On 01.04.2025, the Supreme Court rendered its judgment in a batch of cases [decision reported as Rakesh Bhanot v. M/s Gurdas Agro Pvt. Ltd., 2025 INSC 445 ("Rakesh Bhanot")]. The common issue across the cases concerned the interplay between cheque bounce cases under the Negotiable Instruments Act 1881 [NI Act] and the Insolvency and Bankruptcy Code 2016 [IBC] provisions on moratoriums pending the resolution of the insolvency process for persons and firms.
The problems begin with how the issue is framed at paragraph 4 of the judgment:
"The common legal question that arises for consideration herein is, whether the proceedings initiated against the appellants / petitioners under Section 138 read with Section 141 of the N.I. Act, 1881 should be stayed in view of the interim moratorium under Section 96 IBC having come into effect upon the appellants / petitioners' filing applications under Section 94 IBC. In view of the commonality of issues involved in all the cases, we need not necessarily review the facts of each case individually"
If we read this paragraph without an inkling of the facts, it is reasonable to think that Rakesh Bhanot dealt with general applicability of the moratoriums for persons and firms under Sections 96 / 101 IBC to proceedings for cheque bounce cases. This impression, however, is entirely wrong. Rakesh Bhanot was dealing with a specific and niche issue that the petitions presented. It was not at all a question of deciding the general applicability of the IBC moratorium clauses for personal insolvency to cheque bounce cases. Rather, I would frame the issue as follows:
Company X is arraigned in a cheque bounce case under Section 138 NI Act, and Y is arraigned in his capacity as its director. Company X moves insolvency proceedings for corporate debtors under IBC, and separately, Director Y moves personal insolvency proceedings in his capacity as a personal guarantor of the company. Can Director Y use the interim moratorium triggered by his filing an application of personal insolvency, to stall proceedings of the cheque bounce case filed against Company X and him?
This issue is an offshoot of the Supreme Court's earlier decision in P. Mohanraj [(2021) 6 SCC 258 (Three Justices' Bench)] where it had to decide whether a cheque bounce filed against a company would be hit by the IBC moratorium provisions. P. Mohanraj held that the moratorium provisions for corporations covered cheque bounce cases. The key element of the Court's reasoning was that a cheque bounce case is, essentially, a proceeding for recovering debts owed to a person. Even though it may potentially involve a jail sentence, cheque bounce cases could be seen as 'quasi-criminal' at best.
Crucially, though, the Court specifically held that the moratorium would not apply to the persons arrayed in their capacity as directors / officers of the corporate debtor itself. In other words, while proceedings in cheque bounce cases against a company undergoing insolvency would be halted against the company during the insolvency process, they could continue against its directors. The findings on this aspect in P. Mohanraj are, unreasoned, to say the least. Nevertheless, they have not been challenged. Instead, it would seem that litigants across the country devised a new approach to try and use IBC moratorium clauses to stall cheque bounce cases in which they were arraigned as directors of companies.
This approach was to file for personal insolvency under Section 96 IBC which has a separate moratorium process. A look at the clause makes it clear that this route could not be availed so simply. Section 96 IBC halts any pending proceedings in respect of a debt of the person filing for insolvency. In a cheque bounce case against the company, the 'debt' would be that of the company which issued the cheque, and not the director. The liability of the director is purely vicarious, flowing from his position in the company as an officer responsible for the company's affairs.
This is where the guarantor arrangement is relevant. Section 126 and Section 128 of the Indian Contract Act 1872 when read together explain that the liability of a surety (the person giving the guarantee) is coextensive with that of the principal debtor (here, the company). So in situations where a director stands as a guarantor for debts of the company that the company pays by way of a cheque which is dishonoured, one cannot separate the debt in respect of which a cheque is issued as being that of the company alone, and it must be seen as also being a debt of the director who stands as guarantor in the contract. If the debt is equally that of the guarantor, then it would bring us back within the fold of Section 96 IBC, and the moratorium would have to apply.
How has Rakesh Bhanot resolved the issue? Deeply unsatisfactorily, to say the least. The Court notes at Paragraph 10.1 that the moratorium under Section 14 IBC for corporate debtors "is not available to the surety or in other words, to a personal guarantor" but that is merely stating the obvious since none of the pleas invoked Section 14 to begin with but invoked Section 96 IBC to make their case. On that score, the Court notes in the same paragraph that "[T]he use of the words 'all the debts' and 'in respect of any debt' in sub-section (1) of Section 96 is not without a purpose, as the moratorium is intended to offer protection only against civil claim to recover the debt. Hence, such period of moratorium prescribed under Section 14 or Section 96 is restricted in its applicability only to protection against civil claims which are directed towards recovery and not from criminal action." Through Paragraphs 10 to 13 the Court hammers down this nail of its reasoning, emphasising that a cheque bounce case is not a civil claim for debt recovery but a criminal case, and notes the deterrent effect of this criminal case in Paragraph 17 to hold that a person should not be allowed to evade liability by using IBC moratorium clauses.
In other words, rather than explain to us whether the debt in question could be that of the surety to extend Section 96 IBC to cheque bounce cases against the director, or offer any argument of public policy that militates against extension of Section 96 IBC, what the Court in Rakesh Bhanot has held is that Section 96 IBC cannot be applied to cheque bounce cases at all. This finding is directly contrary to the judgment of a larger strength in P. Mohanraj which held that moratoriums under both Section 14 and Section 96 IBC would extend to cheque bounce cases because they were "'civil sheep' in a 'criminal wolf's' clothing". In fact, P. Mohanraj observed that the language of Section 96 IBC covered cheque bounce cases against persons / firms, and its used this as the starting point for its conclusions that the Section 14 IBC moratorium for companies also covers cheque bounce cases.
None of these observations in P. Mohanraj are dealt with or mentioned by the bench in Rakesh Bhanot through paragraphs 10-13. The 2021 decision is only referred to is in paragraph 14 by citing the extract from P. Mohanraj that denies extension of Section 14 IBC moratorium to the directors of a company in cheque bounce cases, which has been followed by subsequent cases. Again, extending Section 14 IBC to directors was not the issue. It was only the starting point for understanding the issue, which concerned the impact of the coextensive nature of debts under guarantee contracts on the moratorium provisions of the IBC. This issue has not been touched, let alone discussed, in Rakesh Bhanot.
Given how difficult it is to seek a review of a verdict, one wonders whether this spells the end for what is an interesting legal issue that could benefit explanations through a reasoned judgment. Even so, this entire branch of litigation appears to be the result of loopholes in the IBC regime on moratoriums in personal insolvency cases. Section 96 IBC triggers an 'interim moratorium' upon the filing of an insolvency plea, and this interim moratorium remains in force till the application is 'admitted' by the authority. Compare Section 96 IBC and its 'interim moratorium' with the actual 'moratorium' governed by Section 101 IBC post admission of the plea, and you can see the loophole. Where Section 101 limits a moratorium to 180 days after the application is admitted, there is no time limit to how long interim moratoriums can subsist, because there is no time limit to how long it can take for the application to be 'admitted'. Since the interim moratorium remains in force till the application is admitted, enterprising litigants will naturally try and delay things at this stage itself. This is a problem with Section 96 / 101 IBC which the legislature really ought to address, which might clean up a lot of issues in pending litigations.
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