A) ABSTRACT / HEADNOTE

The judgment in Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd. addresses whether proceedings under Section 138 read with Section 141, Negotiable Instruments Act, 1881 may be stayed owing to the interim moratorium under Section 96, Insolvency and Bankruptcy Code, 2016 triggered upon filing personal insolvency applications under Section 94 IBC.

The Supreme Court rejects the plea for stay, emphasizing that the moratorium available under Part III of the IBC is intended only to suspend civil actions relating to recovery of debt and not criminal prosecutions arising from penal statutes. The Court distinguishes between protection accorded to a corporate debtor under Section 14 IBC and the scheme applicable to individuals under Sections 96 and 101 IBC, reiterating that insolvency mechanisms do not extinguish personal criminal liability for dishonour of cheques.

The Court underscores that the liability under Sections 138/141 NI Act is personal, statutory and penal, intended to uphold the credibility of negotiable instruments. It holds that neither the presentation of personal insolvency petitions nor the commencement of interim moratorium can bar or stall criminal prosecutions which aim not at “recovery of debt” but at punishing dishonour of cheque.

The doctrine of noscitur a sociis is invoked to interpret “legal action in respect of any debt” under Section 96 IBC as confined to civil recovery actions only. The Court relies extensively on P. Mohanraj, Narinder Garg, and Ajay Kumar Radheyshyam Goenka, clarifying that directors, signatories, and natural persons remain personally liable notwithstanding corporate insolvency or personal insolvency proceedings. The appeals and writ petitions are dismissed, affirming the High Courts’ orders refusing to stay Section 138 proceedings.

Keywords: Interim Moratorium; Section 96 IBC; Section 138 NI Act; Criminal Liability; Personal Insolvency; Noscitur a Sociis; Debt Recovery; Directors’ Liability; Negotiable Instruments; Corporate Debtor.

B) CASE DETAILS 

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The judgment consolidates numerous appeals and a writ petition where accused persons prosecuted under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 sought stay of criminal proceedings on the basis of the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 invoked upon filing personal insolvency applications.

The central question is whether the filing of applications under Section 94 IBC by individuals, often directors and signatories of cheques issued on behalf of corporate entities, produces the legal effect of automatically halting prosecutions pending before various criminal courts. The High Courts had consistently rejected such prayer, holding that criminal proceedings under Section 138 NI Act fall outside the scope of moratorium protections.

To address the question comprehensively, the Supreme Court evaluates the statutory scheme of the IBC across Sections 94, 96 and 101, juxtaposed against the nature, object, and intent of penal liability embedded in Section 138 NI Act.

A key component of the background concerns the legislative purpose of the IBC as a mechanism for resolving insolvency through restructuring or liquidation, geared towards maximisation of asset value and protection of creditors. In contrast, the NI Act embodies a penal framework intended to deter dishonour of negotiable instruments and foster commercial integrity.

The Court traces the jurisprudential developments from P. Mohanraj, where it was held that Section 14 IBC does not shield natural persons from prosecution, and the subsequent clarification in Narinder Garg and Ajay Kumar Radheyshyam Goenka that even dissolution of a corporate debtor or approval of a resolution plan does not extinguish the personal criminal liability of directors or signatories.

Against this doctrinal backdrop, the appellants attempted to draw a distinction between corporate moratorium under Section 14 IBC and personal insolvency moratorium under Section 96 IBC, contending that Section 96 uses broader language covering “all debts”.

The Court is tasked with determining whether the interim moratorium under Part III, designed for individuals and partnership firms, operates to shield individuals from prosecution under a penal statute. The adjudication necessitates interpreting statutory text through principles such as noscitur a sociis, closely examining legislative intent, and distinguishing civil and criminal liabilities.

D) FACTS OF THE CASE

The factual matrix common to all the appeals involves initiation of criminal prosecution under Section 138 NI Act based on dishonour of cheques issued by the accused individuals, often in their capacity as directors or signatories for corporate entities. For illustrative clarity, the Court recounts the facts from SLP (Crl.) No. 6087/2023, which serves as the representative case.

In this matter, M/s Gurdas Agro Pvt. Ltd. lodged a complaint under Section 138 NI Act alleging that M/s Arjun Mall Retail Holdings Pvt. Ltd., acting through its Director Kiran Bhanot, and its other officers including Rakesh Bhanot and their son, had issued four cheques of ₹50,00,000 each drawn on UCO Bank to discharge a legally enforceable liability.

These cheques, when presented, were dishonoured with the endorsement “funds insufficient”. Following statutory notice and failure to make payment within the period mandated under Section 138 proviso (c) NI Act, the complaint was filed and taken on record as COMA No. 1059/2019 before the Judicial Magistrate, Bathinda.

