Introduction

The Rajasthan High Court’s recent decision allowing the Amendment of a Complaints Under Section 138 of the Negotiable Instruments Act (NI Act) has significant implications for the prosecution of cheque dishonour cases. This article explores the legal framework, key judgments, and implications of this decision, providing a comprehensive understanding of the power to amend complaints under the NI Act.

Case Title

Mahaveer Prasad Suman v. Lalit Mohan Sharma

Background

In the case at hand, the petitioner sought to amend the complaint and the affidavit annexed to it to correct typographical errors related to the dates of presentation and dishonour of the cheque. The trial court and the revisional court had dismissed the petition, prompting an appeal to the High Court.

Key Legal Provisions and Judgments

1. Section 138 of the NI Act: This section deals with the offence of dishonour of cheque due to insufficiency of funds or other reasons. The complainant must issue a legal notice within 30 days of receiving the information about the dishonour and file a complaint within 30 days after the expiry of the 15-day notice period.
2. Amendment of Complaints: Although there is no explicit provision in the Criminal Procedure Code (CrPC) for amending complaints, the Supreme Court in S.R. Sukumar v. Sunaad Raghuram held that courts could allow amendments to correct curable infirmities, provided no prejudice is caused to the other party. The Court stated, “If the amendment sought to be made relates to a simple infirmity which is curable by means of a formal amendment and by allowing such amendment, no prejudice could be caused to the other side, notwithstanding the fact that there is no enabling provision in the Code for entertaining such amendment, the Court may permit such an amendment to be made.”
3. Aneeta Hada v. Godfather Travels and Tours Private Limited: This case established that for a director or authorized signatory to be prosecuted under Section 138 NI Act, the company must also be named as an accused. This judgment underscores the need for specific averments in the complaint, which can be corrected through amendments if they are merely procedural.

Rajasthan High Court’s Decision on Amendment of Complaints Under Section 138

In the current case, the Rajasthan High Court allowed the amendment, citing that the errors in dates were typographical and did not prejudice the accused. The Court noted that the correct dates were evident from the annexed documents, such as the pay-in-slip and the statement of account, which showed the actual dates of presentation and dishonour.

The High Court observed that the trial court should have considered these documents when taking cognizance of the complaint, thus preventing the errors. It also highlighted that serving the legal notice within the statutory period based on the correct dates indicated that the trial court had implicitly recognized the correct dates.

Implications

1. Legal Precedents: This decision aligns with the Supreme Court’s stance in S.R. Sukumar and ensures that procedural errors do not obstruct justice. It reaffirms the principle that amendments should be allowed if they correct minor procedural errors without causing prejudice.
2. Practical Considerations: For complainants, this ruling provides a safeguard against procedural dismissals due to typographical errors. It underscores the importance of ensuring that all documents and details in complaints are accurate but provides a remedial measure if genuine mistakes occur.
3. Judicial Efficiency: Allowing such amendments promotes judicial efficiency by preventing the dismissal of complaints on technical grounds, thereby enabling courts to focus on substantive issues rather than procedural formalities.

Conclusion: Amending Complaints Under Section 138

The Rajasthan High Court’s ruling in Mahaveer Prasad Suman v. Lalit Mohan Sharma is a significant development in the interpretation of the NI Act, emphasizing the judiciary’s pragmatic approach to procedural errors. By allowing amendments to correct typographical mistakes, the Court has reinforced the principle that justice should not be derailed by minor procedural lapses, provided no prejudice is caused to the accused.

The post The Legal Implications of Amendment of a Complaints Under Section 138 of the Negotiable Instruments Act appeared first on Bhatt & Joshi Associates.

Introduction

A cheque is a type of negotiable instrument that can be easily encashed. It is defined under section 6 of the Negotiable Instruments Act, 1881 as ‘a bill of exchange on a specific banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.’[1] The person who creates the cheque is referred to as the ‘Drawer’, while the individual to whom the cheque is addressed or the recipient of the cheque is known as the ‘Payee’. The entity that is instructed to make the payment, typically the bank, is termed the ‘Drawee’.

