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Dishonour of Cheque: Moratorium under Insolvency and Bankruptcy – No Shield to Escape Personal Accountability

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In Dineshchand Surana v. UCO Bank (Criminal Appeal No. [To Be Allocated] of 2026, arising out of SLP (Crl.) No. 12135 of 2024, decided on May 27, 2026), the Supreme Court of India adjudicated a significant intersection between criminal law and commercial insolvency. The primary issue was whether a criminal complaint under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) for cheque dishonour is automatically stayed by the statutory interim moratorium and subsequent moratorium provisions under Part III of the Insolvency and Bankruptcy Code, 2016 (IBC) during personal insolvency and bankruptcy proceedings of a director/signatory.

The Supreme Court dismissed the appeals and upheld the judgment of the Madras High Court, establishing that the statutory moratoriums under Sections 96, 101, 124, and 128 of the IBC do not protect natural persons from their personal penal liabilities. Splitting the trial into a Two-Tier Framework, the Court ruled that Tier-I (the criminal aspect) is inherently punitive and remains entirely unimpeded by the IBC, meaning criminal trials must proceed concurrently. Conversely, Tier-II (the compensatory aspect) is fundamentally civil and remains restricted by the asset distribution structures of the IBC. Directors cannot use individual insolvency tools as a shield to escape personal accountability for fraudulent or negligent commercial conduct.

1. Factual Matrix & High Court Recourse

  • The Background & Commercial Deal: The appellant was the former Managing Director of M/s. Surana Power Ltd. (SPL). On December 26, 2014, the appellant secured credit facilities from UCO Bank, including an Irrevocable Letter of Credit for Rs. 5,03,21,250/- to purchase Indonesian coal. As security, the appellant issued a blank cheque with an explicit understanding that the bank could encash it if SPL defaulted.
  • The Default and Dishonour: SPL defaulted, prompting the bank to pay the vendor and activate the security cheque. On June 18, 2015, the cheque bounced due to “Funds Insufficient”. Following a statutory demand notice, the bank filed a criminal complaint under Section 138 of the NI Act before the Metropolitan Magistrate, Egmore, Chennai. SPL subsequently went into liquidation in 2018.
  • The Insolvency Interventions: On February 15, 2022, the NCLT admitted a personal insolvency application against the appellant under Section 95 of the IBC. Armed with this, the appellant petitioned the Madras High Court to quash or stay the Section 138 trial, claiming that Section 96 of the IBC imposes a blanket stay on all actions “in respect of any debt.”
  • High Court Dismissal: The High Court dismissed the petitions on October 18, 2023, observing that Section 138 is a criminal enactment imposing fines and imprisonment rather than a standard debt recovery tracking mechanism. During the pendency of the appeal before the Supreme Court, the appellant transitioned from personal insolvency into a formal bankruptcy order under Section 126 of the IBC, triggering a Section 128 moratorium.

2. Legal Submissions of the Parties

Appellant’s Assertions

  • Counsel argued that the statutory moratoriums under Part III of the IBC (Sections 96 and 101 for personal insolvency; Sections 124 and 128 for bankruptcy) are uniquely designed to halt actions “in respect of any debt”. This phrase carries a wider ambit than Section 14 (which targets the corporate debtor as an entity).
  • Relying heavily on the three-judge bench ruling in Mohanraj v. Shah Bros. Ispat (P) Ltd. (2021), the appellant argued that Section 138 proceedings are practically a “civil sheep in a criminal wolf’s clothing” focused primarily on debt restitution. Allowing these trials to proceed would deplete the personal estate of the bankrupt, thereby derailing the structured collection and distribution of assets under the IBC. It was contended that a later two-judge ruling in Rakesh Bhanot (2025) went against the core of P. Mohanraj.

