Individual insolvency under IBC & proceedings u/s 138 NI Act: embargo?

 

Recently, the Supreme Court has settled the issues with regard to the fact as to whether the proceedings u/s 138 of Negotiable Instruments Act could be stayed against insolvent individuals and /or whether proceedings u/s 138 of NI Act could be stayed sine die. till the conclusion of the proceedings initiated under Section 94 of the Insolvency and Bankruptcy Code, 20163, before the National Company Law Tribunal. A writ petition was also filed for declaration and direction that section 138 proceedings shall be deemed to be stayed during the operation of the moratorium period under section 96 IBC.

The Supreme Court has finally and conclusively dealt with the issue in Rakesh Bhanot Versus  M/S.Gurdas Agro Pvt Ltd, 2025 INSC 445 1 Criminal Appeal No. 1607 of 2025 (Arising out of SLP (Crl.) No. 6087 OF 2023)

CONTENTIONS OF APPELLANT

(i)     There is a complete and unequivocal bar on continuation of proceedings of the N.I. Act, 1881, in view of pendency of the insolvency proceedings before the National Company Law Tribunal, as envisaged under Section 96 IBC.

(ii)    Once the proceedings under Section 94 IBC have been initiated before the Adjudicating Authority for personal insolvency resolution process, on account of the appellants / petitioners having become personally insolvent, necessarily all further proceedings under Section 138 of the N.I. Act, 1881, would remain stayed in terms of Section 96(1)(b) IBC.

(iii)    The legislative intent behind the IBC is to provide a structured framework for debt resolution, while ensuring that debtors are afforded a fair opportunity to reorganize their financial affairs. The moratorium is designed to prevent creditors from taking coercive actions that could further destabilize the debtors' financial situation.

(iv) There is fine distinction in the statute between “Corporate Insolvency Resolution Process” and “Personal Insolvency Resolution Process”.  In case, where a Company is a corporate debtor and insolvency proceedings are initiated against such corporate debtor under Section 7 or Section 9 IBC, the Adjudicating Authority under Section 14(1) IBC passes an order to declare a moratorium. On the other hand, Section 94 IBC provides for a situation wherein a debtor may approach the Adjudicating Authority for initiation of Personal Insolvency Resolution Process. Similarly, Section 95 IBC provides for a situation wherein a creditor may approach the Adjudicating Authority for initiation of Personal Insolvency Resolution Process against an individual.

Section 96(1) IBC provides that in either case, whether under Section 94 or Section 95,

(a) Interim moratorium comes into effect on the date of the application itself;

(b) This moratorium is in respect of all debts;

(c) This moratorium shall cease to have effect on the date of admission of such application;

(d) During this period, all pending legal action or proceedings in respect of any debt shall be deemed to have been stayed;

(e) Creditors of debt shall not initiate any legal action or proceeding in respect of any debt.

(v) It is also to be seen that the moratorium came into effect in a proceeding under Section 96 IBC and not under Section 14 IBC.

(vi) However, the High Court erroneously relied on the judgment in P.Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258 as in that case, the Supreme Court was concerned only with the proceedings under section 14 IBC and not section 96 IBC. Hence, the observations made therein can be read only in the context of a moratorium under section 14 IBC.

(vii) Further, the reliance placed in the decision in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. (2023) 10 SCC 545, is misconceived, since the said judgement merely holds that the moratorium under Section 14 IBC shall not protect the signatories and the directors of the corporate debtor because the said moratorium is only with respect to the corporate debtor, and not the individuals.

(viii) Once the application under Section 94 or 95 IBC has been admitted, Section 101 IBC states that “the debtor shall not transfer, alienate, encumber, or dispose of any of his assets of his legal rights or beneficial interest therein” thereby imposing an express bar on the individual/director/ signatory/ cheque from making any payment in relation to the dishonoured cheque. Thus, when the law prohibits payment, it would create a dichotomy to simultaneously proceed against the said individual under Section 138 read with Section 141 of the N.I. Act 1881 for dishonour of the cheque and failure to make the payment to purge/compound the said offence. Therefore, the appellants / petitioners cannot be penalised for not performing an act expressly barred by law. 