DISHONOUR OF CHEQUE

A cheque is considered dishonored when the Payee submits it to the bank for payment and it is subsequently returned unpaid from the bank account. It can be due to multiple reasons as:

• When the signature of the drawer does not match with that of the Cheque
• When the amount in words does not match with that of the numbers on the cheque
• When there is alteration, modification, or overwriting on the cheque
• When the validity of the cheque has expired
• When the cheque has been damaged
• When the drawer has used a cheque from an old chequebook which has been discontinued by the bank

But when the dishonour is due to insufficiency of funds in the drawer’s bank account, the cheque is bounced, it is an offence. The bank rejects and returns such cheques with a memo of insufficient funds. The drawer of the check may be served with a notice that the cheque has bounced, demanding payment of the full amount.

The notice is sent under section 138 of the Negotiable Instruments Act, 1881.[2] If the cheque is bounced due to some other reasons than insufficient funds, then the bank cannot issue such notice and the cheque can be resubmitted. The drawer cannot be prosecuted if the dishonored cheque was a gift.

STRICT LIABILITY

Section 138 of the Negotiable Instruments Act, 1881 imposes strict liability on the drawer so that regular business transactions are easily settled.[3] Dishonour of a Cheque is said to be a criminal offence that is punishable by fine or punishment which may extend to 2 years or both. It is a bailable offence.

PROCEDURE FOLLOWED AFTER CHEQUE GETS DISHONOURED

1. Upon receiving the returned dishonoured cheque from the bank, the payee is obligated to issue a cheque-bound legal notice to the drawer within 15 days of the date the notice is received. This notice must be sent within 30 days of the date of the acknowledgment of the ‘Cheque Return Memo’.
2. After the expiry of 15-day time period, if the drawer is still unable to pay the amount, he can be punished under section 138 of the Negotiable Instruments Act.[4] The complaint can be filed in the court of Judicial Magistrate of First Class or Metropolitan Magistrate.

• If the court finds the payee’s claim satisfactory, then it may call upon the drawer by issuing summons.

1. If the drawer declines to show up in court, the magistrate may issue a warrant against him that is subject to bail. If the accused does not show up in court then a bailable warrant is issued, and if even after the accused does not appear in court, a non-bailable warrant is issued.
2. If the accused pleads guilty, the court sentences him and if the accused pleads not guilty, the accused is given a copy of the complaint made out against him.
3. The parties can then cross-examine one other and present their supporting evidence.

• The judgment is issued by the court and is subject to appeal by either side.

DOCUMENTS REQUIRED TO FILE A CASE OF CHEQUE DISHONOUR IN INDIA

The documents required are as follows:

1. A duplicate copy of the notice delivered to the drawer.
2. Evidence of notice delivery, such as a courier receipt or registered mail receipt.

• Original cheque on record.

1. A cheque return memo issued by the banker to the drawer.
2. Proof of the existence of a legally enforceable debt or liability.

JURISDICTION IN CASE OF FILING CHEQUE DISHONOURED SUIT

According to Section 142(2) of the Negotiable Instruments (Amendment) Act, 2015, the payee can file the complaint before the Magistrate at the place where the drawee banker’s branch is situated and at no other place.[5]

OTHER LIABILITIES

Apart from a complaint under the N.I.A, other remedies can also be invoked:

Criminal Law- An FIR can be filed against the accused. Further, a case can be filed under sections 406 and 420 of the Indian Penal Code,1860 that is Criminal breach of trust and Cheating respectively.[6]

Civil Law- A summary proceeding can be filed under order XXXVII of the Code of Civil Procedure.[7] The facility of summary procedure is available even when the bill or the note is non-negotiable.