Respondent Bank’s Counter-Assertions

  • The bank counter-argued that a Section 138 proceeding is primarily an exercise in deterrence under a penal statute to ensure trade security. Vicarious liability under Section 141 of the NI Act is triggered due to the willful, negligent, or fraudulent conduct of the corporate director at the time the negotiable instrument was floated.
  • Citing Ajay Kumar Radheshyam Goenka (2023), the bank established that while a corporate debtor might get liquidated or restructured out of a debt, the natural human signatories enjoy no immunity from personal criminal prosecution. Multiple High Courts had already concurrently ruled that Section 96 of the IBC cannot be twisted to stall penal consequences.

3. Structural Analysis by the Supreme Court

A. The Dual Split-Jurisdiction Doctrine (Two-Tier Model)

Justice J.B. Pardiwala dissected Section 138 to look closely at its hybrid characteristics. The Court definitively mapped out a structural Two-Tier Framework to explain the operation of the law:

  1. Tier-I: The Criminal Core: This step handles the verification of the offence—evaluating whether a valid cheque was presented and subsequently returned unpaid due to a lack of funds. It establishes strict statutory liability, independent of criminal intent (mens rea). Because its primary focus is systemic deterrence, the IBC moratorium has zero application here, and the criminal prosecution can proceed unimpeded.
  2. Tier-II: The Compensatory Core: This step is triggered only when a court exercises its discretionary power under Section 357(1) of the CrPC / Section 395(1) of the BNSS to direct part of the fine as restitution to the complainant. Because this mechanism operates as an alternative to a civil suit for money recovery, the IBC moratorium strictly applies here to prevent any preferential collection of funds outside the insolvency pool.

B. Deeming Fictions and Co-Extensive Boundaries

  • The Legal Fiction: The Court observed that while the root of a cheque bounce is fundamentally a civil breach of contract, the Parliament introduced a clear “deeming fiction” under Section 138 to elevate the default into a criminal offence. This artificial fiction must be given full structural effect; a criminal prosecution cannot be equated to a standard civil collection suit.
  • Parallel Actions Permissible: The ruling reiterated that the law permits parallel tracks: a complainant can simultaneously maintain a civil suit for money recovery and launch a criminal case under Section 138 for the same exact cheque. The civil suit targets asset reclamation, whereas the criminal court seeks penal accountability.

C. Refining P. Mohanraj and Upholding Personal Accountability

  • The Supreme Court clarified that Mohanraj (2021) explicitly dealt with an entity-level moratorium under Section 14 protecting a corporate debtor. While P. Mohanraj rightfully labeled Section 138 a “civil sheep in criminal clothing” to insulate corporate assets during restructuring, it never intended to create a safe haven for individual wrongdoers experiencing personal insolvency.
  • The Court affirmed the findings in Rakesh Bhanot (2025), declaring it fully aligned with the larger benches. Individual accountability must persist. An insolvency plan or bankruptcy order can wipe out a pre-existing debt from a ledger, but it does not erase the historical criminal misconduct of issuing a bad cheque.

4. Definitive Answers to the Issues & Conclusion

The Supreme Court summarized its answers to the three primary questions of law:

  1. Object of Section 138: The proceedings are penal in character aimed at safeguarding trade sanctity, not an alternate civil pathway for money recovery.
  2. Protection Under Part III: The criminal aspects (Tier-I) of a Section 138 trial are not protected by the moratoriums under Sections 96, 101, 124, or 128 of the IBC. Only the compensatory orders (Tier-II) are restricted by insolvency procedures.
  3. Vicarious Liability of Directors: Individual directors undergoing personal insolvency or bankruptcy cannot claim any protection or stay against ongoing Section 138/141 criminal trials.

Final Order: The Supreme Court dismissed the appeals and clarified that the trial court must proceed with the criminal prosecution without treating the personal bankruptcy order as a stay on penal liability. All pending applications were disposed of.

