Act, which criminalizes cheque dishonour. This intersection has generated significant judicial discourse, with courts grappling to balance the rehabilitative objectives of insolvency law against the deterrent purposes of criminal liability for commercial misconduct.
Legislative Framework and Statutory Provisions
Section 96 of the Insolvency and Bankruptcy Code, 2016
Section 96 of the IBC, titled “Interim-moratorium,” forms part of Chapter III of Part III dealing with insolvency resolution for individuals and partnership firms. The provision reads as follows:
“(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 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.
(2) Where the application has been made in relation to a firm, the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application” [2].
The legislative intent behind Section 96 was to provide immediate relief to financially distressed individuals and partnership firms by creating breathing space for resolution. Unlike Section 14 of the IBC, which requires an order from the Adjudicating Authority, the interim moratorium under Section 96 operates automatically upon filing of the application [3].
Section 138 of the Negotiable Instruments Act, 1881
Section 138 of the NI Act, inserted through the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, 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 and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both” [4].
The provision further requires that no court shall take cognizance of such offence except upon complaint made within one month of the cause of action arising, and that notice demanding payment must be given within fifteen days of receipt of information regarding dishonour.
The Judicial Evolution: Key Landmark Judgments
The P. Mohanraj Precedent: A Watershed Moment
The Supreme Court’s decision in P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd. (2021) marked a pivotal moment in understanding the relationship between IBC moratorium provisions and NI Act proceedings [5]. The three-judge bench, comprising Justices R.F. Nariman, Navin Sinha, and K.M. Joseph, definitively settled that moratorium under Section 14 of the IBC covers proceedings under Section 138 of the NI Act against corporate debtors.
The Court observed that proceedings under Section 138 are “quasi-criminal” in nature, describing them as “civil sheep in criminal wolf’s clothing.” This characterization was crucial in determining that such proceedings, despite their criminal facade, essentially serve civil recovery purposes and therefore fall within the moratorium’s scope. The Court reasoned that allowing such proceedings to continue would defeat the purpose of preserving corporate debtor assets during the resolution process [6].
However, the judgment created a crucial distinction by holding that while corporate debtors enjoy protection under Section 14, natural persons such as directors and signatories remain liable for prosecution under Section 138. This bifurcation established that moratorium protects the corporate entity while preserving individual criminal accountability.
The Rakesh Bhanot Clarification: Settling the Section 96 Controversy
The Supreme Court’s recent judgment in Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd. (2025) has definitively resolved the uncertainty surrounding Section 96’s applicability to Section 138 proceedings [7]. The two-judge bench comprising Justices J.B. Pardiwala and R. Mahadevan held that interim moratorium under Section 96 of the IBC cannot be invoked to stall prosecution in cheque bounce cases under Section 138 of the NI Act.
The Court emphasized several critical distinctions. First, it clarified that the cause of action under Section 138 commences upon dishonour of the cheque and failure to pay within the statutory fifteen-day notice period. This cause of action is independent of the underlying debt and focuses specifically on the criminal act of issuing a cheque without sufficient funds [8].
Second, the Court distinguished between civil suits for recovery based on dishonoured cheques and criminal prosecution under Section 138. While interim moratorium may operate in the former case, it cannot shield individuals from criminal liability arising from statutory offences. The deterrent effect of Section 138 is essential for maintaining trust in negotiable instruments, and allowing debtors to evade prosecution through moratorium would undermine this fundamental purpose [9].
Conflicting High Court Decisions: The Pre-Rakesh Bhanot Era
Prior to the Supreme Court’s clarification in Rakesh Bhanot, various High Courts had taken divergent approaches to this issue, creating considerable uncertainty in commercial practice.
Delhi High Court Approach
In Sandeep Gupta v. Ram Steel Traders & Ors., the Delhi High Court held that Section 96 moratorium would not apply when the petitioner was arrayed as an accused in Section 138 proceedings in his capacity as Managing Director [10]. The Court reasoned that Section 138 prescribes punishment and compensation for cheque dishonour and is not a recovery proceeding. Therefore, what could be protected was only the company, not the personal penal liability of accused persons covered under Section 141 of the NI Act.