(ix) In State Bank of India v. V.Ramakrishnan  (2018) 17 SCC 394 (2000) while adjudicating on the applicability of moratorium under Section 14 IBC to personal guarantors, it was held by this Court that personal guarantors are covered by the moratorium under Section 96 IBC, while stating the protection of moratorium under these sections 96 and 101 IBC is far greater than the moratorium under section 14 IBC.

(x) The IBC must prevail over Section 138/141 of the N.I. Act, 1881, for the want of the non-obstante provision of Section 238. Further, it will override anything inconsistent contained in any other enactment, including the Income-Tax Act, 1961. Reference can be in this connection made to Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co. & Ors. (2000) 5 SCC 694, which made it clear that income-tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors, who are private persons.

(xi) Reference was made to the decision in Dilip B. Jiwrajka vs. Union of India (2024) 5 SCC 435, wherein, while upholding the constitutional validity of Sections 95-100 IBC, this court explained the concept of a moratorium under Section 14 of Part II vis-à-vis interim moratorium under Section 96 of Chapter III of Part III.

Ultimately, it was inter alia concluded that the purpose of the interim moratorium under section 96 is to protect the debtor from further legal proceedings. 

(xii) Thus, the proceedings under section 138 r/w 141 of the N.I. Act, 1881, which is concerned with the dishonour of the alleged cheques under the signatures of the appellants / petitioners, would undoubtedly fall within the prohibition contained in section 96 IBC and that the Courts below erred in rejecting the petitions filed for staying the 138 proceedings till the conclusion of the insolvency proceedings pending before the Tribunal. Hence, the impugned orders passed by them are liable to be set aside.

 

CONTENTIONS OF INTERVENORS

 

(i) The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted in order to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. Further, it was enacted with an object to maximize the wealth of person undergoing insolvency proceedings, to enable a purposeful and constructive interpretation.

(ii) On initiation of insolvency proceedings under IBC, Section 14 provides for a moratorium during which all legal proceedings against the insolvent Company stand stayed. Whereas, on the filing/initiation of personal insolvency, moratorium under Sections 96 and 101 IBC come into effect. When the moratorium comes into effect, then, no legal proceeding against him can be initiated for recovery of any debt. Generally, when an individual is prosecuted even for dishonour of cheque, then in effect, he is being prosecuted for "non-payment of debt". As such, such legal proceedings are covered under Sections 96 and 101 IBC and the same do not lie/ cannot be continued. Therefore, all types of debt recovery proceedings are stayed and all types of assets of the individual are pooled to pay-off the debts.

(iii) During moratorium under section 14 IBC, the Company is protected from any civil or legal proceedings including Section 138 of the N.I. Act, 1881 proceedings. Similarly, when the resolution of debts of an individual takes place under the aegis of personal insolvency under IBC, in such a situation, continuing with the offence of cheque dishonour case shall double jeopardize the individual, since he has already utilized all his assets to enter into a resolution and shall have no means to compound/settle the offence of cheque dishonour and shall be forced to face criminal prosecution. Therefore, similar protection under Section 96 IBC ought to be granted to the individual under personal insolvency as is available to the Company under Section 14 IBC on the initiation of insolvency process.

(iv) The proceedings under Section 138 / 141 of the N.I. Act, 1881 qua the Directors are civil in nature and should be considered as such for the cases which lie under Section 96/101 IBC. The role of Directors has to be specific, meaning thereby that the liability under Section 138/141 of the N.I. Act, 1881, is vicarious in nature. Similarly, the offences under all the statutes, whether under the Companies Act, Income Tax Act, or any other Act, where punishment may be imposed by way of fine, must be considered under the domain of the provisions of section 96/101 IBC.

(v) The benefit of moratorium under Section 96 IBC and Section 101 IBC be extended to the individuals against criminal proceedings pending under Section 138 of N.I. Act, 1881, as the same is in consonance with the scope and intent of the legislature.

                CONTENTIONS OF RESPONDENT

 

(i) The IBC is meant to resolve genuine financial distress, and not to shield individuals from criminal liability.

(ii) The interim moratorium under Section 96 IBC is intended to operate in respect of debt as opposed to a debtor and that the purpose of interim moratorium under Section 96 is to restrain the initiation or continuation of legal action or proceedings against the debt. The words used both in clause (b) (i) and clause (b) (ii) of Section 96(1) are “in respect of any debt” and therefore, moratorium would strictly apply to the security interest created by the debtors / appellants / petitioners herein in their personal capacity, wherein personal guarantee is given in respect of a debt and in no manner can be stretched to include the criminal proceedings under Section 138 of the N.I. Act, 1881, since the same is not qua the debt, but is built on the principle of not honouring the cheques, when presented for encashment which in turn attract the criminal liability and fines.

