IBC: MORATORIUM AND SECTION 138 OF NI ACT

In one of the recent judgments of Apex Court, it has been held that provisions relating to moratorium under section 96 (Part III) of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) can not be made applicable to criminal impact of section 138 of Negotiable Instruments Act, 1881 (NI Act) dealing with dishonor of cheque for insufficiency etc of funds in the account.

In Dineshchand Surana Versus Uco Bank - 2026 (5) TMI 1732 - Supreme Court , it has been held that interim moratorium provisions of IBC, 2016 cannot be made applicable on criminal impact of section 138 of Negotiable Instruments Act, 1881. The court concluded that:

1. Moratorium under part III of IBC is applicable only to compensatory aspect of Section 138 proceedings, i.e., recovery of compensation, and not to criminal aspect.
2. Moratorium under Sections 96 and 101 of the IBC respectively is applicable on director(s) who are saddled with liability to discharge compensatory obligation of company by virtue of use of words "any debt" therein.
3. Moratorium under Sections 124 and 128 of IBC would also stay any suit or legal proceedings against properties of debtor, instituted with purpose of enforcement of bankruptcy debt.
4. Since matter required comprehensive consideration and an authoritative pronouncement, it was to be placed before Chief Justice of India to constitute an appropriate three-Judge Bench.

Statutory Provisions

On the relevant statutory provisions, section 96 of IBC 2016 provide for interim moratorium. 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.

Where the application has been made in relation to a firm, the above interim-moratorium shall operate against all the partners of the firm as on the date of the application. The above provisions shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator. These provisions shall also not apply where an application is filed for initiating an insolvency resolution process in respect of a personal guarantor to a corporate debtor.

As per section 101 of IBC, 2016, 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.

Further, 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;

Where an order admitting the application under section 96 has been made in relation to a firm, the moratorium shall operate against all the partners of the firm.

In the terms of section 124 of IBC, 2016 which deals with effect of application, when an application is filed under section 122 or section 123-

(a) an interim-moratorium shall commence on the date of the making of the application on all actions against the properties of the debtor in respect of his debts and such moratorium shall cease to have effect on the bankruptcy commencement date; and

(b) during the interim-moratorium period -

(i) any pending legal action or legal proceeding against any property of the debtor in respect of any of his debts shall be deemed to have been stayed;

(ii) the creditors of the debtor shall not be entitled to initiate any legal action or legal proceedings against any property of the debtor in respect of any of his debts.

Where the application has been made in relation to a firm, the interim-moratorium shall operate against all the partners of the firm as on the date of the making of the application. These provisions shall not apply where an application is filed for initiating a bankruptcy process in respect of a personal guarantor to a corporate debtor.

Section 128 of IBC, 2016 deals with effect of bankruptcy order. On the passing of the bankruptcy order under section 126, -

(a) the estate of the bankrupt shall vest in the bankruptcy trustee

(b) the estate of the bankrupt shall be divided among his creditors

(c) a creditor of the bankrupt indebted in respect of any debt claimed as a bankruptcy debt shall not-

(i) initiate any action against the property of the bankrupt in respect of such debt; or

(ii) commence any suit or other legal proceedings except with the leave of the Adjudicating Authority and on such terms as the Adjudicating Authority may impose.

The bankruptcy order shall not affect the right of any secured creditor to realize or otherwise deal with his security interest in the same manner as he would have been entitled if the bankruptcy order had not been passed. However, no secured creditor shall be entitled to any interest in respect of his debt after the bankruptcy commencement date if he does not take any action to realise his security within thirty days from the said date. Further, where a bankruptcy order under section 126 has been passed against a firm, the order shall operate as if it were a bankruptcy order made against each of the individuals who, on the date of the order, is a partner in the firm.

Section 138, of Negotiable Instruments Act, 1881, provide for dishonour of cheque for insufficiency of funds in the account. Accordingly, where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both.

