Supreme Court Questions P. Mohanraj Precedent On Nature Of Cheque Bounce Case Proceedings; Refers Part III IBC Moratorium Issue To Larger Bench

The Bench said that even though Section 138 NI Act arises from a civil dispute over repayment of debt, it cannot be treated as a civil recovery proceeding; the deeming fiction makes cheque dishonour a punitive criminal offence. To authoritatively settle the resulting legal friction and overlapping statutory text, the Court has referred this second question, introducing a distinct "tiered proceeding" doctrine to navigate the statutory conflict.

Through the referral, the Bench directly questioned the three-judge Bench precedent in P. Mohanraj v. Shah Bros. Ispat (P) Ltd. (2021) 6 SCC 258 which had characterised Section 138 as a "civil sheep in a criminal wolf’s clothing". The Court noted that while a personal insolvency moratorium is legislated to safeguard a debtor’s estate from asset depletion via civil suits, it cannot be used as an escape route by errant individuals to evade the penal consequences of their fraudulent commercial conduct. The larger Bench will conclusively determine if an IBC moratorium should engulf the entirety of a Section 138 prosecution or be restricted solely to its compensatory aspects.

Justice J.B. Pardiwala and Justice K.V. Viswanathan observed, “In light of the overlap between criminal and civil remedies caused by the quasi-criminal nature of Section 138, it is not possible to provide a conventional answer as regards the manner in which the moratorium provisions under Part III of the IBC should apply thereto. We are of the firm view that the moratorium under Sections 96 and 101 of the IBC respectively, should not place an embargo on the criminal aspect of cheque bounce proceedings. However, extending such interpretation to the compensatory aspect thereof would undermine the objective underlying the moratorium provisions, that is the individual undergoing insolvency should be given breathing space to restructure his liabilities and there should not be depletion of his assets in the meantime”.

While answering that whether the proceedings under Section 138 of the NI Act are in the nature of legal action for recovery of money, the Bench further observed, “The answer to this question must be an emphatic ‘No’. We are of the considered view that the discussion on the predominantly criminal nature and objective of Section 138 of the NI Act was not brought to the attention of the three-Judge Bench of this Court in P. Mohanraj (supra). We have held that though proceedings under Section 138 of the NI Act are quasi-criminal, yet the predominant nature of such proceedings is criminal. We have said so after a perusal of the reasons on the strength of which the judgment in P. Mohanraj (supra) described Section 138 as a ‘civil sheep in criminal wolf’s clothing’. In our considered opinion the three-Judge Bench described Section 138 proceeding inherently civil in nature primarily on the basis of the procedure stipulated under Chapter XVII of the NI Act”.

Advocate Shreeyash Lalit appeared on behalf of the appellant and Tanu Priya Gupta, AOR appeared for the respondent.

The Bench referred the following 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?

The brief facts arise from a corporate debt dispute where the appellant, the former Managing Director of M/s. Surana Power Ltd. (SPL), issued a security cheque to UCO Bank in connection with an Irrevocable Letters of Credit facility. When the underlying financial liability devolved, the respondent bank presented the cheque for encashment, which was returned dishonoured due to insufficient funds in the account.

Following the appellant's failure to clear the outstanding dues within the mandatory fifteen-day statutory notice period, the bank instituted a criminal complaint under Section 138 of the NI Act before the XIV Metropolitan Magistrate, Egmore, Chennai.

Thereafter, the appellant approached the Madras High Court seeking the quashing of the criminal complaints on the ground that the National Company Law Tribunal (NCLT) had admitted a personal insolvency application against him under Section 95 of the IBC, thereby triggering an interim moratorium under Section 96.

The High Court dismissed the petitions, ruling that Section 138 is a penal enactment involving punitive consequences and does not constitute a civil recovery proceeding. While the subsequent appeals were pending before the Supreme Court, the NCLT passed a formal bankruptcy order against the appellant, initiating a final moratorium under Section 128 of the IBC.

Analysing the legal landscape, the Court noted that Section 138 proceedings cannot be treated strictly as civil actions wrapped in a criminal format, as they are inherently quasi-criminal with a heavy tilt toward criminal culpability because they carry sentences of imprisonment and punitive fines.

“We are conscious of the fact that the commission of the criminal offence of cheque dishonour results in the civil injury of non-payment of ‘debt’. However, in our considered view, to make moratorium provisions under the IBC applicable on proceedings under Section 138 of the NI Act, solely because of the civil nature of the injury is untenable in light of the objective sought to be achieved by the enactment of Section 138. We may even go so far as to say that the applicability of moratorium provisions on Section 138 proceedings makes the same equivalent to a debt recovery mechanism, which could never have been the intention of the legislature”, observed further.

The Bench introduced a "tiered proceeding" doctrine, separating the trial into a Tier I phase dedicated to determining criminal liability and societal deterrence, and a Tier II phase addressing the discretionary compensatory civil elements now governed under Section 395 of the Bharatiya Nagarik Suraksha Sanhita (BNSS). The Court reasoned that while an IBC moratorium logically stays the enforcement of the Tier II compensatory aspect to prevent the unfair depletion of a debtor’s pool of assets, the Tier I trial focusing on personal criminal accountability must continue unhindered.

“Unfortunately, there is no statutory guidance provided in the NI Act as regards the recovery of debt for which the cheque is drawn. This absence has led to varying interpretations of the nature and objective of Section 138 and has caused confusion regarding the applicability of moratorium on the cheque bounce proceedings. Through the tiered understanding of the objectives of Section 138, we have attempted to resolve this dilemma by bifurcating the criminal and compensatory aspects of the provision”, the Bench said.

Consequentially, the Court directed the registry to place the entire batch of matters before the Hon’ble Chief Justice of India for the constitution of an appropriate three-judge Bench.

Cause Title: Dineshchand Surana v. UCO Bank (Neutral Citation: 2026 INSC 579)

Appearances:

Appellant: Shreeyash Lalit, Advocate, Himanshu Vats, Angad Pahel, Lavam Tyagi, Ishita Khurana, Aviral Kumar Mishra, Ishaan George, AOR, Prateek Kushwaha, AOR, Advocates.

Respondent: Tanu Priya Gupta, AOR, Brijesh Kumar Tamber, AOR, Vinay Singh B, Advocate.

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