Supreme Court refers the question of applicability of moratorium under IBC on proceedings u/s 138 of the NI Act to Chief Justice for constitution of a larger bench
In a recent judgment, Hon’ble Supreme Court has held that moratorium provisions under Part III of the IBC cannot be made applicable on the criminal impact of Section 138 of the NI Act. The moratorium provisions under Part III of the IBC must be made applicable in respect of recovery of compensation in Section 138 proceedings
ABCAUS Case Law Citation:
5158 (2026) (05) abacus.in SC
Important Case Laws relied upon by Parties:
Mohanraj v. Shah Bros. Ispat (P) Ltd
In the instant case, the appellant had challenged the judgment of the High Court dismissing his appeal to quash the complaint filed by the Bank under Section 138 of the Negotiable Instruments Act, 1881 (the “NI Act”), essentially on the ground that the appellant was undergoing personal insolvency proceedings and that the complaint proceedings under Section 138 of the NI Act were stayed during the interim moratorium period under Section 96 of the Insolvency and Bankruptcy Code, 2016 (the “IBC”).
The appellant was the Managing Director of a company which had availed various financial and credit facilities from the respondent bank which included opening of Irrevocable Letters of Credit Facility against the security of a blank cheque.
The cheque issued by the company in discharge of outstandings against the LoC was however dishonoured with an endorsement of “Funds Insufficient”.
As a result, the respondent bank issued a statutory notice under Section 138 of the NI Act, to the company, the appellant and the other accused calling upon them to make good the amount in respect of which the cheque was dishonoured. After 15 days from the issuance of the statutory notice, the respondent filed a criminal complaint before Metropolitan Magistrate.
The appellant filed a Petition before the High Court praying for quashing of the complaint. However, the High Court dismissed the petition.
After about three years, the National Company Law Tribunal, Chennai (NCLT) admitted an insolvency application against the appellant under Section 95 of the IBC, during the pendency of the complaint filed before the MM.
The appellant against approached High Court for quashing of the complaint under Section 138 of the NI Act pending before the MM and stay of the proceedings thereunder. The appellant prayed for stay of the proceedings under Section 138 of the NI Act on the ground that as per Section 96 of the IBC, the interim moratorium would operate as regards a legal proceeding in respect of any debt. Therefore, the proceedings under Section 138 of the NI Act would be covered by such interim moratorium.
The High Court dismissed the said applications on the premise that Section 138 of NI Act is not a proceeding for recovery of money from a debtor and thus, the moratorium under Section 96 of the IBC is not applicable. The High Court opined that Section 138 of the NI Act is a criminal enactment which provides for sentence of imprisonment and fine. Therefore, the proceedings under Section 138 of the NI Act could be said to be criminal in nature and not merely intended to be recovery proceedings against a debtor.
The Hon’ble Supreme Court however opined that the proceedings under Section 138 of the NI Act are not in the nature of legal action for recovery of money. The Court observed that in its previous decision in P. Mohanraj, it was observed that Section 138 is a hybrid provision that attaches criminal liability to a civil dispute to enforce payment under a bounced cheque if it is otherwise enforceable in law. It was held that held that though proceedings under Section 138 of the NI Act are quasi- criminal, yet the predominant nature of such proceedings is criminal.
The Hon’ble Supreme Court opined that in P. Mohanraj the remark that described Section 138 as a “civil sheep in criminal wolf’s clothing” described Section 138 proceeding inherently civil in nature primarily on the basis of the procedure stipulated under Chapter XVII of the NI Act.
The Hon’ble Supreme Court opined that a bare reading of the Statement of Objects and Reasons of the Banking Amendment Act which introduced Chapter XVII of the NI Act indicates that the predominant object of Section 138 proceedings is to increase the faith of the public in the integrity and credibility of the use of cheques in commercial transactions. It is the offence of cheque dishonour which has been saddled with criminal consequences. The provision of punishment is a measure of deterrence. Therefore, the provision was not intended to be used as a recovery of debt mechanism which is also apparent from the fact that Section 138 proceedings do not bar the institution of a co-extensive civil suit.
The Hon’ble Supreme Court opined that legal action taken under Section 138 can be categorised as tiered proceedings. Tier I of the proceeding under Section 138 is without any doubt, criminal and culminates into punishment of either imprisonment, fine or both, if the drawer of the cheque is convicted. Tier I is mandatory in nature unlike Tier II which is dependent upon the discretion of the courts to order compensation. Tier II is the compensatory aspect of Section 138 which causes an inevitable overlap between criminal and civil actions.
The Hon’ble Supreme Court opined that the criminal aspect of Section 138 proceedings results in punishment including imprisonment, fine or both. This makes it sufficiently clear that moratorium provisions under Part III of the IBC cannot be made applicable on the criminal impact of Section 138 of the NI Act. The moratorium provisions under Part III of the IBC must be made applicable in respect of recovery of compensation in Section 138 proceedings.
The Hon’ble Supreme Court also opined that moratorium under Sections 96 and 101 of the IBC is applicable on the director(s) who are saddled with the liability to discharge the compensatory obligation of the company by virtue of the use of the words “any debt” therein. Further, the moratorium under Sections 124 and 128 of the IBC respectively would also stay any suit or legal proceedings against the properties of the debtor, instituted with the purpose of enforcement of the bankruptcy debt.
However, the Division Bench of the Hon’ble Supreme Court opined that for a comprehensive consideration and an authoritative pronouncement after taking into account all aspects, including those dealt with hereinabove, the matter needs to be placed before Hon’ble the Chief Justice of India to constitute an appropriate three-Judge Bench.
As a result, their Lordships referred the matter to be placed before Hon’ble Chief Justice to constitute a Full Bench to decide whether the provisions of Section 138 of the NI Act and the objective underlying the enactment thereof indicate that it is quasi-criminal in nature with a tilt towards the criminal side? and whether the moratorium provisions under Part III of the IBC should be made applicable on the entire proceedings under Section 138 of the NI Act or only to the compensatory aspect thereof?
Download Full Judgment Click Here >>
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