In a recent ruling, the Supreme Court of India in Rakesh Bhanot v. Gurdas Agro Private Limited[1] (with connected appeals) (collectively “Appeals”) clarified the scope of the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (“Code”). The core issue in these appeals was whether proceedings under Section 138 and Section 141 of the Negotiable Instruments Act, 1881 (“NI Act”) can be stayed once a personal insolvency application is filed under Section 94 of the Code, thereby triggering the interim moratorium.
The Appeals arise from complaints filed against the Appellants for issuing cheques which were dishonored due to insufficient funds. During the pendency of these cheque bounce cases, personal insolvency proceedings were initiated against the Appellant under Section 94 of Code before the National Company Law Tribunal. Consequently, the Appellants approached Trial court(s)/ High Court(s) for stay of the criminal prosecutions by invoking interim moratorium under Section 96 of the Code. Trial Courts and High Courts have rejected the plea, leading to the filing of the said Appeals.
Legal Contentions
The Appellants contended that Section 96(1)(b) of the Code mandates a stay on all legal proceedings in respect of “any debt” from the date of filing of a personal insolvency application. Since cheque bounce cases are premised on unpaid debts, it was argued that such proceedings must be stayed. The Appellants also sought to place reliance on the overriding provision under Section 238 of the Code, and the decision of the Supreme Court of India in Dilip B. Jiwrajka vs. Union of India[2], which upheld the constitutional validity of the personal insolvency framework under Part III of the Code.
It was also argued by the Appellants that the legislative intent behind the Code is to provide a structured framework for debt resolution, while ensuring that the debtors are afforded a fair opportunity to reorganize their financial affairs. The moratorium is therefore, designed to prevent creditors taking coercive actions, which could further destabilize the debtor’s financial status.
The aforesaid submissions were objected to by the Respondents arguing that Section 138 of the NI Act are penal in nature and are not civil debt recovery proceedings. It was also argued that Section 96 of the Code is intended to protect debtors from coercive recovery actions, and not to immunize them from criminal liability. Placing reliance on the judgments of P. Mohanraj v. Shah Brothers Ispat[3], Ajay Kumar Goenka v. TFCI Ltd[4] and Narinder Garg and Others v. Kotak Mahindra Bank Ltd[5]., the observations to the extent of stay of proceedings during moratorium were only limited to moratorium under Section 14 of the Code and did not extend to natural persons for criminal offences under the NI Act.
Reasoning and Analysis of the Supreme Court
The Supreme Court of India rejected the Appellants’ plea and upheld the decisions of the Trial Courts/ High Courts. It was observed that interim moratorium under Section 96 of the Code applies only to legal proceedings in respect of “any debt,” and not to criminal prosecutions under Section 138 of the NI Act, which penalizes dishonour of cheques and are not merely instruments for debt recovery.
The Court reiterated that the object of Section 96 of the Code is only to provide temporary relief from civil proceedings related to debt, giving the debtor an opportunity to reorganize their financial affairs. However, this protection does not extend to criminal liability, which serves a distinct public function of maintaining the sanctity of commercial instruments like cheques.
It further held that the terms used in Section 96 of the Code i.e., “legal proceedings in respect of any debt”, must be interpreted in a limited sense, in line with the principle of noscitur a sociis, and cannot be stretched to include criminal proceedings.
Referring to P. Mohanraj (supra), the Supreme Court noted that while moratorium under Section 14 Code stays criminal proceedings only against the corporate debtor, the directors remain personally liable and therefore, the same principle applies to Section 96 of the Code in the context of individual insolvency.
Additionally, neither the filing of an insolvency petition nor the imposition of a moratorium under Sections 96 or 101 of the Code extinguishes personal criminal liability of directors or cheque signatories. The prosecution under the NI Act is premised on the dishonour of a cheque, and its object is distinct from civil debt restructuring under the Code.
KLA Conclusion
The Supreme Court’s decision settles the legal ambiguity concerning the intersection of personal insolvency under the Code and criminal liability under the NI Act. It affirms that filing of an insolvency application under Section 94/ 95 of the Code does not stay proceedings under Section 138 of the NI Act, and individuals cannot escape criminal prosecution merely by initiating insolvency proceedings.
This ruling reinforces the principle that insolvency laws are not intended to shield legal accountability of individuals, emphasizing that insolvency proceedings cannot be used as a means to evade criminal liability.
More importantly, willful defaulters are not absolved from the deterrent effect of cheque dishonour prosecutions and the Supreme Court of India has provided a much-needed clarity to Trial Courts handling such cases, by protecting the integrity of commercial transactions. This decision will serve as a binding precedent in cheque dishonour cases involving individuals undergoing personal insolvency and will ensure that the Code is not misused as a tool to evade penal consequences.
—
[1] Judgement dated April 01, 2025, in Criminal Appeal No. 1607 of 2025
[2] (2024) 5 SCC 435
[3] (2021) 6 SCC 258
[4] (2023) 10 SCC 545
[5] (2022) SCC OnLine SC 517
AUTHORS: Sanampreet Singh (Senior Associate) | Shivani Sharma (Associate)