During pendency of the criminal proceedings, the appellant, Rakesh Bhanot, instituted an application under Section 94 IBC before the NCLT, Chandigarh Bench, seeking initiation of personal insolvency resolution process. His wife, a co-accused, filed a similar application.

Relying on the commencement of interim moratorium under Section 96(1)(a) and 96(1)(b) IBC, the appellant sought adjournment sine die of the Section 138 trial, asserting that all legal proceedings “in respect of any debt” stood stayed. The trial court rejected this plea on 23.05.2022. The High Court, in exercise of jurisdiction under Section 482 CrPC, declined to interfere.

Parallel situations existed in the other appeals: accused persons in multiple cheque dishonour cases had either filed or had pending personal insolvency applications and attempted to suspend ongoing criminal prosecutions. Many sought relief directly through special leave petitions, while one writ petition sought a declaration that Section 138 NI Act prosecutions must be deemed stayed by virtue of Section 96 IBC.

Across all matters, the common factual thread remained the same criminal prosecutions had already commenced, notices under Section 138 NI Act had been issued, and the accused had failed to honour the cheques.

Insolvency petitions under Sections 94 or 95 IBC were initiated only subsequently, prompting the accused to argue that continuation of prosecution was barred by interim moratorium. The Supreme Court had earlier granted interim stay of proceedings in some matters, but now resolves the issue finally.

E) LEGAL ISSUES RAISED

i. Whether the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 automatically stays criminal proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881?

ii. Whether individuals who file personal insolvency applications under Section 94 IBC can claim immunity from penal liability arising from dishonour of cheques?

iii. Whether the expression “legal action or proceeding in respect of any debt” in Section 96 IBC includes criminal prosecution under the NI Act?

iv. Whether the moratorium provisions under Sections 94, 96, 101 IBC are intended to shield personal guarantors or directors from criminal consequences of cheque dishonour?

F) PETITIONER / APPELLANT’S ARGUMENTS

The counsels for the petitioners submitted that the language of Section 96(1)(b) IBC unequivocally bars “any legal action or proceedings in respect of any debt” during the operation of interim moratorium. They argued that proceedings under Section 138 NI Act, although criminal in nature, ultimately relate to “recovery of debt”, thus falling squarely within the moratorium’s ambit.

They emphasised that the legislative scheme of personal insolvency is designed to provide the debtor comprehensive protection from all coercive actions, mirroring the protection extended to corporate debtors under Section 14 IBC.

It was further submitted that once an application under Section 94 IBC is filed, the debtor loses the legal capacity to discharge liabilities due to the restrictions under Section 101(2)(c) IBC, which prohibits transfer or payment.

Thus, continuation of Section 138 NI Act prosecution would place the debtor in an impossible position and defeat the object of insolvency resolution. Reliance was placed on State Bank of India v. V. Ramakrishnan, Dilip B. Jiwrajka, and the non-obstante clause under Section 238 IBC to argue that IBC overrides the NI Act wherever inconsistencies arise.

The petitioners contended that the High Courts erred in relying on P. Mohanraj, asserting that the said decision addressed only Section 14 IBC and corporate insolvency, not personal insolvency under Section 96. They argued that the statutory phrase “all debts” under Section 96 IBC had a wider connotation, intended to grant broader protection.

G) RESPONDENT’S ARGUMENTS

The respondents countered that Section 138 NI Act prosecutions are penal in nature and not proceedings “in respect of any debt”. They argued that the object of Section 96 IBC is limited to civil proceedings seeking recovery or enforcement of debts. Applying noscitur a sociis, the phrase “legal action in respect of debt” cannot encompass criminal prosecution.

They relied heavily on P. Mohanraj and Narinder Garg, submitting that natural persons remain statutorily liable for cheque dishonour irrespective of corporate insolvency or personal insolvency processes.

They contended that accepting the petitioners’ interpretation would enable individuals to evade criminal liability merely by filing insolvency applications, thereby defeating the deterrent purpose of Section 138 NI Act. The IBC does not expressly or impliedly extinguish criminal liability, nor does any provision intend to shield wrongdoers.

The Insolvency Law Committee Report 2020 was invoked to clarify that moratorium applies only to the debtor and its assets, not to penal consequences.

H) RELATED LEGAL PROVISIONS 

i. Section 138, Negotiable Instruments Act, 1881 – Penal provision for dishonour of cheque.
ii. Section 141 NI Act – Vicarious liability of directors and persons in charge.
iii. Section 94 IBC – Application for personal insolvency resolution.
iv. Section 96 IBC – Interim moratorium upon filing application.
v. Section 101 IBC – Moratorium after admission of personal insolvency application.
vi. Section 14 IBC – Corporate moratorium; distinction drawn by Court.
vii. Section 482 CrPC – Inherent jurisdiction of High Courts.