Consumer (Protection) Act, 1986- ‘Banking’ as a service is included in section 2(1)(o) of the CPA therefore,[8] when the bank wrongfully dishonours the cheque, it amounts to a deficiency in service on the part of the bank and for that, it must be liable to pay compensation for any loss including the loss of reputation.

LANDMARK JUDGMENTS

1. In the case Dashrath Singh Rathod vs. State of Maharashtra it was held that it is not a valid ground under section 140 of the N.I.A.,[9] that the drawer had no idea about the dishonour of the cheque. The state of mind of the accused, mens rea, knowledge or reasonable beliefs are not essential in such cases.[10]
2. In N Parameswaran Unni vs G Kannan, it was held that when a notice is sent by registered post and is returned with postal endorsement “refused” or “not available in the house” or “house locked” or “shop closed” or “addressee not in the station”, the due service of the notice within 15 days is presumed.[11]
3. In Dashrathbhai Trikambhai vs. Hitesh Mahendrabhai Patel, it was held that the presence of a legally enforceable debt at the date of encashment is important.[12]

RECENT AMENDMENTS IN THE ACT

• 20% of the check’s value will be paid as temporary compensation to the payee by the cheque’s drawer.
• Within 60 days of the date of the court’s order, the interim compensation must be paid.
• The payee must repay the compensation with interest if the court determines that the cheque’s drawer was not at fault and is found not guilty.

APPLICABILITY OF SECTION 138 WHEN ELECTRONIC FUNDS ARE DISHONOURED

ELECTRONIC CLEARING SERVICE (ECS)

ECS is an electronic method of receipt and payment for routine and recurring transactions. ECS essentially allows for the mass transfer of funds from one bank account to numerous bank accounts or the opposite.

ECS credit facilitates the payment of funds for the distribution of dividends, interest, salary, pension, etc., of the user institution whereas ECS debit helps pay periodic or repetitive bills that are owed to the user institution by a large number of consumers, such as phone, electricity and water bills, cess and tax collections, loan instalment repayments, periodic investments in mutual funds, insurance premiums, etc.

When there are insufficient funds to perform an electronic transfer of payments or when the amount to be transferred would exceed the payer’s credit limit, Section 25 of the Payment and Settlement Systems Act, 2007 can be invoked under which the payer is liable to be either imprisoned for 2 years or fined an amount which is twice the amount of the electronic funds’ transfer or both.[13] Thus dishonour of electronic funds is an offence. Certain exceptions to this offence are:

1. If the payment of any amount of money of electronic funds was initiated to discharge another person of any liability by paying in whole or in part;
2. When the electronic funds transfer was initiated in accordance with the relevant procedural guidelines as issued by the system provider;
3. When the beneficiary has given a demand notice within 30 days of receiving information from the bank concerning dishonour of electronic transfer of funds;
4. When the person making the payment has transferred the funds within 15 days of receiving the said notice.

Electronic fund transfers and their regulations are carried out by the Reserve Bank of India. The chief manager of RBI issued a clarification that ‘the act of dishonour of an electronic funds transfer carries the same penalties as the act of dishonour of a cheque and that Section 25 of the Payment and Settlement Systems Act offers the same rights and remedies as Section 138 of the Negotiable Instruments Act’.[14]

Further in Ritu Jain vs The State and another, it was held that when section 25 of the Payment and Settlement Act is invoked, section 138 of the Negotiable Instruments Act is also applicable.[15]

CONCLUSION

Today, in a world that is expanding quickly, we all conduct our business both online and offline. In most cases, we give someone a cheque in the form of an order to pay or withdraw the money from the bank. The new ruling and changes have made it better prepared in case of a conflict, but concurrently, events like frivolous appeals and arbitrary delays to procedures can postpone the payment of the cheque. In many ways, this is still highly harmful to the payee, and to address it, the law needs to be made more comprehensive.

Written by Divyanshi Maheshwari, 3rd Year Law Student at the Institute of Law, Nirma University.

