The Supreme Court has referred to a larger Bench a legal question on how personal insolvency proceedings under Part III of the Insolvency and Bankruptcy Code interact with cheque dishonour prosecutions under Section 138 of the Negotiable Instruments Act.
The Supreme Court has referred to a larger Bench a significant question regarding the interaction between personal insolvency proceedings under Part III of the Insolvency and Bankruptcy Code, 2016 (IBC) and cheque dishonour prosecutions under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).
The reference was made by a Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan.
The dispute arose from a cheque dishonour complaint filed by UCO Bank against Dinesh Chand Surana, the former Managing Director of Surana Power Ltd., which was already in liquidation. As noted in the judgment, the bank had opened an inland letter of credit for the purchase of coal.
After devolvement of the letter of credit, a cheque dated 26 March 2015 for Rs. 5,03,21,250/- was issued towards the dues. The cheque was dishonoured on 18 June 2015 with the endorsement “Funds Insufficient”.
Following the statutory notice, the bank initiated a complaint under Section 138 NI Act before the Metropolitan Magistrate at Egmore, Chennai.
While the complaint was pending, personal insolvency proceedings were commenced against the appellant under Part III of the IBC. The appellant sought quashing and stay of the Section 138 proceedings, arguing that the interim moratorium under Section 96, and thereafter the moratorium under Section 101, would apply to all legal proceedings in respect of any debt.
The Madras High Court rejected this submission, holding that Section 138 proceedings are criminal in nature and cannot be treated as merely proceedings for recovery of money.
The appellant challenged that order before the Supreme Court.
Before the Supreme Court, three central issues were framed:
- Whether Section 138 proceedings are intended primarily for recovery of money;
- Whether such proceedings are protected during moratorium under Part III of the IBC; and
- Whether persons who are vicariously liable—such as directors under Section 141 NI Act—can also benefit from the personal insolvency moratorium.
In a detailed analysis, the Bench examined the character of proceedings under Section 138. It observed that dishonour of a cheque is made an offence through a statutory deeming fiction, and that the legislature intended criminal consequences to follow from the dishonour of a cheque issued in respect of a legally enforceable debt.
In support of this, the Court relied on the Statement of Objects and Reasons to the 1988 amendment introducing Chapter XVII of the NI Act, emphasizing that the legislative goal was to enhance the acceptability and credibility of cheques used for settlement of liabilities.
The Bench further stressed that the offence under Section 138 is not simply about failure to pay a debt; rather, it is specifically about dishonour of the cheque as the chosen instrument of payment.
It held that even if the underlying transaction has civil aspects, Section 138 cannot be treated as equivalent to a civil claim for money recovery. The Court also noted that the punishment contemplated under Section 138 includes imprisonment, fine, or both, which reflects the provision’s largely criminal and deterrent nature, even though it may be described as quasi-criminal in a broader sense.
The judgment also revisited P. Mohanraj and Ors. v. Shah Brothers Ispat Pvt. Ltd., (2021) ibclaw.in 24 SC, where Section 138 proceedings were famously described as civil sheep in a criminal wolf’s clothing. The present Bench indicated that the predominantly deterrent criminal elements of Section 138 were not fully placed before the earlier three-Judge Bench in P. Mohanraj.
It observed that the principal object of Section 138 is to deter dishonour of cheques and protect commercial trust in cheque-based transactions—therefore, Section 138 cannot be reduced to a mere device for debt enforcement.
At the same time, the Court recognized that Section 138 contains a compensatory component. It discussed the difference between punishment and compensation and noted that compensation in cheque dishonour matters is awarded by the criminal court under the general provision for compensation in criminal procedure now reflected in Section 395 of the BNSS.
The Bench held that this compensatory portion has an inherently civil character. It also pointed out that a civil suit for recovery of money may proceed alongside a complaint under Section 138, reinforcing that criminal prosecution under the NI Act is not the sole method for recovering dues.
To harmonize these aspects, the Bench proposed a two-tier understanding of Section 138 proceedings.
On this basis, the Court expressed the view that the moratorium under Part III of the IBC should not apply to the criminal aspect of Section 138, because doing so would effectively permit evasion of criminal liability.
However, the Court indicated that the compensatory aspect could potentially be treated differently, since recovery of compensation is civil in nature and impacts the debtor’s asset pool.
The Bench went further and observed that, where directors are made vicariously liable under Section 141 NI Act, recovery of compensation from such directors may also be capable of being covered by the moratorium under Part III, if those directors themselves are undergoing personal insolvency or bankruptcy. According to the Court, the phrase any debt in Sections 96 and 101 IBC is sufficiently broad to include liabilities that may not have been personally incurred by the individual, but have nonetheless come to rest upon them by operation of law.
Despite recording these views extensively, the Supreme Court did not issue a conclusive binding ruling on the controversy. The Bench expressly held that an authoritative pronouncement by a larger Bench is necessary. Accordingly, it directed the Registry to place the matter before the Chief Justice of India for constitution of an appropriate three-Judge Bench.
The Court identified two key questions for consideration by the larger Bench:
- Whether Section 138 NI Act is quasi-criminal in nature while tilted towards the criminal side; and
- Whether the moratorium under Part III of the IBC applies to the entire Section 138 proceeding or only to its compensatory aspect.
This reference is significant because it underscores a direct tension between the IBC’s objective of providing breathing space to an insolvent individual and the NI Act’s objective of preserving the credibility of cheque-based commercial dealings through criminal sanction.
Importantly, the present decision does not settle the law finally; it results only in a reference to a larger Bench. The ultimate legal position on the extent to which personal insolvency moratorium affects Section 138 proceedings will now depend on the larger Bench’s final ruling.