The Delhi High Court has clarified that the interim moratorium under the Insolvency and Bankruptcy Code cannot stay criminal proceedings under Section 138 of the Negotiable Instruments Act, thereby restoring a cheque-dishonour complaint that had been stayed on insolvency grounds.
Background & Facts
The Dispute
The petitioner, Shri Amarjeet Singh, advanced a friendly loan of ₹30,00,000 to the respondent, Shri Hardeep Singh, in June 2015. The parties executed a loan agreement on 06.07.2015. To facilitate repayment, the respondent issued six post-dated cheques of ₹5,00,000 each.
Key Facts
- Two cheques were honoured; the remaining four were presented in July 2018 and were dishonoured with remarks "Insufficient Funds" and "Payment Stopped by Drawer".
- A statutory demand dated 08.08.2018 was issued; the respondent failed to pay within the prescribed period.
- The petitioner filed Complaint Case No. 11995/2018 under Section 138 of the Negotiable Instruments Act, 1881.
- Mediation failed; a notice under Section 251 CrPC was framed against the respondent.
- The parties reached a settlement on 13.03.2020. The respondent paid ₹13,50,000 of the settled amount of ₹20,00,000 but defaulted on the remaining ₹6,50,000 despite successive undertakings before the trial court.
- The petitioner filed an application under Sections 421 and 431 CrPC for recovery of the unpaid settlement amount. The Metropolitan Magistrate, by order dated 21.03.2022, directed the SDM to recover ₹13,00,000 as fine by attachment of movable and immovable properties.
- On 23.09.2022, the respondent again undertook to clear the outstanding amount in instalments.
- The respondent produced orders from the NCLT (26.04.2022) and NCLAT (31.10.2022) invoking an interim moratorium under Section 96 IBC. Relying on the NCLT order, the Metropolitan Magistrate stayed the criminal complaint on 17.11.2022.
Procedural History
- June 2015: Loan request made by respondent.
- 06.07.2015: Loan agreement executed.
- July 2018: Four cheques presented and dishonoured.
- 08.08.2018: Statutory demand issued.
- 2018: Complaint Case No. 11995/2018 filed under Section 138 NI Act.
- 13.03.2020: Settlement reached; partial payment received.
- 21.03.2022: Magistrate ordered recovery of ₹13,00,000 as fine.
- 26.04.2022: NCLT order imposing interim moratorium.
- 31.10.2022: NCLAT order granting liberty to move application under Section 12A IBC.
- 12.07.2022: NCLT order declaring respondent's firm under moratorium.
- 17.11.2022: Metropolitan Magistrate stayed the Section 138 complaint.
- 20.07.2026: Petition filed under Article 227 read with Section 482 CrPC challenging the stay.
- 30.07.2026: Delhi High Court delivered the judgment.
Parties' Positions
- Petitioner: Argues that the stay is illegal because the Supreme Court in Rakesh Bhanot v. Gurdas Agro (P) Ltd. (2025) held that IBC moratorium does not bar criminal prosecution under Section 138 NI Act. Also contends that the stay was passed without hearing.
- Respondent: Relies on the NCLT and NCLAT orders, asserting that the interim moratorium under Section 96 IBC stays all legal actions relating to the debt, including the criminal complaint.
Relief Sought
The petitioner seeks: (1) setting aside the stay order dated 17.11.2022; (2) restoration of the criminal complaint under Section 138 NI Act to the trial court; and (3) disposal of any pending applications.
The Legal Issue
The central question is whether the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 can lawfully stay criminal proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881.
Arguments Presented
For the Petitioner
The petitioner relied on the Supreme Court decision in Rakesh Bhanot v. Gurdas Agro (P) Ltd. (2025) 6 SCC 781, emphasizing paragraphs 25 and 31, which hold that the IBC moratorium does not extend to criminal prosecutions under Section 138. The petitioner also argued that the stay was passed without furnishing the NCLT/NCLAT orders to the complainant and without an opportunity of hearing, violating principles of natural justice.
For the Respondent
The respondent contended that Section 96 IBC expressly stays “any legal action or proceeding pending in respect of any debt,” and therefore the criminal complaint, being in respect of a debt arising from dishonoured cheques, falls within the ambit of the moratorium. The respondent submitted the NCLT and NCLAT orders as proof of the operative moratorium.
The Court's Analysis
The Court began by examining the language of Section 96 IBC, which provides that during the interim-moratorium period “any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed.” The key interpretative issue was whether the phrase “legal action or proceeding” encompasses criminal prosecutions under the Negotiable Instruments Act.
The Court noted that the provision was drafted to protect the debtor’s assets during insolvency and to prevent a race among creditors. It therefore primarily targets civil recovery actions. The Court then turned to the Supreme Court’s pronouncement in Rakesh Bhanot v. Gurdas Agro (P) Ltd. which categorically held that the moratorium “does not extend to criminal prosecution under Section 138 of the Negotiable Instruments Act, 1881.”
"the moratorium contemplated under Sections 96 and 101 of the Insolvency and Bankruptcy Code does not extend to criminal prosecution under Section 138 of the Negotiable Instruments Act,1881 ."
The High Court emphasized that criminal proceedings serve a distinct public-policy purpose: preserving the credibility of negotiable instruments and deterring commercial fraud. This purpose cannot be subordinated to the debtor-relief objectives of the IBC. Consequently, the Court concluded that the stay order was legally untenable.
The Court also observed that the procedural deficiency - failure to provide the petitioner with the NCLT/NCLAT orders and an opportunity to be heard - though present, was rendered moot by the substantive error in applying the moratorium to a criminal matter.
The Verdict
The Delhi High Court set aside the stay order dated 17.11.2022, restored the criminal complaint under Section 138 of the Negotiable Instruments Act, 1881 to the trial court, and disposed of any pending applications. No monetary award or specific time-bound directive was issued; the matter is to proceed in accordance with law.
What This Means For Similar Cases
Criminal Prosecution Remains Viable
Practitioners must recognise that invoking an IBC moratorium cannot be used to halt criminal actions under Section 138. Creditors should continue to pursue criminal complaints irrespective of insolvency proceedings.
Distinguish Civil Debt Recovery from Criminal Liability
- Civil recovery actions may be stayed under Section 96 IBC; criminal prosecutions cannot.
- Counsel should file separate civil suits for debt recovery while maintaining the criminal complaint.
Procedural Vigilance Required
- Ensure that any stay application is supported by a clear distinction between civil and criminal proceedings.
- Provide the opposite party with all documents and an opportunity of hearing before seeking a stay, to avoid procedural infirmities.