This section shall apply if-

(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice; in writing, to the drawer of the cheque, within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Issues before Court

The Apex Court identified the following issues to be addressed:

1. Whether the proceedings under Section 138 of the NI Act are in the nature of legal action for recovery of money?
2. Whether the proceedings under Section 138 of the NI Act are protected during the moratorium period provided under Part III of the IBC?
3. Whether director(s) liable under section 141 of the NI Act would enjoy the benefit of moratorium in respect of Section 138 proceedings, while undergoing personal insolvency?

Observations and Findings

The apex court observed that:

1. The expression "legal action or proceeding in respect of any debt" ought to be read in a manner that is consistent with the objective of the penal provisions in the NI Act.
2. The expression any "legal action or proceeding" when read stand alone would undoubtedly include proceedings under section 138 of the NI Act. A reading of the said expression with the qualifier "in respect of any debt" would also not exclude Section 138 proceedings considering that the dishonoured cheque thereunder must be drawn for the payment in whole or in part, of any legally enforceable debt or liability.
3. The proceedings under section 138 of the NI Act should not receive protection of moratorium because the predominant nature of the offence of cheque dishonour is criminal.
4. To make moratorium provisions under the IBC applicable on proceedings under section 138 of the NI Act, solely because of the civil nature of the injury is untenable in light of the objective sought to be achieved by the enactment of Section 138.
5. Section 138 cannot be stayed by way of sections 96 and 101 of the IBC respectively. If the protection of moratorium is granted to the persons accused of cheque dishonour, it would tantamount to allowing evasion of Criminal liability. Allowing the said criminal aspect to be stayed by the moratorium provisions under Part III of the IBC would cause violence to the language and intent of section 138 of the NI Act.
6. The moratorium under sections 96 and 101 of the IBC respectively, should not place an embargo on the criminal aspect of cheque bounce proceedings. However, extending such interpretation to the compensatory aspect thereof would undermine the objective underlying the moratorium provisions, that is the individual undergoing insolvency should be given breathing space to restructure hi liabilities and there should not be depletion of his assets in the meantime.
7. Once the criminal court exercising jurisdiction over a complaint under section 138, orders compensation under section 395 of the BNSS, then the moratorium would be made applicable if the recovery of compensation remains pending.
8. After the sentence of punishment has been imposed on the director(s) of the company, the order of final compensation under section 395 of the BNSS can be imposed on the director(s) as well, especially in the absence of the company as an accused person due to a legal impediment.
9. Any debt includes all such liabilities which the debtor might not have personally incurred but the onus of repayment of the same falls onto him owing to a contractual agreement or statutory provision.
10. When sections 96 and 101 of the IBC respectively have the effect of staying the proceedings in respect of 'any debt', the moratorium attaches to the debt obligation itself. Whereas moratorium under section 124 stays proceedings against 'any property of the debtor' and therefore, attaches to specific assets. What is discernible from this is that the objective of sections 96 and 101 respectively is to protect the individual debtor from debt enforcement while an insolvency resolution plan is being mapped out. On the other hand, the objective of the moratorium under sections 124 and 128 of the IBC respectively is to freeze the asset pool of the bankrupt individual.
11. Moratorium under sections 96 and 101 respectively, when triggered by the insolvency proceedings of the individual director of such a corporate by the insolvency proceedings of the individual director of such corporate debtor which is also undergoing insolvency or liquidation under Part II of the IBC, stays the recovery of compensation ordered under Section 395 of the BNSS during the proceedings under section 138 of the NI Act.
12. 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.

The Apex Court opined that for a comprehensive consideration and an authoritative pronouncement after taking into account all aspects, the matter needs to be placed before Hon'ble the Chief Justice of India to constitute an appropriate three - Judge Bench.

Further, reference to Larger Bench was for answering the following two issues:

1. 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?
2. 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 ?

The appeal was thus disposed of by referring to Larger Bench as aforesaid.