Section 138 of NI Act Proceedings During Moratorium: The Evolving Jurisprudence from P. Mohanraj to Dineshchand Surana

– Barsha Dikshit, Partner, and Srihari GS, Executive [resolution@vinodkothari.com ]

The interplay between the insolvency proceedings under Insolvency and Bankruptcy Code, 2016 (‘IBC’) and cheque dishonour proceedings under Section 138 of the Negotiable Instruments Act, 1881 (‘NI Act’) has been one of the most debated areas. While the IBC seeks to provide a financially distressed debtor with a “breathing space” by way of moratorium on legal proceedings, Section 138 of the NI Act aims to maintain trust in cheque-based transactions by imposing criminal liability for dishonour of cheques.

The Supreme Court’s landmark decision in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. appeared to settle the issue by holding that the protection of the moratorium under Section 14 of the IBC extends to the proceedings under Sections 138/ 141 of the NI Act against the corporate debtor. However, the recent decision in Dineshchand Surana v. UCO Bank has reopened the discussion by questioning certain aspects of the reasoning adopted in P. Mohanraj and referring the matter to a larger Bench for consideration.

In this write up we have made an attempt to discuss the evolving judicial approach towards the applicability of IBC moratorium to proceedings under Section 138 of the NI Act.

Read more: Section 138 of NI Act Proceedings During Moratorium: The Evolving Jurisprudence from P. Mohanraj to Dineshchand Surana

Legal Position established in P. Mohanraj Ruling

In P. Mohanraj, a three-judge bench of the Supreme Court examined- “whether the institution or continuation of a proceeding under Section 138/141 of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of the IBC?”

While examining the provisions of NI Act vis-a vis IBC, the Court held as follows:

• As per section 14 (1), AA shall mandatorily impose a moratorium to prohibit the actions specified in clauses (a) to (d), such as legal proceedings against the corporate debtor, transfer of its assets, enforcement of security interests, and recovery of property from its possession, subject to the exceptions provided in sub-sections (2) and (3). 
• Proceeding under Sections 138 and 141 of the NI Act are covered by the moratorium imposed under Section 14(1)(a) of the IBC insofar as they are instituted or continued against the corporate debtor.
• The term “proceedings” under Section 14(1)(a) was given a broad interpretation and was not restricted only to civil proceedings. The Court held that it includes proceedings arising from transactions that may affect or deplete the assets of the corporate debtor .
• While section 138 proceedings are criminal in nature, the Court described them as “quasi-criminal” because their primary objective is to ensure payment and not the punishment. The Court observed that the purpose of Section 138 is to secure payment of the cheque amount and maintain confidence in commercial transactions, while the penal consequences are mainly a means of enforcing compliance.
• While prosecution under Section 138 may result in compensation payable by the corporate debtor, continuation of such proceedings during CIRP could adversely affect the assets available for resolution and defeat the purpose of the moratorium.
• The Court emphasised that the moratorium under Section 14 is intended to provide the corporate debtor a “breathing space” and preserve its assets during CIRP proceedings. However, the protection is not extended to the natural persons associated with the CD, such as, its directors, signatories, and other persons responsible under Section 141 of the NI Act. Therefore, cheque dishonour proceedings may continue against such individuals even though they are stayed against the company
• The Court clarified that upon cessation of the moratorium, the suspended proceedings against the corporate debtor may revive and continue in accordance with law.

Thus, the judgment was significant because it treated Section 138 proceedings as ‘civil sheep in a criminal wolf’s clothing’, that is having a predominantly debt-recovery character, thereby bringing them within the protective umbrella of IBC.

Subsequent judicial developments

Referring to the judgement in P. Mohanraj, courts consistently maintained that upon commencement of CIRP against a CD, it is the CD that enjoys protection during CIRP, however, the directors and other officers of CD cannot evade personal liability under the NI Act merely because insolvency proceedings have commenced against the company.

