Personal Insolvency Proceedings Cannot Shield Individuals from Prosecution under Section 138 of the N.I. Act Despite Interim Moratorium under Section 96 of the IBC
- REEDLAW
- 14 hours ago
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The Supreme Court held that personal insolvency proceedings under the IBC cannot shield individuals from prosecution under Section 138 of the Negotiable Instruments Act, 1881, and clarified that the interim moratorium under Section 96 of the IBC does not bar such criminal proceedings.
On 01-04-2025, the Supreme Court Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan adjudicated a batch of criminal petitions along with a writ petition and held that the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016, does not bar or stay criminal proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, as such proceedings are penal in nature and do not constitute legal actions “in respect of any debt.” Accordingly, personal insolvency proceedings cannot be invoked as a shield against prosecution for cheque dishonour.
In a batch of matters involving common questions of law and fact, the Supreme Court addressed whether proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, should be stayed in light of the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016, triggered by the filing of personal insolvency applications under Section 94 IBC. The appeals had arisen from various High Court decisions dismissing petitions filed under Section 482 of the CrPC, wherein the petitioners sought adjournment or stay of criminal proceedings for cheque dishonour pending adjudication of their personal insolvency petitions before the NCLT. The lead matter, Rakesh Bhanot v. M/s Gurdas Agro Pvt. Ltd., involved dishonour of multiple cheques amounting to ₹2 crores, where the accused sought protection from criminal prosecution by invoking the interim moratorium under Section 96 IBC, which the trial court and the High Court rejected.
The petitioners contended that the moratorium under Section 96(1)(b) IBC provided an absolute bar against the continuation of proceedings “in respect of any debt,” including criminal prosecutions arising out of defaulted payments. They argued that personal insolvency, unlike corporate insolvency, deserved wider protection, and the legislature, by incorporating the moratorium in Part III of the IBC, intended to shield individuals from the burden of legal proceedings during the pendency of insolvency resolution. Emphasis was laid on a purposive interpretation of the phrase “in respect of any debt” to include proceedings under Section 138 of the N.I. Act, which they claimed was fundamentally debt-related and hence covered under the protective umbrella of the moratorium.
In contrast, the respondents strongly refuted the applicability of Section 96 IBC to proceedings under the N.I. Act, arguing that criminal prosecutions for cheque dishonour were not civil recovery actions but penal proceedings that addressed wilful financial misconduct. The respondents relied upon judicial precedents, particularly P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REEDLAW 2021 SC 03526, which clarified that the moratorium under Section 14 IBC applied only to corporate debtors and not to individuals under Section 141 of the N.I. Act. They asserted that this rationale equally applied to the moratorium under Section 96 IBC. Further, reference was made to the Insolvency Law Committee Report, 2020, which made it explicit that personal insolvency moratoriums were not intended to affect third-party proceedings such as criminal complaints under Section 138. It was also argued that to allow otherwise would dilute the deterrent object of the N.I. Act and render creditors remediless.
The Supreme Court, in dismissing all the criminal appeals and the writ petition, upheld the rationale adopted by the High Courts and trial courts. It held that the scope of Section 96 IBC was confined to legal actions for debt enforcement and did not extend to criminal liability under Section 138 N.I. Act. The Court reiterated that dishonour of cheques constitutes a penal offence independent of the underlying debt, aimed at ensuring the credibility of negotiable instruments in commercial dealings. The Court affirmed the view taken in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REEDLAW 2021 SC 03526; Narinder Garg, and Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited, REEDLAW 2023 SC 03569, stating that neither corporate resolution plans nor interim moratoriums under personal insolvency proceedings extinguish or shield personal criminal liability of individuals who issued dishonoured cheques. The objective of Section 138 proceedings, being penal in nature, remained unaffected by insolvency resolution mechanisms provided under the IBC. The Court found no legal infirmity in the continuation of such proceedings and accordingly refused to interfere. Pending applications were also disposed of in view of the dismissal of the main appeals.
Ms. Neelam Singh, Ms. V. Elanchezhiyan, Mr. Abhimanyu Tewari, Mr. Jaydip Pati, Mr. Chritarth Palli and Ms. Misha Rohatgi, AORs, represented the Appellants.
Mr. Yusuf Iqbal Yusuf, Ms. Bhavya Sethi, Ms. Gyanika Kochar, Mr. Mohd. Abid Sheikh, Mr. R.K. Rathore, Mr. Jawahar Lal, Mr. Danish Saifi, Mr. Subramaniam S, Mr. Naman Dwivedi, Mr. Shafik Ahmed, Mr. Bhaskar Sundaram, Mr. P.R. Sreejith, Ms. Pallavi Anand, Mr. Siddhant Saroha, Mr. Viren Sibal, Mr. Prashant Katara, Mr. Soin Khan, Mr. Nitish Kumar Rai, Ms. Anushruti Tripathi, Ms. Anita, Mr. Nakul Mohta, Mr. Puneet Pathak, Mr. Amulya Upadhyay, Mr. Ayush Kashyap, Mr. Shashank Khurana, Mr. Nitin Setia, Mr. Abhishek Baid, Mr. Mohit Kumar Bafna, Mr. Praneet Das, Mr. Anup Jain, and Mr. Ashok Kumar Jain, Advocates, represented the Appellants.
Mr. S. Janani, Senior Advocate, with Mr. Devendra Kumar Shukla, Mr. Ashish Kumar Upadhyay, Mr. Ashish Pandey, Mr. Deepak Goel, Mr. Aaditya Aniruddha Pande, Mr. Md. Naushad Alam, Mr. Palash Singhai, Mr. S. Vinay Ratnakar, Mr. Ankit Roy, Ms. Paromita Majumdar, Ms. Astha Tyagi, Ms. Henna George, Ms. Purti Gupta, AORs, appeared for the Respondents.
Mr. Pankaj Garg, Mr. Shailendra Babbar, Mr. Avinash Das, Mr. Rahul Kumar, Mr. Rishi Kapoor, Ms. Deboleena Datta, Ms. Maitri Goal, Mr. Atul Mangla, Mr. Inderjeet, Mr. Shubham Saxena, Mr. Prateek Rai, Mr. Ashutosh Bhardwaj, Mr. Pushkar Dwivedi, Mr. Anmol Goyal, Mr. Akshit Chauhan, Ms. Sharika Rai, Ms. Alka Goyal, Ms. Archana Preeti Gupta, Mr. Aditya Krishna, Mr. Siddharth Dharmadhikari, Mr. Raghav Vij, Mr. Suraj Kumar Jha, Ms. Sakshi Tiwari, Mr. Pratham Malik, Mr. Apoorva Misra, Mr. Manish Gusain, Mr. Milind Garg, Ms. Nikita Garg, Mr. Yaksh Garg, Mr. Suvidutt M.S., Ms. Saumya Jain, Ms. Yashna Ahuja, Ms. Atulika Ghawana, Ms. Shambhavi Sharma, Ms. Minakshi Vimal, Ms. Bhavana Jhakhar, Mr. Akhil Sachar, and Ms. Sunanda Tulsyan, Advocates, appeared for the respondents.
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