Moratorium under IBC does not stay criminal cheque‑dishonour proceedings, Supreme Court clarifies

A bench of Justices R. Mahadevan and J.B. Pardiwala heard a batch of appeals and a writ petition challenging various High Court orders that refused to stay prosecutions under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881. The appellants had sought protection from criminal proceedings by invoking interim moratoriums triggered on filing personal‑insolvency applications under Section 94 of the Insolvency and Bankruptcy Code, 2016 and the interim moratorium under Section 96 IBC.

The Court held that the interim moratorium under Chapter III of the IBC applies to civil actions in respect of debts and does not operate to stay criminal prosecutions under Section 138/141 of the N.I. Act. The Court observed that the moratorium provisions were “intended to offer protection only against civil claim to recover the debt” and did not extend to penal actions imposed to preserve the integrity of negotiable instruments. The Court, in its reasoning, observed: “The term ‘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 proceedings unrelated to the recovery of the debt. The protection is not available against penal actions, the object of which is not to recover any debt.” The Court therefore dismissed all criminal appeals and the writ petition.

Background

The appeals arose from multiple complaints under Section 138 N.I. Act where cheques issued by individuals or signatories to companies were returned unpaid. In the lead matter, M/s Gurdas Agro Pvt. Ltd. lodged a complaint alleging four cheques of Rs.50,00,000 each were dishonoured; the accused included Rakesh Bhanot and others. While Section 138 prosecutions were pending, the alleged offenders filed personal insolvency applications under Section 94 IBC before the NCLT and invoked the interim moratorium under Section 96. Trial Courts refused to stay the criminal proceedings; High Courts dismissed petitions under Section 482 Cr.P.C. seeking a stay. The matters were clubbed before the Supreme Court.

Petitioners argued that the interim moratorium under Section 96(1)(b) IBC, and the moratorium under Section 101 upon admission, operated “in relation to all the debts” and therefore stayed all proceedings in respect of any debt, including Section 138 prosecutions. They relied on the protective purpose of the IBC and submitted that Section 101’s bar on transfer or disposition of assets would render accused persons unable to make payments and thus should protect them from penal consequences. Respondents maintained that the IBC moratorium protects civil recovery actions and security enforcement but cannot be stretched to nullify criminal liability under the N.I. Act; reliance was placed on P. Mohanraj, Narinder Garg and other precedents.

The Court analysed the IBC provisions (Sections 94, 96, 100, 101 and Section 14) alongside Section 138/141 N.I. Act and earlier precedents, including P. Mohanraj and Ajay Kumar Goenka, and concluded the legislative scheme differentiates between civil debt recovery and penal consequences for cheque dishonour. The Court reiterated that moratorium under Section 14 protected the corporate debtor but did not exculpate natural persons under Section 141, and the interim moratorium under Section 96 likewise does not bar criminal prosecutions. The Court cited the maxim that law does not compel performance of the impossible but rejected any reading that would permit insolvency filings to allow natural persons to evade criminal liability: “law does not compel a man to do which he cannot possibly perform.” The Court dismissed all the criminal appeals and the writ petition; pending applications were closed. Earlier interim stays granted by this Court in the course of litigation were superseded by this final disposal.

Case Details: Case No.: Criminal Appeal No. 1607 of 2025 (Arising out of SLP (Crl.) No. 6087 of 2023) Case Title: Rakesh Bhanot v. M/s Gurdas Agro Pvt. Ltd. Appearances: For the Petitioner(s): [Names not reported] For the Respondent(s): [Names not reported]