IBC Moratorium Under Part III Does Not Shield Directors From Personal Criminal Liability In Cheque Bounce Cases U/S 138 NI: Supreme Court

"The moratorium provisions would not operate in respect of the criminal aspect of Section 138 and the director(s) of the corporate debtor cannot escape personal criminal liability, as the moratorium is not intended to shield individuals from personal criminal liabilities arising from their actions," Supreme Court, in an exhaustive ruling dated May 27, 2026, has clarified that the moratorium provisions for personal insolvency under Part III of the IBC do not provide an absolute shield to directors against criminal prosecution for cheque bounce.

A bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan observed that while the moratorium may stay the recovery of compensation, it cannot be used to evade personal criminal accountability under Section 138 of the NI Act.

The appellant, Dineshchand Surana, former Managing Director of Surana Power Ltd, faced criminal complaints under Section 138 of the NI Act after cheques issued by him were dishonoured. During the pendency of these proceedings, the National Company Law Tribunal admitted a personal insolvency application against him, triggering an interim moratorium under Section 96 of the IBC. Surana contended that this moratorium stayed all legal proceedings, including the criminal prosecution, as the cheques were issued in respect of a "debt."

The primary questions before the court were whether proceedings under Section 138 of the NI Act are essentially legal actions for money recovery and whether directors vicariously liable under Section 141 can benefit from the Part III IBC moratorium during personal insolvency. The court also examined if the moratorium applies to the entire criminal proceeding or only to its compensatory aspect.

Section 138 NI Act Is Predominantly Criminal And Punitive

The court analyzed the nature of Section 138, emphasizing that while the underlying dispute may be civil, the "deeming fiction" created by Parliament makes the dishonour of a cheque a criminal offence. The bench noted that the provision's objective is to maintain trust in commercial transactions and ensure the credibility of cheques as financial instruments. The judges observed that the provision is punitive and carries the sanction of imprisonment and fine.

Bifurcation Of Section 138 Into Criminal And Compensatory Tiers

To reconcile the overlap between the NI Act and the IBC, the court introduced a tiered understanding of Section 138 proceedings. Tier I represents the mandatory criminal aspect which culminates in punishment such as imprisonment or fine, while Tier II represents the discretionary compensatory aspect aimed at reparations. The court held that the criminal nature of the offence cannot be subsumed by the civil nature of the injury.

Moratorium Under Sections 96 And 101 Does Not Bar Criminal Prosecution

The bench held that the moratorium provisions under Sections 96 and 101 of the IBC cannot place an embargo on the criminal aspect of cheque bounce cases. It reasoned that the IBC's objective is to address financial distress and provide a "breathing space" for debt restructuring, but it was never intended to shield natural persons from criminal acts. "Allowing the respective appellant-petitioners to evade prosecution under Section 138 by invoking the moratorium would undermine the very purpose of the NI Act," the bench noted.

Fine Imposed In Criminal Trials Is An 'Excluded Debt' Under IBC

The court highlighted Section 79(15) of the IBC, which defines "excluded debt" to include the liability to pay a fine imposed by a court or tribunal. Since a fine under Section 138 is a personal criminal liability, it cannot be treated as a debt for the purposes of protection under the moratorium provisions. The court observed that granting such protection would be an unintended and dangerous consequence of a misinterpretation of the law.

Moratorium Applies Only To The Recovery Of Compensation

While the criminal trial can proceed to its logical conclusion, the court held that the moratorium stays the recovery of compensation ordered under Section 395 of the BNSS (erstwhile Section 357 CrPC). The bench reasoned that the compensatory aspect is inherently civil and its recovery would result in the depletion of the insolvent individual's assets, which the IBC aims to protect during the resolution process.

Conflict With P. Mohanraj Decision On 'Civil Sheep' Description

The bench expressed reservations regarding the description of Section 138 in P. Mohanraj v. Shah Bros. Ispat (P) Ltd. as a "civil sheep in a criminal wolf’s clothing." The court noted that while P. Mohanraj focused on procedural aspects, it did not fully address the deterrence theory of punishment. The bench emphasized that the act of dishonour is a breach of trust that has been intentionally criminalized by the legislature.

Reference To A Larger 3-Judge Bench For Finality

Given the divergence in judicial opinions and the significance of the intersection between insolvency laws and criminal liability, the bench referred the matter to a larger 3-judge bench. The court noted that an authoritative pronouncement is required to determine whether the objective of Section 138 indicates a tilt toward the criminal side and whether the moratorium should apply to the entire proceeding or only the compensatory aspect.

The Supreme Court concluded that while a director undergoing personal insolvency is protected from the recovery of compensation ordered in a cheque bounce case, they remain subject to the penal consequences of the trial. The bench emphasized that personal responsibility for a criminal act persists regardless of insolvency outcomes. The registry was directed to place the matter before the Chief Justice of India for the constitution of an appropriate bench.

Date of Decision: 27 May 2026