I) JUDGMENT

The Supreme Court dismissed all appeals and writ petitions, affirming that proceedings under Section 138 NI Act cannot be stayed on the basis of interim moratorium under Section 96 IBC. The Court held that the moratorium under Section 96 is designed only to protect the debtor from civil actions for recovery of debt and not from criminal prosecution.

It reasoned that the object of Part III of the IBC is to allow debtors breathing space to reorganize financial affairs, not to serve as a shield against penal statutes.

The Court emphasized that Section 96 IBC uses the phrase “in respect of any debt”, and through the interpretative aid of noscitur a sociis, concluded that “legal action or proceedings” are limited to civil actions akin to recovery, enforcement or execution proceedings.

Criminal prosecution is not an action “in respect of debt” but a statutory consequence of dishonour of cheque.

The Court reiterated the doctrinal position established in P. Mohanraj, Narinder Garg, and recently in Ajay Kumar Radheyshyam Goenka, that natural persons directors, signatories, guarantors remain personally liable under Section 138/141 NI Act despite corporate insolvency resolution processes, dissolution of corporate debtor, or approval of resolution plans. The same principle applies with greater force in the context of personal insolvency.

The Court clarified that the extinction or restructuring of debt through insolvency proceedings has no bearing on the continuation of criminal prosecution. Penal liability arises upon dishonour and non-payment within statutory timelines, and survival of such liability is independent of the underlying debt’s restructuring.

Even where insolvency law prohibits payment post-admission under Section 101 IBC, the impossibility principle does not cure prior default.

Therefore, invocation of Section 94 IBC cannot be permitted as a tool to stall or evade criminal liability. Accepting such an interpretation would emasculate Section 138 NI Act and undermine its deterrent purpose. The Court concluded that the High Courts had rightly refused to stay proceedings and no interference was warranted.

a. RATIO DECIDENDI

The ratio decidendi rests upon a precise construction of Section 96 IBC in light of statutory purpose and established jurisprudence. The Court holds that the interim moratorium under Section 96 IBC applies exclusively to civil proceedings “in respect of any debt”, which includes suits, recovery actions, or enforcement of security interests, but excludes criminal prosecution under Section 138 NI Act.

The decisive reasoning stems from the principle that penal proceedings are not for recovery of debt but for imposing criminal liability for dishonour of a negotiable instrument.

Applying noscitur a sociis, the Court notes that the expression “legal action or proceedings” must be read in the context of associated words, all of which relate to civil claims aimed at debt enforcement. The penal purpose of Section 138 NI Act stands outside this cluster of meanings.

The Court also relies on the inherent distinction between corporate moratorium under Section 14 IBC and personal insolvency moratorium under Section 96 IBC, asserting that neither provision intends to shield individuals from criminal consequences.

The statutory liability under Section 138/141 NI Act is personal and continues irrespective of corporate debtor’s insolvency, restructuring, or dissolution. This principle is fortified by P. Mohanraj, which held that natural persons remain prosecutable even during moratorium, and by Ajay Kumar Radheyshyam Goenka, which further reinforced that dissolution of a company does not discharge director’s liability.

Thus, the Court concludes that personal insolvency proceedings under Section 94 IBC cannot override or stall ongoing criminal prosecution. The interpretation urged by the appellants would frustrate the very purpose of Section 138 NI Act, which is to preserve credibility of commercial instruments through deterrence. Accordingly, the appeals fail.

b. OBITER DICTA

The Court offers significant observations regarding the broader legislative design and interplay between insolvency law and penal statutes. It remarks that the object of moratorium provisions, whether under Section 14 or Section 96 IBC, is to preserve assets and prevent multiplicity of civil claims that may jeopardise equitable distribution among creditors.

However, these objectives do not extend to extinguishing or suspending penal liability arising from actions involving dishonesty or breach of trust in commercial dealings.

The Court further observes that allowing accused persons to evade prosecution through insolvency filings would invite misuse of the insolvency framework and result in erosion of faith in cheque-based transactions.

The deterrent function of Section 138 NI Act serves public policy, ensuring discipline and integrity in financial transactions. Penal statutes cannot be neutralised by insolvency mechanisms aimed at debt restructuring.

The judgment also offers reflections on the structural difference in treatment of partnerships and companies: while Section 96(2) IBC extends moratorium to partners of a firm, no such extension exists for directors of companies, indicating deliberate legislative differentiation.

The Court stresses that directors and signatories are not mere representatives but are personally accountable for the dishonour of cheques.

