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Relevance: GS Paper II — Polity & Judiciary; GS Paper III — Economy Source: Indian Express, 2026

Supreme Court Refers IBC vs Cheque Bounce Conflict to Larger Bench

1 · What happened

On May 29, a Supreme Court division bench of Justices J. B. Pardiwala and K. V. Viswanathan referred a key question to a larger bench: can a personal insolvency proceeding under the IBC freeze a criminal cheque bounce case under Section 138 of the Negotiable Instruments (NI) Act?

The bench wanted a clear distinction between the criminal and compensatory aspects of cheque bounce litigation and warned that the IBC must not become an escape route from personal criminal liability. The matter has been placed before the Chief Justice of India to constitute the larger bench.

2 · The Statutory Clash

Two central statutes pull in opposite directions. The IBC’s moratorium says: pause everything. Section 138 of NI Act says: a bounced cheque is a crime. Does the pause cover the crime as well?

IBC Side
The Moratorium
A statutory pause on all debt-recovery actions once insolvency begins — designed to preserve the debtor’s assets for orderly distribution among all creditors.
NI Act Side
Section 138 — Dual Character
Punishment (jail / fine for dishonouring a cheque due to insufficient funds) + restitution (court-ordered compensation; parallel civil suits permitted).
The Twin Risk
Shield vs Skip-the-Queue
Full stay → IBC becomes a shield for wilful defaulters. No stay → individual creditors skip the Waterfall queue and disrupt equitable distribution.
Likely Way Forward
Split the Two Aspects
Let the criminal trial proceed for accountability, but stay execution of any compensation order until the insolvency process concludes.

  • P. Mohanraj v. Shah Bros Ispat (2021): Three-judge bench called Section 138 a “civil sheep in criminal wolf’s clothing” — held the moratorium blocks Section 138 trials.
  • Rakesh Bhanot v. Gurdas Agro (2025): Two-judge bench held the moratorium covers civil debts only — criminal prosecution cannot be stalled.
  • Pendency angle: Section 138 cases form roughly 10–15% of pending magisterial cases; a settled rule will unclog trial courts.

UPSC Value Box
IBC, 2016 The Insolvency and Bankruptcy Code; consolidates the laws governing insolvency of individuals, partnership firms, and corporates into one framework.
Dineshchand Surana v. UCO Bank The 2026 case in which the question of moratorium vs Section 138 has been referred to a larger bench.
IBBI Insolvency and Bankruptcy Board of India — the regulator overseeing insolvency professionals, agencies, and information utilities.
NCLT National Company Law Tribunal — adjudicating authority for corporate insolvency under the IBC.
DRT Debt Recovery Tribunal — adjudicating authority for insolvency of individuals and partnership firms under the IBC.
Waterfall Mechanism (Section 53, IBC) The strict order of priority for distributing proceeds from liquidation — secured creditors and workmen first, then unsecured creditors, government dues, and operational creditors.
Compoundable Offence An offence that can be lawfully settled between complainant and accused — Section 138 is compoundable.
Doctrine of Harmonious Construction Rule of statutory interpretation: when two central laws conflict, courts must read them together so that both are given effect, where possible.

MCQ Practice Question
Q. With reference to the Insolvency and Bankruptcy Code (IBC), 2016, consider the following statements:

  1. In P. Mohanraj v. Shah Bros Ispat (2021), the Supreme Court held that the IBC moratorium does not stall proceedings under Section 138 of the Negotiable Instruments Act.
  2. The Insolvency and Bankruptcy Board of India (IBBI) is the statutory regulator overseeing insolvency professionals and information utilities.
  3. Section 53 of the IBC lays down the “Waterfall Mechanism” governing the priority order for distribution of liquidation proceeds.

Which of the statements given above is/are correct?
(a) 1 and 2 only    (b) 2 and 3 only    (c) 1 and 3 only    (d) 1, 2 and 3

Answer: (b) 2 and 3 only

  • Statement 1 — Incorrect: Reversed. The P. Mohanraj three-judge bench held the opposite — that the IBC moratorium does stall Section 138 proceedings, calling them a “civil sheep in criminal wolf’s clothing”. The 2025 Rakesh Bhanot ruling took the contrary view — but that is a separate, two-judge decision.
  • Statement 2 — Correct: IBBI is the regulator under the IBC; it oversees insolvency professionals, insolvency professional agencies, and information utilities.
  • Statement 3 — Correct: Section 53 sets the priority order — the “waterfall” — for distributing liquidation proceeds.

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