Section 96 IBC Interim Moratorium Cannot Shield Company Directors From Cheque Bounce Prosecution Under Section 138 NI Act: Bombay High 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." Bombay High Court, in a significant ruling dated August 18, 2026, held that the statutory interim moratorium triggered under Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC) upon the filing of personal insolvency resolution proceedings does not operate to stay criminal prosecution against company directors for cheque bounce under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (NI Act).

A single bench of Justice N. J. Jamadar observed that penal liability for dishonour of a cheque is distinct from personal debt recovery mechanisms, emphasizing that natural persons cannot use personal insolvency filings to escape vicarious criminal culpability for dishonoured corporate cheques.

The ruling came on a batch of criminal applications and writ petitions filed by directors and authorized signatories of various defaulting member entities of the National Spot Exchange Limited (NSEL), including Mohan India Private Limited, challenging trial court orders that refused to stay pending Section 138 NI Act trials despite the initiation of personal insolvency resolution proceedings under Sections 94 and 95 of the IBC before the National Company Law Tribunal (NCLT).

The primary question before the High Court was whether the statutory interim moratorium under Section 96 of the IBC automatically operates to interdict and stay the initiation or continuation of criminal complaints filed under Section 138 read with Section 141 of the NI Act against company directors who are vicariously liable for corporate debts.

Corporate Debt Distinct From Personal Debt Under Section 96 IBC

The court began by dissecting the statutory scheme under Part III of the IBC, emphasizing the fundamental distinction between the separate legal personality of a corporate entity and the personal standing of its individual directors. Justice Jamadar observed that when a company incurs an obligation, the debt remains squarely that of the corporate entity and does not transmute into the personal debt of its directors.

The bench noted that the interim moratorium envisaged under Section 96 of the IBC is triggered specifically in respect of the debts of the individual debtor who applies under Section 94 or against whom a creditor proceeds under Section 95. Consequently, where a cheque is issued on a company's bank account to discharge a corporate liability, the debt in question is corporate in character, and arraigning directors under the deeming fiction of Section 141 of the NI Act does not convert corporate liabilities into individual debts covered under Section 96.

"The debt referred to in Section 96 must be a debt of the person by or against whom the insolvency resolution process is initiated under Sections 94 or 95, as the case may be."

Criminal Prosecution Under NI Act Is Penal, Not A Debt Recovery Suit

Rejecting the argument that Section 138 proceedings are purely civil recovery proceedings in disguise, the court placed decisive reliance on the Supreme Court's three-judge bench ruling in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. and the two-judge bench verdict in Rakesh Bhanot v. Gurdas Agro Pvt Ltd.

The bench reiterated that proceedings under Chapter XVII of the NI Act are fundamentally penal in nature and are designed to uphold faith in commercial transactions and banking operations rather than function merely as a civil execution apparatus. Justice Jamadar stressed that while the civil injury is non-payment of debt, the statutory act causing it has been criminalized by the legislature to deter commercial fraud and protect the integrity of negotiable instruments.

Fines And Compensatory Penalties Fall Under Excluded Debts

Addressing the argument that Section 138 convictions could lead to monetary compensation or fines, the court referred to the Supreme Court's ruling in Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth, which clarified the scope of "excluded debts" defined under Section 79(15) of the IBC.

Justice Jamadar highlighted that Section 79(15)(a) explicitly excludes liabilities arising out of court-imposed fines and statutory penalties from being discharged or restructured during insolvency proceedings. The bench held that any potential direction for fine or compensation imposed by a criminal court under Section 138 of the NI Act or Section 395 of the Bharatiya Nagarik Suraksha Sanhita (BNSS) remains unaffected by the commencement of individual insolvency resolution proceedings.

"Liabilities arising from court-imposed fines, penalties or damages for negligence or breach of obligations are explicitly excluded from being discharged or restructured under the resolution process."

Pendency Of Reference To Larger Bench In Dineshchand Surana No Ground To Stall Trials

The applicants heavily relied on the Supreme Court's recent two-judge bench decision in Dineshchand Surana v. UCO Bank, where questions regarding the nature of Section 138 proceedings and the applicability of Part III IBC moratorium to the compensatory aspect were referred to a larger three-judge bench. The petitioners urged the High Court to defer its judgment or stay the underlying trials pending the larger bench's decision.

Repelling this contention, Justice Jamadar cited the binding precedents in Ashok Sadarangani v. Union of India and Union Territory of Ladakh v. Jammu and Kashmir National Conference, which mandate that high courts must decide cases based on the law as it stands and cannot refuse to follow binding Supreme Court precedents merely because a reference or review is pending before a larger bench.

No Blanket Stay On Criminal Trials Even If Compensatory Execution Is Halted

The bench further underscored that even in Dineshchand Surana, the Supreme Court had unequivocally reiterated that moratorium provisions under the IBC do not operate in respect of the criminal aspect of Section 138 proceedings and directors cannot escape personal criminal culpability.

The High Court clarified that at best, the criminal court might evaluate the moratorium's effect on the recovery of compensation at the stage of sentencing or execution under Section 395 of the BNSS, but there is zero legal justification to halt the criminal trial itself. Pointing out that several of the underlying cheque bounce complaints involving hundreds of crores had been pending trial for over a decade, the court refused to grant any stay.

Dismissing the entire batch of petitions, the High Court held that the interim moratorium under Section 96 of the IBC does not impede the trial of criminal complaints under Section 138 read with Section 141 of the NI Act against company directors. The bench discharged the rule, vacated all interim reliefs, and directed the trial courts to proceed with the pending trials without delay.

Date of Decision: 18 August 2026