Summary: This blog analyses a recent BHC judgment that delineates the contours of the interim moratorium under Section 96 of the IBC vis-à-vis the initiation/ continuation of a prosecution under Sections 138 read with 141 of the NI Act against the directors of a company.
Introduction
The moratorium under Part III of the Insolvency and Bankruptcy Code, 2016 (“IBC”), aims to provide temporary relief to an individual guarantor by staying proceedings that could deplete their assets. However, certain forms of liabilities are not protected even though these might also deplete the guarantor’s monies or assets.
The natural consequence of Proceedings under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”), result in criminal liability in the form of either imprisonment or fine or both.
In Jagmohan Garg v. National Spot Exchange Ltd. & Anr.[1] (“Jagmohan Garg”), the Bombay High Court (“BHC”) held that a moratorium under Sections 96 and 101 of the IBC does not bar the initiation or continuation of a prosecution under Sections 138 read with 141 of the NI Act against the directors of a corporate debtor. Comparing the wordings of Section 14 (corporate moratorium) with Sections 96 and 101 of the IBC (moratorium against individual guarantors), the BHC reasoned that the underlying debt of a company-issued cheque remains that of the company and does not convert into the directors’ personal debt merely because they face liability under Section 141 of the NI Act. It also clarified that this position holds, regardless of whether the proceeding was initiated by the debtor under Section 94 or by a creditor under Section 95 of the IBC.
The contours of the interim moratorium under Section 96 of the IBC was discussed in a separate CAM blog here.
Brief facts
National Spot Exchange Ltd. (“NSEL”) filed a complaint (“Complaint”) against a private limited company (“Company”) and its directors, including Mr. Jagmohan Garg (“Mr. Garg”), under Sections 138 read with 141 of the NI Act. The Company was liable to pay certain sums under a settlement award passed under Section 73 of the Arbitration and Conciliation Act, 1996. However, the Company-issued cheque for INR 30 crore, signed by Mr. Garg and another director, towards part discharge of its liability was dishonoured due to insufficiency of funds.
During the pendency of the Complaint, Mr. Garg initiated his own personal insolvency resolution process (“PIRP”) under Section 94 of the IBC and applied to the Magistrate to stay the Complaint, contending that the interim moratorium under Section 96 of the IBC had come into effect. The Magistrate rejected this application, holding that the expression “in respect of any debt” in Section 96 would not govern Mr. Garg’s vicarious liability under the Complaint.
Issue before the BHC
The principal issue before the BHC was whether the interim moratorium under Section 96 of the IBC would apply to the initiation/ continuation of prosecutions under Sections 138 and 141 of the NI Act (“NI Act Prosecutions”) against persons vicariously liable for an offence committed by a company.
Submissions before the BHC basis existing judicial precedents
The petitioners argued that NI Act Prosecutions, though criminal in form, are primarily intended for debt enforcement or discharge of a liability. Therefore, their continuation during the moratorium was impermissible.
Relying on the Supreme Court (“SC”) judgments in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd.[2] (“Ajay Kumar”) and Rakesh Bhanot v. Gurdas Agro (P) Ltd.[3] (“Rakesh Bhanot”), NSEL contended that Section 96 of the IBC governs the case of personal debt and not the debt of the corporate entity.
In Ajay Kumar, the SC had held that considering the IBC and NI Act proceedings are distinct and do not intercede each other, extinguishment of a debt under the IBC does not automatically extinguish the personal criminal liability of the director who signed the dishonoured cheque.
In Rakesh Bhanot, the SC had held that the interim moratorium under Section 96 of the IBC protects only against civil claims for debt recovery and not criminal prosecutions under the NI Act, construing the words “in respect of any debt” in Section 96(1)(b) to mean legal action/ proceedings relating to debt recovery. Addressing the reason for the difference in language between Section 14 of the IBC and Sections 96 and 101, in SBI v. V. Ramakrishnan[4] (“Ramakrishnan”),the SC had held that the Sections 96 and 101 provide wider protection than Section 14, in that pending legal proceedings in respect of the debt, and not the debtor are stayed.
