The Supreme Court has sought an official ruling by a larger bench on the interplay between insolvency moratorium provisions and check bounce suits, asking the Chief Justice of India to question whether proceedings under Section 138 of the Negotiable Instruments (NI) Act can continue against business entities undergoing insolvency resolution.
A bench of Justices JB Pardiwala and KV Vishwanathan on Wednesday said the issue raises important questions related to the nature of check dishonor proceedings and the scope of moratorium under the Insolvency and Bankruptcy Code (IBC), which needs to be considered by a larger bench.
Referring the matter to CJI Surya Kant for formation of an appropriate three-judge bench, the court framed two important questions for official determination.
The first question is whether the proceedings under section 138 of the NI Act are quasi-criminal with predominant criminal character despite arising from a civil debt dispute.
The second is whether the stay provisions under Part III of the IBC should operate to stop the entire proceedings under Section 138 or only the compensatory and recovery-related aspects of such prosecutions.
The bench said that while cases of check dishonor arise in civil disputes relating to repayment of legally enforceable debt, Parliament has deliberately added criminal consequences for dishonor of checks to maintain public confidence in commercial transactions.
“Though Section 138 of the NI Act is based on a civil dispute regarding repayment of loan, yet, it cannot be equated to a civil proceeding for recovery of money. The fictitious narrative makes it sufficiently clear that the provision is punitive and makes the act of dishonoring a check a criminal offence,” the bench said.
Tracing the legislative history behind the inclusion of sections 138 to 142 in the NI Act through the 1988 amendment, the judgment said that the objective was to “enhance the acceptability of checks in settlement of liabilities” by imposing penalties for check dishonor.
The court underlined that the offense under Section 138 is not only non-payment of loan but also dishonor of cheque. It says, “The legislature has made the dishonor of the manner of payment, i.e., dishonor of a cheque, an offence, and not the failure to pay the amount of the cheque.”
The judgment further clarified that the offense would be deemed to have been committed the moment the check is dishonored and returned unpaid by the bank, although prosecution could proceed only after meeting statutory requirements such as issuance of notice and failure to make payment within 15 days.
According to the bench, while retaining the punitive character of the provision, these safeguards were introduced to protect genuine depositors who may face temporary financial difficulties.
The court described check dishonor as a comparatively “minor offense” that primarily affected private parties rather than society at large, pointing out that the law itself allows criminal consequences to be avoided if payment is made after notice.
The context is important because insolvency proceedings under the IBC impose a statutory bar on legal actions against debtors, leading to frequent disputes over whether cheque-bounce suits can continue during such a period.
The larger bench is now expected to decide whether the moratorium ends or suspends the penal consequences arising from check dishonor proceedings against insolvent entities.