Interplay Between Insolvency Moratorium and Criminal Prosecution for Cheque Dishonour: Supreme Court’s Landmark Ruling

 

By Abhishek Jat, Advocate

Case Title and Citation

Rakesh Bhanot v. Gurdas Agro (P) Ltd., 2025 SCC OnLine SC 728

Background and Legal Context

The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to streamline insolvency resolution and provide a structured mechanism for the revival or liquidation of financially distressed entities and individuals. Central to the IBC is the concept of a moratorium, which temporarily suspends certain legal actions against the debtor to facilitate an orderly resolution process.

For companies, Section 14 of the IBC imposes a moratorium upon commencement of the corporate insolvency resolution process, barring legal proceedings against the corporate debtor. For individuals, Section 96 provides for an interim moratorium from the moment an insolvency application is filed under Section 94, typically invoked by personal guarantors. This interim moratorium is designed to halt ongoing or new proceedings in respect of any debt, thereby protecting the debtor during the insolvency process.

Concurrently, the Negotiable Instruments Act, 1881 (NI Act), particularly Section 138, criminalizes the dishonour of cheques, serving as a deterrent against financial misconduct and upholding the credibility of negotiable instruments in commercial transactions.

Legal Issue

A recurring legal conundrum arises when insolvency proceedings under the IBC coincide with criminal prosecution under Section 138 of the NI Act. The central question before the Supreme Court was whether the interim moratorium under Section 96 of the IBC bars the continuation or initiation of criminal proceedings for cheque dishonour under Section 138 against individuals, including directors or personal guarantors.

Arguments Advanced

Appellants’ Position:

The appellants, including Rakesh Bhanot, contended that the moratorium under Section 96 of the IBC should shield them from criminal prosecution under Section 138 of the NI Act. They argued that the intent of the IBC’s moratorium is to protect debtors from coercive recovery actions, including penal proceedings, to ensure a fair and effective insolvency resolution.

Respondents’ Position:

The respondents maintained that the moratorium under Section 96 is limited to civil proceedings for debt recovery and does not extend to criminal prosecution. They emphasized that Section 138 proceedings are penal in nature, aimed at maintaining the sanctity of cheques and deterring financial fraud, and therefore serve a broader public interest beyond mere debt recovery.

Judicial Analysis and Precedents

The Supreme Court’s analysis drew upon several landmark judgments:

• SBI v. V. Ramakrishnan [(2018) 17 SCC 394]: Clarified that personal guarantors are covered by the moratorium under Section 96, which offers broader protection than Section 14 (applicable to corporate debtors).
• P. Mohanraj v. Shah Brothers Ispat (P) Ltd. [(2021) 6 SCC 258]: Held that the moratorium under Section 14 applies only to corporate debtors and not to individuals. The phrase “in respect of any debt” in Sections 81, 85, 96, and 101 of the IBC was interpreted broadly to include proceedings under Section 138 of the NI Act, but the scope was distinguished between civil and criminal liability.
• Sheetal Gupta v. National Spot Exchange Ltd. [2023 SCC OnLine Bom 3095]: The Bombay High Court, relying on P. Mohanraj, held that Section 138 proceedings are covered under “any legal action or proceeding pending in respect of any debt” under Section 96(1) of the IBC. The Supreme Court did not interfere with this view on appeal.
• Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corp. of India Ltd. [(2023) 10 SCC 545]: The Court clarified that Section 138 proceedings are quasi-criminal and distinct from civil recovery, and thus not covered by the moratorium for individuals under the IBC. This judgment, however, dealt specifically with Section 14 of the IBC.

Supreme Court’s Observations and Ruling

In Rakesh Bhanot v. Gurdas Agro (P) Ltd., the Supreme Court provided a definitive interpretation regarding the interplay between Section 96 of the IBC and Section 138 of the NI Act:

• The legislative intent of Section 96 is to protect debtors from civil recovery actions during insolvency, not to shield them from criminal prosecution.
• Criminal proceedings under Section 138, aimed at upholding commercial trust, are distinct from civil proceedings for debt recovery.
• The Court applied the principle of noscitur a sociis, interpreting “legal action or proceeding” in Section 96 to pertain to actions relating to debt recovery, not criminal prosecution.
• The moratorium under Sections 96 and 101 does not extend to criminal liability for cheque dishonour. The act of issuing a dishonoured cheque constitutes a standalone offence, and insolvency proceedings do not erase criminal culpability.
• The acceptance of a resolution plan or initiation of a moratorium does not bar the continuation of Section 138 prosecutions. The liability under Sections 138 and 141 of the NI Act is personal and attaches to the individual, not merely the company.

Conclusion

The Supreme Court’s ruling reaffirms that while the IBC provides temporary relief to debtors by suspending certain civil proceedings, it does not offer immunity from criminal prosecution for dishonoured cheques. Allowing the interim moratorium to halt such prosecutions would undermine the deterrent purpose of Section 138 of the NI Act and could incentivize wilful defaulters to misuse insolvency proceedings as a shield against criminal accountability. The judgment preserves the integrity of commercial transactions and ensures that insolvency laws are not misapplied to evade personal responsibility for financial misconduct.

Glossary of Key Terms

• Moratorium: A legally mandated suspension of certain legal actions against a debtor during insolvency proceedings.
• Interim Moratorium: A temporary stay on legal proceedings, effective from the filing of an insolvency application against an individual.
• Corporate Debtor: A company or corporate entity undergoing insolvency resolution.
• Personal Guarantor: An individual who guarantees the repayment of a debt owed by a corporate debtor.
• Section 138, NI Act: Penal provision for the offence of dishonour of cheque due to insufficiency of funds or other reasons.
• Section 96, IBC: Provision for interim moratorium on legal proceedings against individuals during insolvency application.
• Noscitur a Sociis: A rule of statutory interpretation meaning “a word is known by the company it keeps.”

Author:   Abhishek Jat, Advocate

References:

 Supreme Court of India, Rakesh Bhanot v. Gurdas Agro (P) Ltd., 2025 SCC OnLine SC 728

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