References:

[1] Negotiable Instruments Act 1881, s 6.

[2] Negotiable Instruments Act 1881, s 138.

[3] Negotiable Instruments Act 1881, s 138.

[4] Negotiable Instruments Act 1881, s 138.

[5] Dashrath Rupsingh Rathod vs. State of Maharashtra, (2014) 9 SCC 129.

[6] Indian Penal Code 1860, s 406 & Indian Penal Code 1860, s 420.

[7] Code Of Civil Procedure 1908, o XXXVII.

[8] Consumer (Protection) Act 1986, s 2 (1) (o).

[9] Negotiable Instruments Act 1881, s 140.

[10] Dashrath Rupsingh Rathod vs. State of Maharashtra, (supra).

[11] N. Parameswaran Unni Vs. G. Kannan, (2017) 5 SCC 737.

[12] Dashrathbhai Trikambhai Patel vs. Hitesh Mahendrabhai Patel, Criminal Appeal No. 1497 of 2022 (SC).

[13] Payment and Settlement Systems Act 2007, s 25.

[14] DPSS. CO.PD.No.497/02.12.004/2011-12.

[15] Ritu Jain Vs. The State, W.P.(CRL) 1266/2019.

The post DISHONOUR OF FUNDS AND ITS LEGAL REMEDIES appeared first on Bhatt & Joshi Associates.

Introduction

The intersection of insolvency law and criminal liability for dishonoured cheques represents one of the most complex and evolving areas of Indian commercial jurisprudence. The Insolvency and Bankruptcy Code, 2016 (IBC) and the Negotiable Instruments Act, 1881 (NI Act) serve distinct yet occasionally overlapping functions in India’s financial ecosystem. While the IBC provides a comprehensive framework for insolvency resolution aimed at maximizing value for stakeholders, the NI Act maintains commercial morality by criminalizing dishonour of cheques due to insufficient funds [1]. The fundamental tension between these legislative schemes becomes particularly pronounced when examining Section 96 of the IBC, which provides for interim moratorium in individual insolvency proceedings, and Section 138 of the NI Act, which criminalizes cheque dishonour. This intersection has generated significant judicial discourse, with courts grappling to balance the rehabilitative objectives of insolvency law against the deterrent purposes of criminal liability for commercial misconduct.

Legislative Framework and Statutory Provisions

Section 96 of the Insolvency and Bankruptcy Code, 2016

Section 96 of the IBC, titled “Interim-moratorium,” forms part of Chapter III of Part III dealing with insolvency resolution for individuals and partnership firms. The provision reads as follows:

“(1) When an application is filed under section 94 or section 95— (a) an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and (b) during the interim-moratorium period— (i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and (ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.

(2) Where the application has been made in relation to a firm, the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application” [2].

The legislative intent behind Section 96 was to provide immediate relief to financially distressed individuals and partnership firms by creating breathing space for resolution. Unlike Section 14 of the IBC, which requires an order from the Adjudicating Authority, the interim moratorium under Section 96 operates automatically upon filing of the application [3].

Section 138 of the Negotiable Instruments Act, 1881

Section 138 of the NI Act, inserted through the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, states:

“Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both” [4].

The provision further requires that no court shall take cognizance of such offence except upon complaint made within one month of the cause of action arising, and that notice demanding payment must be given within fifteen days of receipt of information regarding dishonour.

The Judicial Evolution: Key Landmark Judgments

The P. Mohanraj Precedent: A Watershed Moment

The Supreme Court’s decision in P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd. (2021) marked a pivotal moment in understanding the relationship between IBC moratorium provisions and NI Act proceedings [5]. The three-judge bench, comprising Justices R.F. Nariman, Navin Sinha, and K.M. Joseph, definitively settled that moratorium under Section 14 of the IBC covers proceedings under Section 138 of the NI Act against corporate debtors.

