The intersection of insolvency law and criminal liability for cheque bounce became a significant area of legal debate in India, after the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC). The issue becomes even more complex when personal guarantors to corporate debtors are involved. This article explores how the moratorium under the IBC, particularly Sections 96 and 100, impacts proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), which deals with the offense of cheque bounce.
Section 138 of the Negotiable Instruments Act
The dishonor of a cheque inter alia for insufficiency of funds or if it exceeds the amount arranged is punishable for imprisonment, fine, or both. The proceedings under Section 138 are quasi-criminal in nature and are often used alongside civil recovery mechanisms.
Personal Guarantors under the Insolvency and Bankruptcy Code,
A personal guarantor is an individual who guarantees the repayment of a debt owed by a corporate debtor. If the corporate debtor defaults, the creditor can proceed against the personal guarantor. The IBC, through its 2019 amendments, brought personal guarantors of corporate debtors within its ambit, allowing creditors to initiate insolvency proceedings against them.
Moratorium under Sections 96 and 100 of the IBC
When an application for insolvency resolution is filed against a personal guarantor, Section 96 imposes an interim moratorium. Further when the said application is admitted Section 100 imposes a moratorium. Interim moratorium/ moratorium inter alia prohibits the institution or continuation of suits or proceedings against the personal guarantor in respect of any debt.
IBC Moratorium and Section 138 Proceedings
Pertinently, High Courts across the country took the contradictory view on applicability of moratorium upon Section 138 Proceedings. Eventually, Hon'ble Supreme Court in “Rakesh Bhanot Versus Gurdas Agro Pvt. Ltd. 2025 SCC OnLine SC 728” held that individuals facing prosecution under Section 138 of the N.I. Act, 1881, for dishonouring cheques cannot take refuge under moratorium as envisaged under IBC.
While deciding this issue, the Hon'ble Apex Court heavily reflected upon criminal prosecution involve in Section 138 Proceedings and categorically held that Criminal liability for dishonouring cheques ensures that individuals who engage in commercial transactions are held accountable for their actions. However, it is important to note that Hon'ble Supreme Court in P.Mohanraj v. Shah Brothers Ispat Pvt. Ltd(2021) 6 SCC 258, while dealing with the issue of nature of the proceedings under section 138 of NI Act, was pleased to hold that Section 138 proceeding can be said to be a "civil sheep" in a "criminal wolf's" clothing, as it is the interest of the victim that is sought to be protected, the larger interest of the State being subsumed in the victim alone moving a court in cheque bouncing cases, as has been seen by us in the analysis made hereinabove of Chapter XVII of the Negotiable Instruments Act. The judgment of P.Mohanraj (supra) was though before the Hon'ble Supreme Court in Rakesh Bhanot (supra), however the same is not dealt with.
Conclusion
The moratorium under Sections 96 and 100 of the IBC offers significant protection to personal guarantors by potentially staying all proceedings which will adversely affect the assets of the personal Guarantor. The object of Sections 96 and 101 of IBC is to see that during the insolvency resolution process for individuals and firms, the individual should be given breathing space to recuperate for a successful resolution of his debts through resolution plans which are accepted by a committee of creditors, by which the debtor is given breathing space in which to pay back his debts, which would result in creditors getting more than they would in a bankruptcy proceeding against an individual. However, this aspect has not been examined in the judgment Rakesh Bhanot (Supra) the legal position continues to evolve, and the ultimate impact depends on judicial interpretation.
Notwithstanding the foregoing, creditors are currently entitled to expedite the recovery of their debts by initiating proceedings under Section 138 of the Negotiable Instruments Act against the personal guarantor. However, the ultimate impact of such actions on the personal guarantor's insolvency resolution process under the Insolvency and Bankruptcy Code remains to be determined.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
