Supreme Court Refers Cheque‑Bounce (S.138 NI Act) Moratorium Issue to Larger Bench – Impact on IBC and Directors' Liability

Overview The Supreme Court has sent a pivotal question to a larger three‑judge bench. The question is whether proceedings under Section 138 NI Act can be stayed during the moratorium that operates under IBC . The Court emphasised that the offence is primarily criminal, not a simple debt‑recovery suit. Key Developments The bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan rejected the view that cheque‑bounce cases are merely civil. It introduced a “ tiered ” approach: Tier I covers imprisonment or fine; Tier II covers compensation to the complainant. Section 79(15) of the IBC expressly excludes payment of fines from the moratorium, so the criminal side cannot be stayed. The compensatory side (Tier II) may fall under the moratorium because it can deplete the insolvent debtor’s assets. Directors prosecuted under Section 141 NI Act will enjoy moratorium protection for the compensation component while they are in personal insolvency under Part III of the IBC . Important Facts The dispute originated from a cheque of over ₹5 crore issued by the appellant to UCO Bank under a Letter of Credit. The cheque bounced in June 2015, leading to a criminal case in a Chennai Magistrate Court. While the company entered liquidation, the appellant also faced personal insolvency proceedings. The Madras High Court held that the cheque‑bounce case is criminal and not barred by the insolvency moratorium, prompting the appeal to the Supreme Court. The Court noted that earlier decisions (e.g., Ajay Kumar Radheshyam Goenka v. Tourism Finance Corp. 2023 and P. Mohanraj v. Shah Bros. Ispat 2021) clarified director liability under Section 141, but did not resolve whether the moratorium shields directors from compensatory orders. UPSC Relevance Understanding the interplay between the NI Act and the IBC is essential for GS‑3 (Economy) and GS‑2 (Polity) topics. The case illustrates: How criminal law intersects with insolvency law. The concept of a statutory moratorium and its limits. Director liability under corporate law, relevant to questions on corporate governance. Way Forward The larger bench will decide two crucial questions: (i) whether Section 138 NI Act is quasi‑criminal with a tilt towards criminality, and (ii) whether the IBC moratorium applies to the entire Section 138 proceeding or only to the compensatory component. The outcome will shape future litigation on cheque‑bounce prosecutions during insolvency and clarify the protection available to directors under personal insolvency.