The Court observed that proceedings under Section 138 are “quasi-criminal” in nature, describing them as “civil sheep in criminal wolf’s clothing.” This characterization was crucial in determining that such proceedings, despite their criminal facade, essentially serve civil recovery purposes and therefore fall within the moratorium’s scope. The Court reasoned that allowing such proceedings to continue would defeat the purpose of preserving corporate debtor assets during the resolution process [6].

However, the judgment created a crucial distinction by holding that while corporate debtors enjoy protection under Section 14, natural persons such as directors and signatories remain liable for prosecution under Section 138. This bifurcation established that moratorium protects the corporate entity while preserving individual criminal accountability.

The Rakesh Bhanot Clarification: Settling the Section 96 Controversy

The Supreme Court’s recent judgment in Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd. (2025) has definitively resolved the uncertainty surrounding Section 96’s applicability to Section 138 proceedings [7]. The two-judge bench comprising Justices J.B. Pardiwala and R. Mahadevan held that interim moratorium under Section 96 of the IBC cannot be invoked to stall prosecution in cheque bounce cases under Section 138 of the NI Act.

The Court emphasized several critical distinctions. First, it clarified that the cause of action under Section 138 commences upon dishonour of the cheque and failure to pay within the statutory fifteen-day notice period. This cause of action is independent of the underlying debt and focuses specifically on the criminal act of issuing a cheque without sufficient funds [8].

Second, the Court distinguished between civil suits for recovery based on dishonoured cheques and criminal prosecution under Section 138. While interim moratorium may operate in the former case, it cannot shield individuals from criminal liability arising from statutory offences. The deterrent effect of Section 138 is essential for maintaining trust in negotiable instruments, and allowing debtors to evade prosecution through moratorium would undermine this fundamental purpose [9].

Conflicting High Court Decisions: The Pre-Rakesh Bhanot Era

Prior to the Supreme Court’s clarification in Rakesh Bhanot, various High Courts had taken divergent approaches to this issue, creating considerable uncertainty in commercial practice.

Delhi High Court Approach

In Sandeep Gupta v. Ram Steel Traders & Ors., the Delhi High Court held that Section 96 moratorium would not apply when the petitioner was arrayed as an accused in Section 138 proceedings in his capacity as Managing Director [10]. The Court reasoned that Section 138 prescribes punishment and compensation for cheque dishonour and is not a recovery proceeding. Therefore, what could be protected was only the company, not the personal penal liability of accused persons covered under Section 141 of the NI Act.

Similarly, in Axis Trustee Services Limited v. Brij Bhushan Singal & Anr., the Delhi High Court clarified that interim moratorium under Section 96 cannot include all co-guarantors within its ambit [11]. The Court held that the reference to “all the debts” in Section 96(1)(a) must be understood in respect of all debts of a particular debtor, and cannot extend to other independent guarantors.

Madhya Pradesh High Court’s Contrary View

Conversely, the Madhya Pradesh High Court in Surendra Kumar Patwa v. Dharmendra Vohra took a broader interpretation, holding that interim moratorium under Section 96 would apply to stay Section 138 proceedings [12]. This decision relied heavily on the language of Section 96 and attempted to apply the P. Mohanraj rationale to individual insolvency proceedings.

The Court observed that proceedings under Section 138 of the NI Act are “almost in the nature of civil wrong which have been given criminal overtones,” and therefore should be covered by the moratorium [13].

Regulatory Framework and Enforcement Mechanisms

The Role of Adjudicating Authorities

The National Company Law Tribunal (NCLT) serves as the Adjudicating Authority for individual insolvency proceedings under Part III of the IBC. The NCLT’s role in processing applications under Sections 94 and 95 has become crucial in determining the scope and duration of interim moratorium [14].