The petitioners relied on the ratio of Ramakrishnan to argue that the wider sweep of Section 96 must cover NI Act Prosecutions against directors, considering these are all legal proceedings “in respect of” a debt. Against this, Rakesh Bhanot construed the same phrase narrowly, to hold that it only applies to actions relating to debt recovery and does not extend to penal prosecutions.
Analysis by the BHC
The BHC read Sections 94, 95, and 96 of the IBC together and held that the “debt” referred to in Section 96 of the IBC is necessarily the debt of the person undergoing insolvency resolution. Thus, it clarified that “any debt” under Sections 96 and 101 of the IBC means the debtor’s own debt, and not any debt merely connected to the debtor.
The BHC based its reasoning on the settled legal principle that shareholders and directors are not the owners of the company’s property and that the company has an independent juristic existence. When a corporate entity incurs a debt, that debt remains the company’s debt and does not become its directors’ debt.
In the context of the NI Act, where a company draws a cheque towards discharge of its liability, the liability is its own. While the directors are liable to be prosecuted under the deeming provision in Section 141 of the NI Act, it does not alter the character of the underlying debt.
The BHC relied on Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth[5] (“Saranga Aggarwal”), where the SC had held that the Section 96 moratorium does not extend to regulatory penalties imposed under the Consumer Protection Act, 1986, as all liabilities arising from court-imposed fines/ penalties/ damages are “excluded debts” under Section 79(15) of the Code and remain unaffected by commencement of PIRP.
The BHC also relied on Dineshchand Surana v. UCO Bank[6](“Dineshchand Surana”), where the SC, following Saranga Aggarwal, had balanced the objectives of the IBC and the NI Act and held that the moratorium under Sections 96 and 101 of the IBC would apply only to the compensatory aspect (i.e., a discretionary function of the trial court to order compensation of the complete cheque amount with or without interest and other expenses) and not the criminal aspect (i.e., imprisonment or fine or both) of NI Act Prosecutions. It also referred to a three-judge bench of the SC for an authoritative pronouncement (“Reference”) on the broader questions of (1) whether the essential character of Section 138 is quasi-criminal in nature with a tilt towards the criminal side and (2) whether the moratorium under Sections 96 and 101 of the IBC would be applicable to the entirety of NI Act Prosecutions (i.e., the criminal and compensatory aspects) or only their compensatory aspects.
Consistency with the Insolvency and Bankruptcy (Amendment) Act, 2026 (“IBC Amendment”)
Section 96(4) of the IBC, introduced through the IBC Amendment, clarifies that the interim moratorium will not apply where a PIRP application is filed by a personal guarantor to a corporate debtor, presumably to curb misuse of the interim moratorium as a tool to obstruct legitimate recovery.
Conclusion
Jagmohan Garg reaffirms that directors cannot use the interim moratorium under Section 96 of the IBC to stall NI Act Prosecutions. The BHC’s interpretation of “debt” to extend only to the debt of the individual undergoing PIRP limits the possibility of misuse of moratorium provisions for stalling NI Act Prosecutions instituted for the debts of corporate entities.
By holding that the moratorium under Sections 96 and 101 are applicable only to debts of the individual undergoing insolvency, the BHC has ensured that the moratorium against personal guarantors does not reach a corporate debtor’s debt, thereby furthering the broader objective of the IBC Amendment.
Until the outcome of the Reference,[7] Dineshchand Surana and Jagmohan Garg continue to hold field and remain good law. It is hoped that the SC’s decision will provide greater clarity and help balance the larger objectives of the IBC while protecting the rights of individuals and creditors.
[1] Judgment dated August 18, 2026, in a batch of petitions inter alia including Criminal Writ Petition No. 1749/2024. A special leave petition bearing diary no. 56765/2026 has been filed against the Jagmohan Garg judgment before the SC, however, no order has been passed yet.
[2] (2023) 10 SCC 545
[3] (2025) 6 SCC 781
[4] (2018) 17 SCC 394
[6] 2026 SCC Online SC 987
[7] A three-judge bench of the SC is slated to hear the matter on November 19, 2026
Recent Comments