In a landmark decision clarifying the intersection of insolvency laws and criminal liability, the Supreme Court of India has ruled that while personal insolvency moratoriums under Part III of the Insolvency and Bankruptcy Code, 2016 (IBC) do not stall criminal prosecution under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), they do apply to the compensatory aspect of such proceedings. Observing a divergence in existing judicial precedents, a division bench comprising Justice J.B. Pardiwala and Justice K.V. Vishwanathan has referred the matter to the Chief Justice of India for the constitution of a larger three-judge bench to authoritatively settle the legal questions.
Background of the Case
The appellant, Dineshchand Surana, was the former Managing Director of M/s Surana Power Ltd (SPL), a company involved in electricity generation. In 2014, the appellant availed financial and credit facilities from UCO Bank, which included an Irrevocable Letters of Credit Facility for Rs 5,03,21,250/- to purchase Indonesian coal. As security, the appellant provided a blank cheque with the understanding that the bank could encash it if SPL defaulted on its payment.
Following SPL’s failure to settle the bills, UCO Bank devolved the Letter of Credit. To clear the outstanding dues, the appellant issued a cheque dated March 26, 2015, which was subsequently dishonoured on June 18, 2015, due to “Insufficient Funds.” After issuing a statutory demand notice and receiving no payment, UCO Bank filed a criminal complaint (C.C. No. 3645 of 2015) under Section 138 of the NI Act before the XIV Metropolitan Magistrate, Egmore, Chennai.
While the criminal complaint was pending, the National Company Law Tribunal (NCLT), Chennai, admitted an insolvency application against the appellant in his personal capacity under Section 95 of the IBC. Consequently, the appellant approached the High Court of Judicature at Madras, seeking to quash the Section 138 proceedings on the ground that the interim moratorium under Section 96 of the IBC stayed any legal proceeding in respect of any debt.
The High Court dismissed the appellant’s plea on October 18, 2023, observing that Section 138 is a criminal enactment providing for imprisonment and fine, and thus could not be characterized merely as debt recovery proceedings. Later, during the pendency of the appeal before the Supreme Court, the NCLT initiated a personal insolvency moratorium under Section 101, which eventually culminated in a bankruptcy order on November 12, 2025, triggering the bankruptcy moratorium under Section 128 of the IBC.
Submissions of the Parties
For the Appellant
Advocate Shreeyash Lalit, appearing on behalf of the appellant, submitted that personal insolvency under Part III of the IBC is structurally distinct from corporate insolvency under Part II. He emphasized that the words “in respect of any debt” used in Sections 96, 101, 124, and 128 of the IBC indicate that the moratorium is debt-centric, thereby covering any legal actions directly or indirectly relatable to a debt, including Section 138 proceedings.
The appellant heavily relied on the three-judge bench ruling in P. Mohanraj v. Shah Bros. Ispat (P) Ltd., which characterized Section 138 proceedings as a “civil sheep in a criminal wolf’s clothing” due to their compensatory nature. He argued that the subsequent two-judge bench decision in Rakesh Bhanot v. Gurdas Agro Private Limited—which held that personal insolvency does not shield individuals from Section 138 prosecutions—was in conflict with the larger bench decision in P. Mohanraj. He further contended that once an individual director undergoes personal insolvency, they should be entitled to the protection of the moratorium to prevent the depletion of assets during restructuring.
For the Respondent
Advocate Brijesh Kumar Tamber, representing UCO Bank, contended that the moratorium under Section 96 of the IBC is inapplicable to criminal liability. He placed reliance on Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Ltd., where the Supreme Court held that the signatories of a dishonoured cheque remain subject to criminal liability under Section 138 irrespective of whether the corporate debtor is undergoing insolvency.
Relying on several High Court rulings, including the Delhi High Court’s decision in Sandeep Gupta v. Shri Ram Steel Traders and the Punjab and Haryana High Court’s decision in Jitender Singh Sodhi v. CIT, the respondent argued that Section 138 is penal in nature, aiming to uphold the integrity of commercial transactions. They argued that the vicarious liability of a director under Section 141 of the NI Act is personal and stems from negligent or fraudulent conduct, which cannot be classified as a civil “debt” protected by a bankruptcy moratorium.
The Court’s Analysis
The Deeming Fiction of Section 138
The Court began by analyzing the statutory structure of Section 138 of the NI Act, noting that it contains a legal fiction by “deeming” the dishonour of a cheque to be an offence. The Bench noted that while the underlying transaction and the determination of a legally enforceable debt are civil questions, the enactment was specifically designed as a punitive measure to deter cheque bouncing.
The Tiered Understanding of Section 138
To resolve the overlap between the criminal and civil elements, the Court bifurcated Section 138 proceedings into two distinct tiers:
- Tier I (Criminal Aspect): This represents the mandatory criminal aspect of the provision, culminating in punishment through imprisonment, fine, or both. The Court noted that under Section 79(15)(a) of the IBC, “fines” are explicitly classified as “excluded debts.” Consequently, the Court held that “the predominant nature of the offence of cheque dishonour is criminal.” Allowing a personal insolvency moratorium to stay this aspect would result in the evasion of personal criminal liability, which “is not a good law.”
- Tier II (Compensatory Aspect): This represents the discretionary power of criminal courts to award compensation to the complainant under Section 395 of the Bhartiya Nyaya Suraksha Sanhita, 2023 (BNSS) (formerly Section 357 of the CrPC). The Court observed that this remedy is inherently civil, functioning similarly to a civil suit for debt recovery. Therefore, the Bench concluded that “the moratorium provisions under Part III of the IBC must be made applicable on the compensatory aspect of Section 138 of the NI Act owing to the inherently civil nature of the same.”
Moratorium Protection for Vicariously Liable Directors
Addressing whether the moratorium protects directors liable under Section 141 of the NI Act, the Court answered in the affirmative but restricted the benefit to the compensatory tier. The Court contrasted the phrase “any debt” in Sections 96 and 101 with the phrase “any of his debts” under Section 124 of the IBC, noting that “any debt” is wide enough to include the company’s liability statutorily imposed on a director.
The Court observed that while a director must face the personal criminal trial and potential incarceration or fines, any recovery of the civil compensation ordered against them under Section 138 must be temporarily stayed during their personal insolvency or bankruptcy proceedings to preserve their asset pool.
The Reference to a Larger Bench
Recognizing the complex interplay between the statutes and finding that previous rulings had not fully reconciled the procedural civil aspects of Section 138 with its deterrent penal objectives, the Court referred the matter to the Chief Justice of India.
The Court directed that the newly constituted three-judge bench address the following specific questions:
- “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?”
- “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?”
Case Details
Case Title: Dineshchand Surana v. UCO Bank (with Civil Appeal arising out of SLP (C) No. 4850 of 2025)
Case No.: Criminal Appeal Nos. _______ of 2026 (Arising out of SLP (Crl.) Nos. 12135-36 of 2024)
Bench: Justice J.B. Pardiwala, Justice K.V. Vishwanathan
Date: May 27, 2026