Recent judicial interventions, particularly the Bombay High Court’s decision in Bank of Baroda v. Union of India & Anr. (2024), have established strict timelines for NCLT processing to prevent abuse of the interim moratorium provision. The Court directed that NCLT must notify defects in applications within seven days of filing and applicants must cure defects within fourteen days thereafter [15].

Criminal Justice System Interface

The interface between insolvency proceedings and criminal justice administration presents unique challenges. Section 138 proceedings are conducted before Judicial Magistrates First Class or Metropolitan Magistrates, who must now consider the impact of concurrent insolvency proceedings on their jurisdiction and case management.

The Supreme Court in Rakesh Bhanot emphasized that criminal courts cannot stay proceedings merely due to pendency of insolvency applications. The Court noted that “personal responsibility persists, regardless of the insolvency proceedings and its outcome” [16].

Comparative Analysis: Corporate vs. Individual Insolvency

Distinguishing Features of Section 14 and Section 96

While both Section 14 (corporate insolvency) and Section 96 (individual insolvency) provide for moratorium, their scope and application differ significantly. Section 14 requires an order from the Adjudicating Authority and provides broader protection, including essential services continuation and supply chain stability provisions.

In contrast, Section 96 operates automatically upon application filing but provides more limited protection. The Supreme Court in State Bank of India v. Ramakrishnan observed that “the protection of moratorium under Section 96 and Section 101 is far greater than that under Section 14 as a stay under Section 96 implies that all legal proceedings in respect of the ‘debt’ and not the ‘debtor’ are stayed” [17].

Policy Rationale and Legislative Intent

The differential treatment of corporate and individual insolvency reflects distinct policy objectives. Corporate insolvency resolution aims to preserve going concern value and maximize stakeholder returns through business reorganization. Individual insolvency, conversely, focuses on debt resolution and rehabilitation of the debtor.

This distinction becomes particularly relevant when examining the scope of moratorium provisions. While corporate debtors require comprehensive protection to facilitate resolution professional activities and maintain business operations, individual debtors need protection primarily from civil recovery actions rather than criminal prosecution for statutory offences [18].

Contemporary Challenges and Practical Implications

Abuse of Interim Moratorium Provisions

The automatic nature of interim moratorium under Section 96 has led to its systematic abuse by defaulters seeking to delay legitimate recovery actions. The Bombay High Court in Bank of Baroda observed that borrowers were filing applications under Section 94 without genuine intent to pursue resolution, merely to trigger moratorium and stall SARFAESI proceedings [19].

Common abuse tactics include filing applications by individuals who are not personal guarantors to corporate debtors, submitting incomplete applications to extend moratorium periods, and abandoning applications after achieving delay objectives. These practices have prompted judicial intervention to establish stricter procedural safeguards.

Impact on Commercial Confidence

The uncertainty surrounding the interplay between IBC and NI Act provisions has had significant implications for commercial confidence. Lenders and suppliers have expressed concerns that overly broad moratorium provisions could undermine the deterrent effect of Section 138, potentially increasing the incidence of cheque dishonour.

The Supreme Court’s clarification in Rakesh Bhanot has been welcomed by the commercial community as it preserves the integrity of Section 138 while maintaining legitimate insolvency resolution mechanisms. The Court noted that “allowing the respective appellants/petitioners to evade prosecution under Section 138 by invoking the moratorium would undermine the very purpose of the N.I. Act, 1881” [20].

Enforcement and Compliance Challenges

Financial institutions and creditors face practical challenges in navigating concurrent insolvency and criminal proceedings. The timing of moratorium commencement, scope of protected proceedings, and coordination between different forums require careful legal strategy and case management.

The establishment of clear judicial precedents has provided greater certainty, but practitioners must remain vigilant about evolving jurisprudence and potential legislative amendments addressing these interfaces.

Future Directions and Recommendations

Legislative Reforms

The current legislative framework would benefit from explicit clarification regarding the scope of moratorium provisions in individual insolvency proceedings. Specific provisions addressing the interface with criminal law, particularly Section 138 proceedings, could eliminate residual uncertainty and prevent forum shopping.