Similarly, in Axis Trustee Services Limited v. Brij Bhushan Singal & Anr., the Delhi High Court clarified that interim moratorium under Section 96 cannot include all co-guarantors within its ambit [11]. The Court held that the reference to “all the debts” in Section 96(1)(a) must be understood in respect of all debts of a particular debtor, and cannot extend to other independent guarantors.
Madhya Pradesh High Court’s Contrary View
Conversely, the Madhya Pradesh High Court in Surendra Kumar Patwa v. Dharmendra Vohra took a broader interpretation, holding that interim moratorium under Section 96 would apply to stay Section 138 proceedings [12]. This decision relied heavily on the language of Section 96 and attempted to apply the P. Mohanraj rationale to individual insolvency proceedings.
The Court observed that proceedings under Section 138 of the NI Act are “almost in the nature of civil wrong which have been given criminal overtones,” and therefore should be covered by the moratorium [13].
Regulatory Framework and Enforcement Mechanisms
The Role of Adjudicating Authorities
The National Company Law Tribunal (NCLT) serves as the Adjudicating Authority for individual insolvency proceedings under Part III of the IBC. The NCLT’s role in processing applications under Sections 94 and 95 has become crucial in determining the scope and duration of interim moratorium [14].
Recent judicial interventions, particularly the Bombay High Court’s decision in Bank of Baroda v. Union of India & Anr. (2024), have established strict timelines for NCLT processing to prevent abuse of the interim moratorium provision. The Court directed that NCLT must notify defects in applications within seven days of filing and applicants must cure defects within fourteen days thereafter [15].
Criminal Justice System Interface
The interface between insolvency proceedings and criminal justice administration presents unique challenges. Section 138 proceedings are conducted before Judicial Magistrates First Class or Metropolitan Magistrates, who must now consider the impact of concurrent insolvency proceedings on their jurisdiction and case management.
The Supreme Court in Rakesh Bhanot emphasized that criminal courts cannot stay proceedings merely due to pendency of insolvency applications. The Court noted that “personal responsibility persists, regardless of the insolvency proceedings and its outcome” [16].
Comparative Analysis: Corporate vs. Individual Insolvency
Distinguishing Features of Section 14 and Section 96
While both Section 14 (corporate insolvency) and Section 96 (individual insolvency) provide for moratorium, their scope and application differ significantly. Section 14 requires an order from the Adjudicating Authority and provides broader protection, including essential services continuation and supply chain stability provisions.
In contrast, Section 96 operates automatically upon application filing but provides more limited protection. The Supreme Court in State Bank of India v. Ramakrishnan observed that “the protection of moratorium under Section 96 and Section 101 is far greater than that under Section 14 as a stay under Section 96 implies that all legal proceedings in respect of the ‘debt’ and not the ‘debtor’ are stayed” [17].
Policy Rationale and Legislative Intent
The differential treatment of corporate and individual insolvency reflects distinct policy objectives. Corporate insolvency resolution aims to preserve going concern value and maximize stakeholder returns through business reorganization. Individual insolvency, conversely, focuses on debt resolution and rehabilitation of the debtor.
This distinction becomes particularly relevant when examining the scope of moratorium provisions. While corporate debtors require comprehensive protection to facilitate resolution professional activities and maintain business operations, individual debtors need protection primarily from civil recovery actions rather than criminal prosecution for statutory offences [18].
Contemporary Challenges and Practical Implications
Abuse of Interim Moratorium Provisions
The automatic nature of interim moratorium under Section 96 has led to its systematic abuse by defaulters seeking to delay legitimate recovery actions. The Bombay High Court in Bank of Baroda observed that borrowers were filing applications under Section 94 without genuine intent to pursue resolution, merely to trigger moratorium and stall SARFAESI proceedings [19].
Common abuse tactics include filing applications by individuals who are not personal guarantors to corporate debtors, submitting incomplete applications to extend moratorium periods, and abandoning applications after achieving delay objectives. These practices have prompted judicial intervention to establish stricter procedural safeguards.
Impact on Commercial Confidence
The uncertainty surrounding the interplay between IBC and NI Act provisions has had significant implications for commercial confidence. Lenders and suppliers have expressed concerns that overly broad moratorium provisions could undermine the deterrent effect of Section 138, potentially increasing the incidence of cheque dishonour.
