Decoding Section 138 and IBC – IndiaCorpLaw

[Kevin Preji and Sanjana Rao are 3rd year B.A., LL.B. (Hons.) students at National Law School of India University, Bangalore]

On April 1, 2025, the Supreme Court, in the case of Rakesh Bhanot vs Gurdas Agro Pvt Ltd held that the proceedings for cheque bounces (under s 138 of the Negotiable Instruments Act, 1881 (‘NI Act’)), would not be stayed by the moratorium imposed under section 96 of the IBC as the proceedings were criminal in nature. This post criticises the conclusion not only for its implications on personal guarantors but also based on the reasoning used. This post begins by highlighting the prior confusion in jurisprudence which led to the problematic holding in Rakesh Bhanot. It thenhighlights how Rakesh Bhanot fails to adequately settle the jurisprudence on cheque bounce cases and the moratorium under section 96. Lastly, the post uncovers how Rakesh Bhanot misconstrues precedents to end up becoming per incuriam.

Understanding the Conflict

Section 14 of the IBC provides a moratorium for corporate debtors, prohibiting the ‘institution of suits or continuation of pending suits or proceedings against the corporate debtor’. Evidently, the use of the term ‘proceedings’ has been used as a catch-all term and its scope must be interpreted in light of the purpose and object of the moratorium, as noted in P. Mohanraj vs Shah Brothers Ispat Pvt. Ltd. Courts have been clear that the purpose of the moratorium, as expounded in Swiss Ribbons Pvt. Ltd. v. Union of India, is to prevent the depletion of the corporate debtor’s assets during the insolvency process so as to enable it to continue running as a going concern to maximise the value for all stakeholders. Thus, by using the rules of construction – noscitur a sociis and ejusdem generis, it is obvious that criminal proceedings with larger public interest (as also highlighted in UNCITRAL’s Legislative Guide) would not be stayed by the moratorium. This is because such criminal proceedings outweigh the importance of the moratorium or do not interact with the moratorium. Nevertheless, since section 138 of the NI Act, providing criminal sanctions, is also inextricably linked to the debt created, the question of whether such quasi-criminal proceedings would be stayed by the moratorium has plagued various courts (as discussed here). 

The Court in Rakesh Bhanot is quick to label section 138 proceedings as ‘criminal proceedings’ due to its criminal sanctions. This follows from the reasoning applied in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corpn. of India Ltd, a Three-Judge Bench decision where Justice Sanjay Kishan Kaul, without elaborate reasoning, holds section 138 proceedings to be penal in nature due to its criminal sanctions, despite being in direct contradiction to the reasoning used by Justice Nariman in P. Mohanraj, also a , a Three-Judge Bench decision. Justice Kaul’s reasoning, nevertheless, is better explained by Justice Pardiwala (in the concurring opinion) who highlights that section 138 proceedings are criminal in nature owing to the need to maintain faith in the usage of cheques. On the other hand, this reasoning was considered and outweighed in P. Mohanraj, where the court held it to be a ‘civil sheep’ in a ‘criminal wolf’s clothing’ (read more here). The Court held the same for the following reasons:  

Firstly, the Court concluded that the interpretation of the term ‘proceedings’ would not necessarily include only such proceedings analogous to civil suits (this point was overlooked completely in Ajay Kumar). Secondly, the Court highlighted the quasi-criminal nature of section 138 proceedings, being triggered by a cause of action – which is foreign to criminal jurisprudence but common for recovery suits. Additionally, the public interest of the State is subsumed by the complainant/victim who not only initiates the proceedings through a complaint (as opposed to when the State initiating proceedings in criminal matters) but can also compound the same, on recovery of the defaulted amount. As Kaushalya Devi Massand v Roopkishore Khore rightly held, section 138 proceedings are almost in the nature of a civil wrong which have been given criminal overtones. Lastly, after considering the objective of the NI Act, the Court highlights that in reality, the complainants (usually finance institutions) often view such proceedings primarily as recovery proceedings, using the criminal punishment only as additional means to recover the same. 

While Ajay Kumar is good law to the extent that it supplements the holding in P. Mohanraj (stating that the dissolution of the company would not absolve the personal liability of the directors), its reasoning regarding the criminal nature of section 138 proceedings directly contradicts that of P. Mohanraj which held it to be civil in nature with criminal overtones. Thus, given that Ajay Kumar pays mere lip service to P. Mohanraj without engaging with its reasoning, Courts should look to the holding in P. Mohanraj to be the authoritative conclusion on the matter. Importantly, this conflict between co-ordinate benches of the Apex Court has led to inconsistent and varying rulings by High Courts as to whether cheque bounce cases would fall within the ambit of the moratorium under section 96. 