Another significant observation relates to the principle of impossibility of performance. The Court notes that insolvency law may prohibit payments post-admission, but such restrictions do not retrospectively cure earlier statutory non-compliance under Section 138 proviso (c) NI Act. Criminal liability, once crystallized, survives independent of subsequent financial disability.

These dicta collectively reinforce the interpretation that insolvency law and penal law operate in distinct spheres, and principles of one cannot be imported to negate the operation of the other.

c. GUIDELINES 

Although the Court does not frame formal guidelines, the judgment crystallizes several binding principles which function as operational guidelines for future adjudication:

i. Interim moratorium under Section 96 IBC applies only to civil proceedings “in respect of any debt”, and does not extend to criminal prosecutions under penal statutes such as the NI Act. Courts must distinguish between debt recovery actions and penal consequences.

ii. Personal insolvency applications under Section 94 IBC cannot be used as a mechanism to avoid, delay, or stall ongoing criminal proceedings. Filing of such applications does not create a legal bar on continuation of Section 138 NI Act trials.

iii. Directors, signatories, and natural persons remain personally liable under Sections 138/141 NI Act despite corporate insolvency, acceptance of resolution plan, restructuring of debt, dissolution of corporate debtor, or personal insolvency proceedings.

iv. The term “legal action or proceedings” in Section 96(1)(b) IBC must be interpreted using the principle of noscitur a sociis. Such proceedings refer only to actions analogous to civil debt enforcement, and not to criminal complaints.

v. Criminal courts must continue proceedings under Section 138 NI Act notwithstanding any interim or final moratorium under IBC, unless an express statutory provision creates a bar, which the IBC does not.

vi. Moratorium protections under IBC cannot operate retrospectively to cure statutory defaults committed prior to insolvency filings, especially defaults concerning dishonour of cheques.

vii. IBC proceedings cannot be invoked as a shield against penal consequences, and courts must be vigilant against misuse of insolvency framework by wrongdoers seeking to escape liability.

These principles collectively guide courts, insolvency forums, and litigants on the clear demarcation between insolvency relief and criminal prosecution.

J) CONCLUSION & COMMENTS

The judgment reinforces the sanctity of negotiable instruments and the penal architecture of the NI Act by decisively rejecting attempts to leverage insolvency proceedings as a refuge from criminal liability. By holding that the interim moratorium under Section 96 IBC does not extend to criminal prosecutions for cheque dishonour, the Court preserves the deterrent effect essential to commercial confidence.

It recognizes that the IBC and the NI Act serve different legislative purposes one aimed at equitable debt resolution, the other at maintaining commercial discipline.

The Court’s approach is coherent with prior jurisprudence which persistently maintains that natural persons cannot avoid criminal consequences through corporate or personal insolvency processes.

The emphasis on noscitur a sociis provides clarity to interpretive ambiguities in Section 96, appropriately constraining its application. Additionally, the Court’s acknowledgment of potential misuse of insolvency filings highlights a pragmatic assessment of contemporary commercial practices.

From an analytical perspective, the judgment enhances doctrinal consistency by extending principles from P. Mohanraj and Ajay Kumar Goenka into the realm of personal insolvency. It affirms that insolvency mechanisms cannot be allowed to immunize individuals from penal liabilities that arise from their own conduct. The decision also underscores the autonomy of criminal law, preventing dilution through insolvency shields.

The judgment’s policy implications are significant: it upholds creditor confidence, discourages strategic litigation by defaulters, and maintains the efficiency of cheque transactions. It ensures that insolvency proceedings remain focused on restructuring and not on shielding offenders. It also implicitly nudges legislative clarity by distinguishing the separate spheres of civil and criminal liability.

Overall, the Court delivers a well-reasoned and principled decision that strengthens both insolvency jurisprudence and commercial criminal law, ensuring balance between debtor protection and creditor rights while safeguarding the integrity of financial transactions.

K) REFERENCES

a. Important Cases Referred

i. P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., (2021) 6 SCC 258
ii. State Bank of India v. V. Ramakrishnan, [2018] 10 SCR 974 : (2018) 17 SCC 394
iii. Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., [2000] 3 SCR 509 : (2000) 5 SCC 694
iv. Narinder Garg v. Kotak Mahindra Bank Ltd., (2022) SCC OnLine SC 517
v. Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd., (2023) 10 SCC 545
vi. Dilip B. Jiwrajka v. Union of India, (2023) SCC OnLine SC 1530 : (2024) 5 SCC 435
vii. Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661 (referred in judgment)

b. Important Statutes Referred

i. Negotiable Instruments Act, 1881 – Sections 138, 141
ii. Insolvency and Bankruptcy Code, 2016 – Sections 14, 94, 96, 101, 238
iii. Code of Criminal Procedure, 1973 – Section 482