The Supreme Court’s clarification in Rakesh Bhanot has been welcomed by the commercial community as it preserves the integrity of Section 138 while maintaining legitimate insolvency resolution mechanisms. The Court noted that “allowing the respective appellants/petitioners to evade prosecution under Section 138 by invoking the moratorium would undermine the very purpose of the N.I. Act, 1881” [20].
Enforcement and Compliance Challenges
Financial institutions and creditors face practical challenges in navigating concurrent insolvency and criminal proceedings. The timing of moratorium commencement, scope of protected proceedings, and coordination between different forums require careful legal strategy and case management.
The establishment of clear judicial precedents has provided greater certainty, but practitioners must remain vigilant about evolving jurisprudence and potential legislative amendments addressing these interfaces.
Future Directions and Recommendations
Legislative Reforms
The current legislative framework would benefit from explicit clarification regarding the scope of moratorium provisions in individual insolvency proceedings. Specific provisions addressing the interface with criminal law, particularly Section 138 proceedings, could eliminate residual uncertainty and prevent forum shopping.
Consider amendments to Section 96 that explicitly exclude criminal proceedings from moratorium scope, similar to exceptions already provided for certain transactions under Section 96(3). Such amendments would provide statutory clarity and reduce judicial burden in interpreting legislative intent.
Procedural Improvements
Enhanced procedural safeguards for interim moratorium applications could address abuse concerns while preserving legitimate protection for distressed debtors. Mandatory disclosure requirements, penalty provisions for frivolous applications, and expedited processing mechanisms could improve system efficiency.
The establishment of specialized benches within NCLT for individual insolvency matters could develop expertise and ensure consistent application of legal principles across different jurisdictions.
Stakeholder Coordination
Improved coordination mechanisms between criminal courts, NCLT, and other forums could enhance case management efficiency and reduce conflicting orders. Electronic case management systems linking different judicial forums could provide real-time information about concurrent proceedings.
Training programs for judicial officers on insolvency law principles and their interface with other legal frameworks could improve decision-making quality and consistency.
International Perspectives and Best Practices
Comparative Analysis
Other jurisdictions have addressed similar challenges through various approaches. The United States Bankruptcy Code provides explicit exceptions for criminal proceedings from automatic stay provisions, while the European Union’s restructuring directive focuses on staying civil enforcement actions rather than criminal proceedings.
These international precedents support the approach taken by the Indian Supreme Court in maintaining the distinction between civil debt recovery and criminal liability for statutory offences.
Lessons for India
International experience suggests that successful insolvency regimes require careful balance between debtor protection and creditor rights, with particular attention to maintaining deterrent effects of criminal law. The Indian approach of providing limited moratorium scope in individual insolvency while preserving criminal accountability aligns with global best practices.
Conclusion
The Supreme Court’s definitive resolution in Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd. has brought much-needed clarity to the complex interplay between Section 96 of the IBC and Section 138 of the NI Act. By holding that interim moratorium under Section 96 does not extend to criminal proceedings under Section 138, the Court has struck an appropriate balance between providing relief to financially distressed individuals and maintaining the integrity of commercial transactions.
This judicial clarification serves multiple important functions. First, it preserves the deterrent effect of Section 138, which is essential for maintaining trust in negotiable instruments and commercial morality. Second, it prevents abuse of insolvency proceedings as a shield against criminal accountability. Third, it provides certainty to legal practitioners, financial institutions, and commercial entities regarding the scope of their rights and obligations.
The evolution from uncertainty through conflicting High Court decisions to the current clear precedent demonstrates the dynamic nature of commercial law development in India. The courts have successfully navigated the complex intersection of insolvency and criminal law while preserving the distinct objectives of each legislative scheme.
Moving forward, the legal framework would benefit from continued judicial vigilance against abuse of moratorium provisions, legislative clarity regarding the scope of protection in individual insolvency proceedings, and enhanced coordination between different judicial forums. The precedent established in Rakesh Bhanot provides a solid foundation for addressing these challenges while maintaining the delicate balance between debtor rehabilitation and commercial accountability.
The interplay between the IBC and NI Act will continue to evolve as commercial practices adapt to this legal framework. However, the fundamental principle established by the Supreme Court—that criminal liability for statutory offences cannot be evaded through invocation of insolvency proceedings—provides a stable foundation for future developments in this area of law.