The Supreme Court itself reiterated in subsequent cases that the criminal liability of directors and signatories survives notwithstanding insolvency proceedings against the company. See Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd; Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India; Sandeep Gupta v. Shri Ram Steel Traders

Turning point: Dineshchand Surana v. UCO Bank

The controversy resurfaced in Dineshchand Surana v. UCO Bank^[1], wherein an appeal was preferred before the Supreme Court against the judgment dated 18.10.2023 passed by Madras High Court. In this case, the appellant, the Managing Director of Surana Power Limited, relying on P. Mohanraj, submitted that the expression “legal action or proceeding in respect of any debt” in Sections 96 and 101 is wide enough to include Section 138 proceedings, as the moratorium extends to any legal proceeding relatable to recovery of debt. He also contended that the objective of the moratorium under Part II and Part III is the same i.e. to prevent depletion of assets and provide breathing space and accordingly the reasoning in P. Mohanraj should equally apply to personal insolvency. However, the High Court rejected the same, holding that proceedings under Section 138 of the NI Act are not debt recovery proceedings and therefore do not fall within the scope of the moratorium under Section 96. The Court further observed that Section 138 is a penal provision providing for imprisonment and fine, and hence cannot be equated with recovery proceedings.

The Supreme Court undertook a detailed examination of the nature of cheque dishonour proceedings and expressed reservations about the reasoning adopted in P. Mohanraj.

The Bench observed that proceedings under Section 138 cannot be viewed merely as mechanisms for debt recovery. According to the Court, the main purpose of Section 138 is to maintain public confidence in commercial transactions by attaching penal consequences to cheque dishonour. Therefore, the criminal aspect of the provision is not secondary to the compensation aspect. While the Court observed that the purpose under both Part II and Part III is to provide breathing space to restructure assets and liabilities, however, the Court was also conscious that certain liabilities are not protected by the moratorium even though their consequence might deplete the debtor’s assets; the rationale being that the moratorium is intended to shield the debtor from recovery actions and civil claims, and not from the consequences of criminal misconduct. Accordingly, the mere possibility that a criminal proceeding may ultimately result in a financial burden on the debtor cannot, by itself, bring such proceedings within the ambit of the moratorium.

Further, the Court also explained that proceedings under Section 138 have two separate elements:

1. Compensatory element, which aimed at ensuring payment of the cheque amount and compensation to the complainant, therefore, should be within the moratorium.
2. Criminal element, which aimed at punishing the offence of cheque dishonour through penal consequence, and Moratorium under Part III of IBC does not apply to criminal proceedings.

In view of the above, the Court observed that while the insolvency moratorium may impact the compensatory aspect, it does not necessarily bar or suspend the criminal prosecution.

Since this understanding appeared to differ from the reasoning in P. Mohanraj, which had treated Section 138 proceedings as primarily compensatory and therefore subject to moratorium, the matter was referred to a larger Bench for authoritative determination.

Read more: Section 138 of NI Act Proceedings During Moratorium: The Evolving Jurisprudence from P. Mohanraj to Dineshchand Surana

Concluding remarks:

The decision in P. Mohanraj brought clarity to the law by holding that proceedings under Section 138 of the NI Act against a CD are covered by the moratorium under Section 14 of the IBC. At the same time, the Court made it clear that this protection is available only to the CD and not to its directors, signatories, or other persons responsible for the company’s affairs. This position was thereafter consistently followed by courts.

However, in Dineshchand Surana, the Supreme Court revisited the nature of Section 138 proceedings and questioned the basis of the reasoning adopted in P. Mohanraj. The Court observed the 2 tier aspects of  Section 138 proceeding, i.e (a) compensatory aspect, and (b) a criminal aspect.  This led the Court to raise a significant question as to if the moratorium is intended to protect the debtor’s assets and therefore affects the recovery aspect, should it also stop the criminal prosecution?

It is important to note here that the difference between the two judgments is not about who can be prosecuted. Both judgments recognise that directors and other persons in charge of the company can continue to face proceedings under the NI Act. The real issue is whether the moratorium should stop a Section 138 case against the corporate debtor itself merely because the proceeding also involves recovery of money.

Therefore, the key question before the larger Bench is whether Section 138 proceedings should be stayed completely during the moratorium, as held in P. Mohanraj, or whether only the compensatory aspect should be affected while the criminal prosecution continues, as suggested in Dineshchand Surana.

If the larger Bench agrees with the view expressed in Dineshchand Surana, criminal prosecution under Section 138 may continue against the CD, even during the moratorium, while only the recovery or compensation aspect will be subject to moratorium. Even then, the authors are of the view, given that a corporate entity cannot be imprisoned; the impact would be limited to imposition of fine; and then, it might involve questions surrounding vicarious liability on the directors, etc. and the effect of section 14 on such fines. The decision of the larger Bench will therefore be crucial in determining how the objectives of the IBC will be aligned with the consequences under  NI Act.

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^[1] 2026 INSC 579