Consider amendments to Section 96 that explicitly exclude criminal proceedings from moratorium scope, similar to exceptions already provided for certain transactions under Section 96(3). Such amendments would provide statutory clarity and reduce judicial burden in interpreting legislative intent.

Procedural Improvements

Enhanced procedural safeguards for interim moratorium applications could address abuse concerns while preserving legitimate protection for distressed debtors. Mandatory disclosure requirements, penalty provisions for frivolous applications, and expedited processing mechanisms could improve system efficiency.

The establishment of specialized benches within NCLT for individual insolvency matters could develop expertise and ensure consistent application of legal principles across different jurisdictions.

Stakeholder Coordination

Improved coordination mechanisms between criminal courts, NCLT, and other forums could enhance case management efficiency and reduce conflicting orders. Electronic case management systems linking different judicial forums could provide real-time information about concurrent proceedings.

Training programs for judicial officers on insolvency law principles and their interface with other legal frameworks could improve decision-making quality and consistency.

International Perspectives and Best Practices

Comparative Analysis

Other jurisdictions have addressed similar challenges through various approaches. The United States Bankruptcy Code provides explicit exceptions for criminal proceedings from automatic stay provisions, while the European Union’s restructuring directive focuses on staying civil enforcement actions rather than criminal proceedings.

These international precedents support the approach taken by the Indian Supreme Court in maintaining the distinction between civil debt recovery and criminal liability for statutory offences.

Lessons for India

International experience suggests that successful insolvency regimes require careful balance between debtor protection and creditor rights, with particular attention to maintaining deterrent effects of criminal law. The Indian approach of providing limited moratorium scope in individual insolvency while preserving criminal accountability aligns with global best practices.

Conclusion

The Supreme Court’s definitive resolution in Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd. has brought much-needed clarity to the complex interplay between Section 96 of the IBC and Section 138 of the NI Act. By holding that interim moratorium under Section 96 does not extend to criminal proceedings under Section 138, the Court has struck an appropriate balance between providing relief to financially distressed individuals and maintaining the integrity of commercial transactions.

This judicial clarification serves multiple important functions. First, it preserves the deterrent effect of Section 138, which is essential for maintaining trust in negotiable instruments and commercial morality. Second, it prevents abuse of insolvency proceedings as a shield against criminal accountability. Third, it provides certainty to legal practitioners, financial institutions, and commercial entities regarding the scope of their rights and obligations.

The evolution from uncertainty through conflicting High Court decisions to the current clear precedent demonstrates the dynamic nature of commercial law development in India. The courts have successfully navigated the complex intersection of insolvency and criminal law while preserving the distinct objectives of each legislative scheme.

Moving forward, the legal framework would benefit from continued judicial vigilance against abuse of moratorium provisions, legislative clarity regarding the scope of protection in individual insolvency proceedings, and enhanced coordination between different judicial forums. The precedent established in Rakesh Bhanot provides a solid foundation for addressing these challenges while maintaining the delicate balance between debtor rehabilitation and commercial accountability.

The interplay between the IBC and NI Act will continue to evolve as commercial practices adapt to this legal framework. However, the fundamental principle established by the Supreme Court—that criminal liability for statutory offences cannot be evaded through invocation of insolvency proceedings—provides a stable foundation for future developments in this area of law.