(iii) The interim moratorium under Section 96 IBC will not apply to the criminal proceedings under Section 138 of the N.I. Act, 1881 and hence, there is no bar for continuation of the said proceedings. The reference was placed in P.Mohanraj (supra), and Narinder Garg and Others v. Kothak Mahindra Bank Ltd., and Others (2022) SCC OnLine SCC 517.

(iv) Reliance was also placed on the Report of the Insolvency Law Committee of 2020, Chapter V of which explained the scope of moratorium, and according to Narinder Garg (Supra) the moratorium provisions under Part III IBC were not meant to stay actions against the corporate debtor or other third parties involved in the debt. Therefore, the Committee agreed that the moratorium and interim moratorium under Part III should be interpreted only to be limited to the ‘debtor’ and its assets.

(v) Section 138 of the N.I. Act, 1881, was enacted to enhance the credibility of cheques in commercial transactions and penalize the wilful dishonour of such instruments. It criminalizes the act of dishonouring cheques due to insufficiency of funds or other similar reasons. Section 141 extends liability to individuals who were in charge of and responsible for the conduct of the company’s business at the time of the offence. On the other hand, the appellants / petitioners attempted to use the insolvency proceedings before the National Company Law Tribunal in order to stay the section 138 proceedings pending before the trial court. Thus, they cannot absolve themselves of personal liability merely by citing insolvency proceedings under the IBC.

(vi) As reiterated in P. Mohanraj (supra), “proceedings under Section 138/141 of the N.I. Act, 1881 are distinct and operate independently of insolvency proceedings.” Any contrary interpretation would render creditors powerless and undermine the effectiveness of the N.I. Act, 1881.

(vii) Whether moratorium is under Section 14 or Section 96 IBC, the provision of section 141 is equally applicable and remains the same. The judgement of the Supreme Court in P.Mohanraj (supra) holding that "it is clear that the moratorium provision contained in Section 14 IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141 continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act", would be applicable in the case of moratorium under Section 96 IBC as well.

(viii) On proper appreciation of facts, the courts below rightly dismissed the petitions filed by the appellants and hence, the same need not be interfered with by this court.

                                ANALYSIS

The Insolvency and Bankruptcy Code, 2016.

Section 14. Moratorium

(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:-

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

[Explanation.--For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period;]

(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

[(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified;]

[(3) The provisions of sub-section (1) shall not apply to—

[(a) such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;]

(b) a surety in a contract of guarantee to a corporate debtor.]. (4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process: Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.“

“Section 94 - Application by Debtor to Initiate Insolvency Resolution Process:

“(1) A debtor who commits a default may apply, either personally or through a resolution professional, to the Adjudicating Authority for initiating the insolvency resolution process, by submitting an application.

(2) Where the debtor is a partner of a firm, such debtor shall not apply under this Chapter to the Adjudicating Authority in respect of the firm unless all or a majority of the partners of the firm file the application jointly.

(3) An application under sub-section (1) shall be submitted only in respect of debts which are not excluded debts.

(4) A debtor shall not be entitled to make an application under sub section (1) if he is—

(a) an undischarged bankrupt;

(b) undergoing a fresh start process;

(c) undergoing an insolvency resolution process; or

(d) undergoing a bankruptcy process.

(5) A debtor shall not be eligible to apply under sub-section (1) if an application under this Chapter has been admitted in respect of the debtor during the period of twelve months preceding the date of submission of the application under this section.

(6) The application referred to in sub-section (1) shall be in such form and manner and accompanied with such fee as may be prescribed.”

“96. Interim-moratorium—

(1) When an application is filed under Section 94 or Section 95—

(a) an interim moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and (b) during the interim moratorium period—

(i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and

(ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.

(2) Where the application has been made in relation to a firm, the interim moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application.

(3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.”

 

101. Moratorium.—

(1) When the application is admitted under Section 100, a moratorium shall commence in relation to all the debts and shall cease to have effect at the end of the period of one hundred and eighty days beginning with the date of admission of the application or on the date the Adjudicating Authority passes an order on the repayment plan under Section 114, whichever is earlier.

