Insolvency and Section 138: The IBC Moratorium

When a company that issued dishonoured cheques enters insolvency, two regimes collide. The Insolvency and Bankruptcy Code, 2016 imposes a moratorium that freezes proceedings against the debtor so that its assets can be dealt with collectively. Section 138 prosecutions, though criminal in form, are largely about recovering money. Are they frozen too? And what of the directors? The Supreme Court has answered these questions in a series of decisions from 2021 to 2026.

1. The Moratorium

Section 14, IBC: on admission of a corporate insolvency application, the adjudicating authority declares a moratorium prohibiting, among other things, "the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law".
Personal insolvency (Part III): Sections 96 and 101 provide interim and full moratoria in insolvency proceedings against individuals, including personal guarantors, staying legal actions in respect of their debts.
Section 32A, IBC (2020): once a resolution plan is approved and control passes to new persons, the corporate debtor's liability for offences committed before the insolvency process ceases; but persons who were in charge remain liable.

2. Section 138 Against the Corporate Debtor

📖 P. Mohanraj v. Shah Brothers Ispat (Supreme Court, 2021)

Held: A Section 138 proceeding is, in substance, a "civil sheep in a criminal wolf's clothing": its object is largely compensatory. Such a proceeding is therefore a "proceeding" covered by the Section 14 moratorium, and cannot be initiated or continued against the corporate debtor during the moratorium. But the moratorium protects only the corporate debtor; natural persons liable under Section 141, such as directors and signatories, may still be proceeded against.

3. Directors After the Resolution Process

📖 Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India (Supreme Court, 2023)

Held: The approval of a resolution plan for the company, and its discharge, do not extinguish the liability of its directors and signatories under Sections 138 and 141. The complainant may continue the prosecution against them; Section 32A protects the company, not the individuals.

4. Cause of Action Arising After the Moratorium

📖 Vishnoo Mittal v. Shakti Trading Company (Supreme Court, 2025)

Held: The cause of action under Section 138 arises on the expiry of 15 days after the demand notice, not on dishonour. Where that date fell after the commencement of the insolvency process and the appointment of an interim resolution professional, the former director had lost control of the company's affairs and bank accounts and could not have made the payment. The complaint against him was quashed.

5. Personal Insolvency: The Open Question

In Dineshchand Surana v. UCO Bank (Supreme Court, May 2026), a two-judge Bench considered whether the Part III moratorium in personal insolvency protects an individual against Section 138 proceedings. It suggested that a Section 138 proceeding has two tiers: a criminal tier of punishment, which a moratorium should not shield, and a compensatory tier, which may be stayed because it affects the debtor's assets. Noting that P. Mohanraj may have under-emphasised the deterrent, criminal character of Section 138, it referred the questions to a larger Bench. Until that Bench decides, the position for individual debtors remains unsettled.

6. Practical Position

Corporate debtor in CIRP: no Section 138 proceeding can be begun or continued against the company during the moratorium.
Directors and signatories: prosecution may continue, subject to showing their role under Section 141 (Topic 46).
Post-moratorium cause of action: ex-directors who had lost control of the company cannot be prosecuted (Vishnoo Mittal).

⚠ Key point

Section 138 proceedings against a corporate debtor are barred during the Section 14 IBC moratorium, because they are largely compensatory (P. Mohanraj, 2021), but directors and signatories may still be prosecuted, and their liability survives a resolution plan (Ajay Kumar Radheyshyam Goenka, 2023; Section 32A protects only the company). Where the cause of action arose after the insolvency process began and the director had lost control, he cannot be prosecuted (Vishnoo Mittal, 2025). Whether the personal insolvency moratorium covers Section 138 proceedings, wholly or only their compensatory part, has been referred to a larger Bench (Dineshchand Surana, 2026).

7. Related Topics and Provisions

Origin and nature of the offence (Topic 41)
Companies and directors (Topic 46)
Landmark judgments (Topic 60)