References

[1] P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd., (2021) 5 SCC 314. Available at: https://indiankanoon.org/doc/97452657/ 

[2] The Insolvency and Bankruptcy Code, 2016, Section 96. Available at: https://ibclaw.in/section-96-interim-moratorium/ 

[3] Nishith Desai Associates, “Dissecting the Insolvency Code – Scope and Impact of Interim Moratorium for Individuals.” Available at: https://www.nishithdesai.com/NewsDetails/10625 

[4] The Negotiable Instruments Act, 1881, Section 138. Available at: https://vlex.com/vid/section-138-negotiable-instruments-584547970 

[5] P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd., (2021) 5 SCC 314. Available at: https://ibclaw.in/summary-of-landmark-judgment-p-mohanraj-ors-vs-m-s-shah-brothers-ispat-pvt-ltd/ 

[6] “IBC Moratorium, Cheque Dishonour – Maheshwari & Co.” Available at: https://www.livelaw.in/law-firms/law-firm-articles-/ibc-moratorium-cheque-dishonour-maheshwari-co-181105 

[7] Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd., 2025 INSC 445. Available at: https://www.verdictum.in/court-updates/supreme-court/rakesh-bhanot-v-gurdas-agro-pvt-ltd-2025-insc-445-interim-moratorium-cheque-section-138-ni-act-1573320 

[8] “The Interplay Between IBC Moratorium and Criminal Liability Under Section 138 of the NI Act.” Available at: https://www.legal500.com/developments/thought-leadership/the-interplay-between-ibc-moratorium-and-criminal-liability-under-section-138-of-the-ni-act-in-light-of-recent-judgement-passed-in-rakesh-bhanot-vs-gurdas-agro-pvt-ltd/ 

[9] “Supreme Court Clarifies Non-applicability Of Moratorium Under The Insolvency And Bankruptcy Code, 2016.” Available at: https://www.mondaq.com/india/insolvencybankruptcy/1622238/supreme-court-clarifies-non-applicability-of-moratorium-under-the-insolvency-and-bankruptcy-code-2016-to-proceedings-under-the-negotiable-instruments-act-1881 

[10] “Liability of the Erstwhile Directors: Section 138, Negotiable Instruments Act versus Insolvency and Bankruptcy Code, 2016.” Available at: https://www.scconline.com/blog/post/2023/10/12/liability-of-the-erstwhile-directors-section-138-negotiable-instruments-act-versus-insolvency-and-bankruptcy-code-2016/ 

[11] “Interim Moratorium Under Section 96 Of Insolvency & Bankruptcy Code, 2016 Is Limited To Particular Guarantor.” Available at: https://www.livelaw.in/news-updates/delhi-high-court-section-96-of-insolvency-bankruptcy-code-personal-guarantor-interim-moratorium-213421 

[12] Surendra Kumar Patwa vs Dharmendra Vohra, Madhya Pradesh High Court, 2024. Available at: https://indiankanoon.org/doc/48203583/ 

[13] “IBC proceedings don’t bar liability under Section 138 of NI Act: MP High Court.” Available at: https://www.scconline.com/blog/post/2024/06/20/ibc-proceedings-dont-bar-liability-under-section-138-of-ni-act-mp-high-court-scc-times/ 

[14] “Section 138 NI Act Versus Moratorium In IBC.” Available at: https://taxguru.in/corporate-law/section-138-ni-act-moratorium-ibc.html 

[15] “Abuse of Interim Moratorium Under Section 96 of the Insolvency and Bankruptcy Code, 2016.” Available at: https://www.indialaw.in/blog/civil/abuse-interim-moratorium-section-96/ 

[16] Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd., 2025 INSC 445, Para 10.1. Available at: https://ibclaw.in/case-name/rakesh-bhanot-v-gurdas-agro-pvt-ltd/ 

PDF Links to Full Judgments

• https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/P_Mohanraj_vs_M_S_Shah_Brothers_Ispat_Pvt_Ltd_on_1_March_2021.PDF
• https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/Rakesh_Bhanot_vs_M_S_Gurdas_Agro_Pvt_Ltd_on_1_April_2025.PDF
• https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/Surendra_Kumar_Patwa_vs_Dharmendra_Vohra_on_25_October_2024.PDF
• https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/negotiable_instruments_act,_1881 (1).pdf

The post Interplay between Section 96 and Section 138 appeared first on Bhatt & Joshi Associates.