References
[1] P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd., (2021) 5 SCC 314. Available at: https://indiankanoon.org/doc/97452657/
[2] The Insolvency and Bankruptcy Code, 2016, Section 96. Available at: https://ibclaw.in/section-96-interim-moratorium/
[3] Nishith Desai Associates, “Dissecting the Insolvency Code – Scope and Impact of Interim Moratorium for Individuals.” Available at: https://www.nishithdesai.com/NewsDetails/10625
[4] The Negotiable Instruments Act, 1881, Section 138. Available at: https://vlex.com/vid/section-138-negotiable-instruments-584547970
[5] P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd., (2021) 5 SCC 314. Available at: https://ibclaw.in/summary-of-landmark-judgment-p-mohanraj-ors-vs-m-s-shah-brothers-ispat-pvt-ltd/
[6] “IBC Moratorium, Cheque Dishonour – Maheshwari & Co.” Available at: https://www.livelaw.in/law-firms/law-firm-articles-/ibc-moratorium-cheque-dishonour-maheshwari-co-181105
[7] Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd., 2025 INSC 445. Available at: https://www.verdictum.in/court-updates/supreme-court/rakesh-bhanot-v-gurdas-agro-pvt-ltd-2025-insc-445-interim-moratorium-cheque-section-138-ni-act-1573320
[8] “The Interplay Between IBC Moratorium and Criminal Liability Under Section 138 of the NI Act.” Available at: https://www.legal500.com/developments/thought-leadership/the-interplay-between-ibc-moratorium-and-criminal-liability-under-section-138-of-the-ni-act-in-light-of-recent-judgement-passed-in-rakesh-bhanot-vs-gurdas-agro-pvt-ltd/
[9] “Supreme Court Clarifies Non-applicability Of Moratorium Under The Insolvency And Bankruptcy Code, 2016.” Available at: https://www.mondaq.com/india/insolvencybankruptcy/1622238/supreme-court-clarifies-non-applicability-of-moratorium-under-the-insolvency-and-bankruptcy-code-2016-to-proceedings-under-the-negotiable-instruments-act-1881
[10] “Liability of the Erstwhile Directors: Section 138, Negotiable Instruments Act versus Insolvency and Bankruptcy Code, 2016.” Available at: https://www.scconline.com/blog/post/2023/10/12/liability-of-the-erstwhile-directors-section-138-negotiable-instruments-act-versus-insolvency-and-bankruptcy-code-2016/
[11] “Interim Moratorium Under Section 96 Of Insolvency & Bankruptcy Code, 2016 Is Limited To Particular Guarantor.” Available at: https://www.livelaw.in/news-updates/delhi-high-court-section-96-of-insolvency-bankruptcy-code-personal-guarantor-interim-moratorium-213421
[12] Surendra Kumar Patwa vs Dharmendra Vohra, Madhya Pradesh High Court, 2024. Available at: https://indiankanoon.org/doc/48203583/
[13] “IBC proceedings don’t bar liability under Section 138 of NI Act: MP High Court.” Available at: https://www.scconline.com/blog/post/2024/06/20/ibc-proceedings-dont-bar-liability-under-section-138-of-ni-act-mp-high-court-scc-times/
[14] “Section 138 NI Act Versus Moratorium In IBC.” Available at: https://taxguru.in/corporate-law/section-138-ni-act-moratorium-ibc.html
[15] “Abuse of Interim Moratorium Under Section 96 of the Insolvency and Bankruptcy Code, 2016.” Available at: https://www.indialaw.in/blog/civil/abuse-interim-moratorium-section-96/
[16] Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd., 2025 INSC 445, Para 10.1. Available at: https://ibclaw.in/case-name/rakesh-bhanot-v-gurdas-agro-pvt-ltd/
PDF Links to Full Judgments
- https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/P_Mohanraj_vs_M_S_Shah_Brothers_Ispat_Pvt_Ltd_on_1_March_2021.PDF
- https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/Rakesh_Bhanot_vs_M_S_Gurdas_Agro_Pvt_Ltd_on_1_April_2025.PDF
- https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/Surendra_Kumar_Patwa_vs_Dharmendra_Vohra_on_25_October_2024.PDF
- https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/negotiable_instruments_act,_1881 (1).pdf
