Supreme Court Holds Section 138 NI Act Proceedings Are Quasi-Criminal; Moratorium Under IBC Applies Only to Compensatory Aspect, Criminal liability under Section 138 for cheque dishonour not stayed during personal insolvency moratorium; compensatory claims subject to moratorium protections
In a landmark judgment dated May 27, 2026, the Supreme Court of India clarified the complex interplay between proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) and the moratorium provisions under Part III of the Insolvency and Bankruptcy Code, 2016 (IBC), particularly concerning personal insolvency and bankruptcy.
The case arose from a dispute involving Dinesh Chand Surana, a former Managing Director of Surana Power Ltd., who faced prosecution for cheque dishonour under Section 138 of the NI Act. Surana contended that since he was undergoing personal insolvency proceedings with an operative moratorium under Sections 96 and 101 of the IBC, the criminal complaint against him should be stayed. The Madras High Court dismissed his plea, leading to appeals before the Supreme Court.
The Court undertook a detailed examination of the nature and objective of Section 138 of the NI Act. It held that while the offence arises from a civil debt, Section 138 creates a "deeming fiction" that transforms the dishonour of a cheque into a criminal offence punishable by imprisonment, fine, or both. The Court rejected the characterization of Section 138 proceedings as merely civil recovery actions, emphasizing their "quasi-criminal" nature aimed at deterrence and maintaining trust in negotiable instruments.
Further, the Court distinguished between the criminal punishment (fine or imprisonment) and the compensatory relief that courts may grant to the complainant under Section 395 of the Bharatiya Nyaya Suraksha Sanhita, 2023 (BNSS). While compensation is discretionary and akin to a civil remedy, it does not substitute punishment.
Crucially, the Court analyzed the applicability of the moratorium under Part III of the IBC, which provides temporary relief by staying legal proceedings "in respect of any debt" during insolvency and bankruptcy processes of individuals or firms. The Court clarified that the moratorium does not stay the criminal aspect of Section 138 proceedings, including imprisonment or fines, which are expressly excluded as "excluded debts" under Section 79(15) of the IBC.
However, the Court held that the compensatory aspect of Section 138 proceedings is inherently civil and, therefore, the moratorium provisions under Sections 96, 101, 124, and 128 of the IBC apply to stay recovery of compensation during insolvency and bankruptcy proceedings. This bifurcation balances the need to enforce criminal accountability while protecting insolvent debtors from depletion of assets through civil recovery.
The judgment also addressed the liability of company directors under Section 141 of the NI Act, who are vicariously liable for offences committed by the company. The Court held that while directors cannot escape personal criminal liability despite insolvency or liquidation of the company, the compensatory liabilities imposed on them do attract the moratorium protections during their personal insolvency or bankruptcy proceedings.
The Court noted that the moratorium under Sections 96 and 101 of the IBC applies broadly to "any debt," including compensatory liabilities that directors may incur by operation of law, even if not personally contracted by them. Similarly, the moratorium under Sections 124 and 128 protects the debtor’s properties from enforcement actions during bankruptcy.
Recognizing the intricate legal questions involved, the Court has referred the matter to a three-Judge Bench to decide:
- (i) Whether Section 138 NI Act is quasi-criminal with a tilt towards criminality, and
- (ii) Whether the moratorium under Part III of the IBC applies to the entire Section 138 proceedings or only the compensatory aspect.
This judgment reinforces the principle that criminal prosecutions under Section 138 NI Act cannot be stalled by insolvency moratoriums, thereby preserving the deterrent purpose of the provision. At the same time, it acknowledges the protective scope of insolvency law by allowing moratorium relief for compensatory claims, ensuring equitable treatment of debtors and creditors.
Bottom Line:
Proceedings under Section 138 of the Negotiable Instruments Act are predominantly criminal in nature with a compensatory aspect - Moratorium under Part III of the Insolvency and Bankruptcy Code applies only to the compensatory aspect and not to the criminal prosecution.
Statutory provision(s):
Negotiable Instruments Act, 1881 Section 138, Section 141; Insolvency and Bankruptcy Code, 2016 Sections 79(15), 96, 101, 124, 128; Bharatiya Nyaya Suraksha Sanhita, 2023 Section 395
Dinesh Chand Surana v. UCO Bank, (SC) : Law Finder Doc id # 2907509