2026 INSC 579

Dineshchand Surana V. Uco Bank (D.O.J. 27.05.2026)

2026 INSC 579 click here to view full text of judgment

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Supreme Court Clarifies That Disability Pension Precedent Cannot Be Mechanically Applied

October 13, 2026 No Comments

This miscellaneous application was filed by the Union of India seeking a clarification of the Supreme Court’s common judgment dated February 12, 2026 (passed in C.A. Nos. 6820-6824 of 2018), which had granted ex-servicemen disability pension with broad-banding benefits and arrears from specified dates. The Union of India contended that the judgment was being mechanically relied upon by various courts and tribunals to alter final orders and reopen stale pensionary claims where the very entitlement to a disability pension was initially in dispute. The Supreme Court disposed of the application by clarifying that judgments must be read in the context of their specific facts and that the common judgment cannot be construed to mean that disability pension with arrears can be automatically claimed in every case. The Court emphasized that each claim must be examined and decided on its own individual merits.

  • Nature of the Application: The Union of India sought clarification regarding the broader application of the Supreme Court’s February 12, 2026 common judgment concerning ex-servicemen disability pensions.
  • Concerns Raised by the State: The Additional Solicitor General pointed out that numerous cases across High Courts and the Armed Forces Tribunal were relying on the judgment to modify final orders and settle stale claims where the underlying entitlement to pension was disputed, leading to significant administrative and financial implications.
  • Core Legal Principle Restated: Citing established precedents, the Supreme Court reiterated that observations in a judgment cannot be read like a statute or divorced from their original factual context.
  • Final Clarification: The Court clarified that its earlier common judgment does not mandate the grant of disability pension with arrears in every case, and all future claims must be adjudicated strictly on their own separate merits.

2026 INSC 1113

Union of India Through Its Secretary & Ors. v. SGT Girish Kumar and Ors. (D.O.J. 12.10.2026)

2026 INSC 1113 click here to view full text of judgment

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Plaint Amendments: SC Rules on Late-Stage Amendments and the Discovery of Unknown Decrees

October 13, 2026 No Comments

This civil appeal challenged an order of the Orissa High Court which declined to interfere with a trial court order rejecting an application under Order VI Rule 17 of the CPC for amending a plaint in a long-standing title suit. The original plaintiff had sought to incorporate foundational pleadings regarding a compromise decree in a separate suit (T.S. No. 105 of 1998) which he discovered later and which purportedly affected a portion of the suit property. The Supreme Court allowed the appeal and set aside the orders of the High Court and trial Court, holding that the statutory requirement of “due diligence” under the proviso to Order VI Rule 17 was satisfied because the plaintiff was not a party to the prior compromise suit and only discovered it upon obtaining certified copies. The Court emphasized that a liberal approach should be adopted to prevent multiplicity of proceedings, leaving all questions regarding limitation, maintainability, and the applicability of Order XXIII Rule 3A open for the trial court to determine.

  • Nature of the Original Dispute: The litigation originates from C.S. No. 86 of 2009, filed by the original plaintiff (predecessor of the appellants) seeking a declaration of right, title, interest, recovery of possession, and rectification of registered sale deeds concerning a 0.12-acre property.
  • Discovery of Compromise Decree: During the proceedings, upon searching records following written statements filed by defendants, the plaintiff discovered a compromise decree passed in T.S. No. 105 of 1998 to which he was a stranger, affecting a portion of the suit plot.
  • Satisfaction of Due Diligence: The Supreme Court noted that the explanation regarding the date of knowledge and procurement of certified copies on June 22, 2020, adequately fulfilled the due diligence requirement under the proviso to Order VI Rule 17, and the amendment did not fundamentally alter the nature of the suit.
  • Preservation of Legal Defences: While allowing the amendment subject to costs of Rs. 25,000, the Court explicitly clarified that it was not deciding on the merits, limitation, or the bar under Order XXIII Rule 3A of the CPC, leaving all such statutory objections open for the contesting respondents to raise before the trial court.