Failing to Adequately Settle the Jurisprudence

Various High Courts such as the Bombay High Court in Sheetal Gupta vs. National Spot Exchange Limited and the Madhya Pradesh High Court in Surendra Kumar Patwa vs. Dharmendra Vohra have followed the spirit of P. Mohanraj, holding that section 138 proceedings would be stayed on account of the moratorium under section 96. In fact, the Supreme Court refused to entertain the SLP against the Bombay High Court’s order, reinforcing the position of law.

Nevertheless, in Sandeep Gupta vs Shri Ram Steel Traders, the Delhi High Court was faced with section 138 proceedings against the Managing Director who was not only arraigned under section 141 of the NI Act but also was the personal guarantor for the transaction. Interestingly, the Court differentiated the position of law based on the role:

1. The proceedings would be stayed as per section 96 of the IBC on account of his role as a personal guarantor whose liability is coextensive with that of the Company, and
2. The proceedings would not be stayed due to the personal and vicarious liability imposed upon him under section 141 of the NI Act [natural persons excluded as per P. Mohanraj]

Instead of providing a harmonious construction, the Delhi High Court, on account of the personal and vicarious liability imposed under section 141, refused to stay the proceedings. This was challenged before the Supreme Court, to be decided in Rakesh Bhanot. Not only does Rakesh Bhanot fail to clear the position of law raised in Sandeep Gupta in the context of those who perform such dual roles, it fails to even notice the duality in the first place, thus leaving the position of law unsettled. 

Confusing the Moratorium under Section 14 and Sections 96/101 of the IBC

In P. Mohanraj, the court was faced with the issue of whether the moratorium under section 14 of the IBC would bar criminal proceedings (under NI Act section 138 proceedings) and additionally whether natural persons such as the director could avail of the same protection. While the court categorically held that the moratorium under section 14 of the IBC would bar proceedings under section 138 of the NI Act, the court additionally held that natural persons involved such as the director would not be able to avail the same. While the additional holding was not very ‘well reasoned’, the court took such a position due to the vicarious and personal liability imposed by section 141 of the NI Act [read more here]. Thus, directors of the company would still be personally liable and would not be able to hide behind the moratorium despite the company having stayed the proceedings against it. Ajay Kumar takes this further to hold that the dissolution of the company would not allow directors/signatories to escape their personal and vicarious liability. 

Directors often act both as company directors and as personal guarantors for the company’s debts. In State Bank of India v. V. Ramakrishnan, the court clarified that the moratorium under section 14 of the IBC does not protect personal guarantors (usually directors). The Report of the Insolvency Law Committee (2020), explained that this was to stop guarantors from avoiding their shared responsibility to repay the company’s debt. [read more here]. Instead, personal guarantors are covered under sections 96–101 (Part III), which provide a separate moratorium for them when insolvency proceedings are started against them personally. (While section 96 deals with the interim moratorium which comes into force as soon as the individual files for personal bankruptcy, section 101 provides for a complete moratorium once the Adjudicatory Authority looks into the matter.)

Nevertheless, another commentator, Abhinav Sekhri highlights how the Court in Rakesh Bhanot misconstrues earlier judgements on the applicability of the moratorium – holding that since the moratorium under section 14 would not be applicable to directors or to personal guarantors, the moratorium under section 96 having the same purpose would not be applicable to cheque bounce proceedings at all. This reasoning is highly flawed on the face of it for the following reasons: 

Firstly, the discussion on the non-applicability of section 14 to director/personal guarantor is irrelevant since the plea was that of the moratorium under section 96. 

Secondly, the director possessing a dual role—  not only a director but a personal guarantor— could avail of the moratorium under section 96 as per V. Ramakrishnan. In simpler terms, instead of discussing whether the surety’s debt might warrant the application of section 96 to cheque bounce cases involving the director, or providing any other reasoning that would argue against extending section 96, the Court in Rakesh Bhanot determined that section 96 is not applicable to cheque bounce cases in any circumstance.

Due to the above misconstruction of precedents, the holding in Rakesh Bhanot directly contradicts the larger bench in P. Mohanraj on the applicability of the moratorium under section 96 to cheque bounce cases. When the language of sections 14 and 96/101 is contrasted, it is clear that the width of section 14 is much broader, covering ‘transactions’ (inclusive of transactions relating to debt) by the corporate debtor while sections 96/101 is reduced to legal actions or proceedings relating to any debt. As rightly noted in P. Mohanraj, these proceedings need not be limited to recovery of the debt and thus section 138 proceedings would squarely fall within the moratorium. Thus, Rakesh Bhanot would be per incuriam and bad in law on that account. 

Conclusion