(2) During the moratorium period—

(a) any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed;

(b) the creditors shall not initiate any legal action or legal proceedings in respect of any debt; and

(c) the debtor shall not transfer, alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest therein;

(3) Where an order admitting the application under Section 96 has been made in relation to a firm, the moratorium under sub-section (1) shall operate against all the partners of the firm. 24 (4) The provisions of this Section shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.”

From the above provisions, it is clear that the term “Corporate Person” includes a company as defined under Section 2(20) of the Companies Act, 2013, and a Limited Liability Partnership. However, there is a subtle difference in the protection available to the Directors and the Partners. In case of a partnership firm, the interim moratorium protects not only the firm, but also the partners. But in case of a company, such protection is available only to the company and not to its directors. That apart, the object of interim moratorium can be no different from that of the moratorium specified under Section 14. It is also clear from Section 14 that the protection from legal action during the period of moratorium is not available to the surety or in other words, to a personal guarantor. The use of the words “all the debts” and “in respect of any debt” in Sub-section (1) of Section 96 is not without a purpose, as the moratorium is intended to offer protection only against civil claim to recover the debt. Hence, such period of moratorium prescribed under Section 14 or 96 is restricted in its applicability only to protection against civil claims which are directed towards recovery and not from criminal action. (B) Negotiable Instruments Act, 1881.

Admittedly, the appellants / petitioners are facing trial for the offence under section 138 / 141 of the N.I. Act, 1881, at the instance of the respondents / 27 complainants. While so, they initiated the personal insolvency proceedings under the IBC and sought exemption from the section 138 proceedings before the trial Court, referring to interim moratorium provided under Section 96 IBC. It is to be noted that upon the application being admitted, the moratorium provisions under the IBC offer protection only to the corporate debtor, i.e., the company, and do not extend protection against civil liability to personal guarantors by specific exclusion or to any individual who is prosecuted for committing a criminal act.

The legislative intent behind the Insolvency and Bankruptcy Code (IBC) is to provide a structured framework for the resolution of corporate debtors' financial distress, facilitating their rehabilitation and ensuring the maximization of asset value. The application under Section 94 or 95 would fall under Chapter III of the IBC. An application under Section 94, when taken out by a debtor in the capacity of a personal guarantor of a company, to declare him/her as insolvent, is to be disposed by following the procedures in Sections 97 to 119. The application filed under Section 94 is scrutinized by the Resolution Professional and a report is submitted as contemplated under Section 99 recommending either the approval or rejection of the application. The interim moratorium which commences on the presentation of the application will expire on the admission of the application by an order of the adjudicating authority under Section 100. Upon admission, the moratorium under Section 101 comes into operation. The interim moratorium under Section 96 and the moratorium under Section 101 IBC are designed to offer a breathing space to the corporate debtor, allowing them to reorganize their financial affairs without the immediate threat of creditor actions. However, this moratorium is not intended to shield individuals from personal criminal liabilities arising from their actions outside the scope of corporate debt restructuring.

The respective appellants / petitioners, having filed insolvency applications as personal guarantors under Section 94 IBC, cannot extend this protection to avoid prosecution under Section 138 of the N.I. Act, 1881. Upon filing of the application under section 94 IPC, a moratorium comes into effect, designed to protect the debtors from any legal actions concerning their debts. Specifically, Section 96 IBC provides that any legal proceedings pending against the debtor concerning any debt shall be deemed to have been stayed. The term “any legal action or proceedings” does not mean “every legal action or proceedings”. In sub-clauses 96 (b) (i) and (ii), the term “legal action or proceedings” are followed by the term “in respect of any debt”. The term “legal action or proceedings” would have to be understood to include such legal action or proceedings relating to recovery of debt by invoking the principles of noscitur a sociis. The purpose of interim moratorium contemplated under Section 96 is to be derived from the object of the act, which is not to stall the proceedings unrelated to the recovery of the debt. The protection is not available against penal actions, the object of which is to not recover any debt.

The Supreme Court while upholding the validity of Section 32-A of IBC in Manish Kumar v. Union of India, (2021) 5 SCC 1 has held that “The provision is carefully thought out. It is not as if the wrongdoers are allowed to get away.” That is a very important object and the same should not be permitted to be defeated by accepting the argument that permits the signatory/Director to enjoy the fruits of their own wrong.”