2026 INSC 1112

Haramani Sahoo and Others v. Lalita Nayak and Others (D.O.J. 12.10.2026)

2026 INSC 1112 click here to view full text of judgment

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Unravelling Non-Signatory Liability: SC Rules on Veritable Parties and the Reach of Arbitration Agreements

October 13, 2026 No Comments

This civil appeal challenged a portion of a High Court order under Section 11 of the Arbitration and Conciliation Act, 1996, which had declined to include the 3rd and 4th respondents in ongoing arbitration proceedings on the ground that they were non-signatories to the original arbitration agreement. The Supreme Court allowed the appeal in part, modifying the High Court’s order to hold that the 3rd and 4th respondents are veritable parties to the dispute on a prima facie view. The Court reasoned that the ownership of the subject commercial asset hinges entirely on whether a disputed 1995 retirement deed is valid, which directly impacts the subsequent partnership deeds under which the 3rd and 4th respondents claim rights. Consequently, non-signatories intimately linked to the subject matter and core commercial obligations cannot be shut out at the threshold, leaving all questions of limitation and estoppel open for the Arbitral Tribunal to decide.

  • The Core Property Dispute: The litigation revolves around a 3,500 sq. ft. commercial property in Worli, Mumbai, originally acquired by a partnership firm governed by a 1985 partnership deed containing an arbitration clause.
  • The Chain of Reconstitutions: Appellants claimed they never retired and that a 1995 retirement deed was forged, whereas subsequent reconstitutions led to the 3rd and 4th respondents being inducted as partners into a later incarnation of the firm.
  • Application of Cox & Kings Principles: Drawing from the Constitution Bench precedent in Cox & Kings Limited, the Supreme Court noted that arbitration law is autonomous, and courts must not adopt an overly rigid approach to exclude non-signatories whose conduct, relationships, and involvement tie them to the underlying contract.
  • Prima Facie Status and Tribunal’s Jurisdiction: While the referral court must enter a prima facie satisfaction that a non-signatory is a veritable party, detailed contentions regarding limitation, estoppel, and whether the non-signatories are ultimately bound must be left for the Arbitral Tribunal to determine.

2026 INSC 1111

Hemant D. Shah HUF & Anr. v. Chittaranjan D. Shah HUF & Ors. (D.O.J. 12.10.2026)

2026 INSC 1111 click here to view full text of judgment

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When E-Payments Meet Paper Rules: SC Quashes Tender Rejection Over “Original” Bid Security Demands

October 13, 2026 No Comments

This civil appeal challenged a Division Bench judgment of the Patna High Court which had affirmed the rejection of the appellant’s technical bid for an Engineering, Procurement, and Construction (EPC) rail link project. The respondent authorities rejected the bid because the appellant failed to submit the “original” of the bid security, as stipulated under Clause 2.20.6(ii) of the Request for Proposal (RFP), despite the appellant having remitted the security via the official e-payment gateway and uploading its digital receipt. The Supreme Court allowed the appeal and set aside the High Court’s order, holding that demanding the physical production of an original receipt for an e-payment—where funds have already directly entered the government’s account—is a legal perversity and an impossibility. The Court ruled that rigid adherence to paper-form rules cannot be used to invalidate an e-payment bid security, and consequently directed that the appellant’s bid be processed.

  • Nature of the Dispute: The appellant’s bid for the Bikramshila-Katareah New Line Rail Link Project was disqualified at the threshold because it did not physically submit an original document for its bid security.
  • The e-Payment Exception: While instruments like Bank Guarantees or Demand Drafts necessitate physical handover to establish a legal lien, the appellant chose the e-payment gateway option, transferring funds directly to the respondents and uploading the digital receipt.
  • Perversity of Rigid Compliance: The Supreme Court observed that insisting on an “original” physical copy for a digital money transfer creates an impossible compliance requirement. The Court noted that this constitutes a clear perversity, falling under the recognized exception to the general rule that courts must defer to an awarder’s tender interpretations.
  • Final Directions: The Supreme Court set aside the lower orders, instructing the respondents to facilitate a re-remittance or renewal of the bid security within a specified timeframe so that the appellant’s financial bid could be opened and evaluated alongside others.

2026 INSC 1110

Hardev Construction Private Limited v. Union of India & Ors. (D.O.J. 12.10.2026)

2026 INSC 1110 click here to view full text of judgment

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