Can the IBC Moratorium Halt a Section 138 Cheque Bounce Case? Supreme Court Refers the Question to a Larger Bench

Can a person facing insolvency proceedings use the statutory moratorium under the Insolvency and Bankruptcy Code, 2016 (IBC) to pause a cheque bounce prosecution under Section 138 of the Negotiable Instruments Act, 1881? On 27 May 2026, the Supreme Court flagged a genuine conflict in its own precedents on this question and referred the matter to a larger bench in Dineshchand Surana v UCO Bank. For anyone navigating both a loan default and a cheque case at the same time, the interplay is consequential, and our guide on how to file a cheque bounce case in India under Section 138 sets out the underlying procedure.

What the Supreme Court Decided

A division bench of Justice J.B. Pardiwala and Justice K.V. Vishwanathan did not finally decide the question before it. Instead, it held that the legal position required authoritative settlement by a larger bench and referred the matter to the Chief Justice of India for the constitution of a three-judge bench. The Court noted an apparent tension between earlier decisions on whether, and to what extent, an insolvency moratorium affects a criminal complaint for the dishonour of a cheque.

A reference of this kind does not change the law immediately. It signals that the existing precedents pull in different directions and that a definitive answer must await the larger bench. Until then, trial courts and High Courts may continue to apply the precedent each considers most apposite, which is precisely the uncertainty the reference is meant to resolve.

The Legal Question

A cheque bounce case under Section 138 is quasi-criminal in nature. It is triggered when a cheque is dishonoured for insufficiency of funds and the drawer fails to pay the cheque amount within fifteen days of receiving a statutory demand notice. The IBC, by contrast, imposes a moratorium that bars the institution or continuation of certain proceedings against a debtor once the insolvency process begins, in order to give the debtor breathing space.

The conflict is whether this moratorium extends to a Section 138 prosecution, which is aimed at penalising the conduct of the drawer rather than simply recovering a debt. If a cheque case is essentially a recovery mechanism, the moratorium might apply. If it is essentially a punitive proceeding for an offence, it might not. The characterisation of the proceeding therefore drives the result.

Background: Surana v UCO Bank

The appellant was the former managing director of a company that had availed credit and letter of credit facilities from UCO Bank. When the underlying liability devolved on the company, a cheque presented by the bank was returned dishonoured for insufficiency of funds, and the bank initiated a complaint under Section 138 before a metropolitan magistrate in Chennai after the statutory notice period expired. The appellant then sought protection on the basis of insolvency proceedings, raising the moratorium question that the Court has now referred to a larger bench.

The Precedent and the Conflict

In its earlier ruling in P. Mohanraj, the Supreme Court had held that the moratorium under Section 14 of the IBC, which applies to corporate insolvency, covers Section 138 proceedings against the corporate debtor for the duration of the moratorium. The present reference questions how that reasoning should apply to the moratorium provisions for personal insolvency under Part III of the Code, and whether natural persons such as directors and guarantors can claim the same protection in their individual capacity.

Because the Court perceived a conflict on this point, it declined to decide it on its own and referred it upward. Borrowers and lenders dealing with distressed accounts may also wish to read about the IBC Amendment Act 2026 and recent developments such as the NCLT admitting SBI's personal insolvency plea against Anil Ambani, both of which illustrate how personal insolvency is increasingly being invoked.

What This Means for Borrowers and Creditors

Until the larger bench decides, parties should expect uncertainty wherever a cheque case overlaps with insolvency. Creditors should not assume that the commencement of insolvency automatically shields a guarantor from a cheque prosecution, and debtors should not assume that a moratorium will necessarily halt every related criminal complaint. The safest course is to obtain fact-specific advice, because the outcome may turn on the precise stage of the insolvency process and the capacity in which the accused is proceeded against.

Related Reading

If your dispute is with a bank rather than a borrower, see our guide on how to file a complaint with the RBI Banking Ombudsman.

For other money recovery situations, read how to recover money sent to a wrong UPI ID or bank account and how to find and claim unclaimed bank deposits in India.

Key Takeaways

The Supreme Court has referred to a larger bench the question of whether an IBC moratorium can halt a Section 138 cheque bounce case. The earlier P. Mohanraj decision applied the corporate moratorium under Section 14 to such cases, but its application to personal insolvency under Part III of the Code remains open. Until the reference is decided, outcomes may vary across courts, so parties facing both insolvency and cheque proceedings should seek case-specific legal advice rather than assume a fixed result.