In Lalit Kumar Jain v. Union of India 9 SCC 321 it is held that the approval of the resolution plan per se does not operate as a discharge of guarantors' liability. That is because:

(a) an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability.

(b) a discharge which the principal debtor may secure by operation of law in bankruptcy (or in liquidation proceedings in the case of a company) does not absolve the surety of his liability.

 

The same principle is applicable to the signatory/Director in the case of Sections 138/141 proceedings. The signatory/Director cannot take benefit of discharge obtained by the corporate debtor by operation of law under IBC. A litigant cannot take advantage of its own wrong (Nullus commodum capere potest de injuria sua propria)

The Supreme Court has thus held in Rakesh Bhanot Versus  M/S.Gurdas Agro Pvt Ltd, 2025 INSC 445 1 Criminal Appeal No. 1607 of 2025 (Arising out of SLP (Crl.) No. 6087 OF 2023) para 17 and 18 as under:

17. For the foregoing discussion, we are of the opinion that the object of moratorium or for that purpose, the provision enabling the debtor to approach the Tribunal under Section 94 is not to stall the criminal prosecution, but to only postpone any civil actions to recover any debt. The deterrent effect of Section 138 is critical to maintain the trust in the use of negotiable instruments like cheques in business dealings. Criminal liability for dishonoring cheques ensures that individuals who engage in commercial transactions are held accountable for their actions, however, subject to satisfaction of other conditions in the N.I. Act, 1881. Therefore, allowing the respective appellants / petitioners to evade prosecution under Section 138 by invoking the moratorium would undermine the very purpose of the N.I. Act, 1881, which is to preserve the integrity and credibility of commercial transactions and the personal responsibility persists, regardless of the insolvency proceedings and its outcome.

18. In view thereof, the contention of the appellants that the decisions relied on by the High Court dealt with the proceedings under section 14 IBC and not the proceedings under section 96 IBC, cannot be countenanced by us. Furthermore, the decision in Dilip B. Jiwrajka (supra) is not relevant to the facts of the present case, as the issue therein was relating to the constitutional validity of certain provisions of the IBC and the applicability of moratorium to a proceedings under Section 138 of the N.I. Act, 1881 was not the subject matter.”

 

What follows from the aforesaid is that for difficulty in prosecuting the corporate debtor under Section 138 of the NI Act after the approval of the resolution plan under IBC, we need not let the natural persons i.e. the signatories to the cheques/Directors of the corporate debtor escape prosecution. How can one allow the natural persons to escape liability on such specious plea? In such a situation the Latin maxim lex non cogit ad impossibilia is attracted which means law does not compel a man to do which he cannot possibly perform. Broom's Legal Maxims contains several illustrative cases in support of the maxim.

Thus, where the proceedings under Section 138 of the NI Act had already commenced and during the pendency the plan is approved or the company gets dissolved, the Directors and the other accused cannot escape from their liability by citing its dissolution. What is dissolved is only the company, not the personal penal liability of the accused covered under Section 141 of the NI Act. They will have to continue to face the prosecution in view of the law laid down in Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661. Where the company continues to remain even at the end of the resolution process, the only consequence is that the erstwhile Directors can no longer represent it. The para no. 75 is reproduced:

“75. Thus, where the proceedings under Section 138 of the NI Act had already commenced and during the pendency the plan is approved or the company gets dissolved, the Directors and the other accused cannot escape from their liability by citing its dissolution. What is dissolved is only the company, not the personal penal liability of the accused covered under Section 141 of the NI Act. They will have to continue to face the prosecution in view of the law laid down in Aneeta Hada [Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661 : 34 (2012) 3 SCC (Civ) 350 : (2012) 3 SCC (Cri) 241],  Where the company continues to remain even at the end of the resolution process, the only consequence is that the erstwhile Directors can no longer represent it. “

The Supreme Court in Rakesh Bhanot (Supra) has therefore dismissed the petitions seeking stay of the prosecution under Section 138 of the N.I. Act, 1881, by placing reliance on the interim moratorium under Section 96 IBC. It was held that the plea cannot be entertained and hence, the judgments / orders passed by the different High Courts affirming the orders of the trial court which had rightly refused to stay the section 138 proceedings was upheld being the correct position of law.

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Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com