Author: Advocate Harshit Sachar
Place of Practice: Ludhiana, Punjab
Jurisdiction: India

Criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881, arising from dishonoured cheques, are not stayed by an interim moratorium under the Insolvency and Bankruptcy Code (IBC) because such proceedings are penal and not civil debt recovery actions. The Delhi High Court has recently held that the moratorium under Section 96 of the IBC does not stay these cheque bounce proceedings, and such matters must continue before the Magistrate even during interim moratorium.

What Is the IBC Interim Moratorium?

When an application under Section 95 or Section 7 of the Insolvency and Bankruptcy Code, 2016 is admitted for personal or corporate insolvency, an interim moratorium begins under Section 96 of the IBC.

The moratorium halts:

• Debt recovery actions

• Enforcement of security

• Initiation or continuation of suits for recovery

The intention is to give a debtor a breathing space to reorganise affairs. However, the scope of this moratorium does not extend to criminal liabilities arising from dishonoured cheques.

Why Cheque Bounce Proceedings Are Different

Nature of Proceedings

• Proceedings under Section 138 of the NI Act are quasi-criminal in nature; they impose penalty or imprisonment for dishonoured cheques.

• They are not civil recovery suits seeking to recover unpaid amounts; instead, they enforce criminal sanctions for failure to honour negotiable instruments.

Because of this penal character, the moratorium under the IBC does not apply.

Latest Delhi High Court Judgment (2026)

In the Delhi High Court case of Somwati v. Suresh Jain (2026), the court considered whether a Section 96 moratorium under the IBC should stay proceedings under Section 138 of the NI Act where cheques were dishonoured due to personal debts. The respondent had sought stay of criminal complaints on the ground that interim moratorium applied.

The court held that:

• Interim moratorium under Section 96 IBC does not cover or stay Section 138 NI Act proceedings;

• Section 138 proceedings may continue because they are penal and not “legal action or proceedings” in the civil enforcement sense contemplated by Section 96;

• Orders that adjourned the complaints sine die were set aside, and the matters were directed to proceed before the Magistrate as per law.

This ruling underscores that even during insolvency proceedings, cheque bounce cases will move forward unless specifically stayed by competent criminal courts on valid legal grounds other than IBC moratorium.

Supreme Court Position (Supporting Legal Principle)

The Supreme Court has similarly upheld in Rakesh Bhanot v. Gurdas Agro Pvt. Ltd. that the interim moratorium under IBC cannot be invoked to block Section 138 NI Act prosecution. This confirms that criminal proceedings under the NI Act are not subject to moratorium protections.

Practical Implications

For Complainants

✔ You can initiate or continue Section 138 proceedings even if an interim moratorium is in place.
✔ Cheque bounce complaints are not automatically stayed due to IBC filings.

For Accused / Debtors

❌ You cannot rely on Section 96 IBC moratorium to stay or delay a Section 138 complaint.
✔ Only appropriate criminal law remedies or bail conditions apply, not insolvency moratorium.

For Counsel

• Draft complaints and respond to summons as usual.

• Challenge improper stays on grounds other than IBC moratorium.

FAQs

Does IBC moratorium stay cheque bounce cases?
No — moratorium under Section 96 of IBC does not stay criminal proceedings under Section 138 NI Act.

Is Section 138 NI Act a civil recovery action?
No — it is penal in nature, focusing on punishment (fine or imprisonment).

Can directors avoid liability under IBC moratorium?
No, natural persons remain liable for Section 138 offences unless the matter is stayed on valid criminal law grounds.

Conclusion

Cheque bounce cases under Section 138 of the Negotiable Instruments Act are not covered by an interim moratorium under the Insolvency and Bankruptcy Code. Recent Delhi High Court rulings confirm that such proceedings — being penal — must continue even if insolvency or personal insolvency proceedings are ongoing. Neither complainants nor accused can use IBC moratorium to stay or dismiss Section 138 matters.