The Bombay High Court dismissed a slew of applications seeking to invoke the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016, to stay criminal prosecutions under Section 138 of the Negotiable Instruments Act against directors of National Spot Exchange Ltd. The judgment clarifies the limited reach of the moratorium, distinguishing corporate debtors from natural persons.
Background & Facts
The Dispute
The core dispute centres on whether the moratorium provisions of Section 96 of the IBC, 2016 can be extended to stay a criminal complaint under Section 138 read with Section 141 of the NI Act, 1881 filed by National Spot Exchange Ltd. (NSEL) against directors of its trading member, M/s Mohan India Private Limited (A1).
Key Facts
- 30 Oct 2013: A1 and its sister concerns entered into a Settlement Agreement under the Arbitration and Conciliation Act, 1996, obligating A1 to pay Rs. 771 crores in 13 installments.
- 28 Feb 2014: A1 issued a cheque of Rs. 30 crores (drawn on Axis Bank, New Delhi) signed by directors A2 and A3 to discharge part of the settlement liability.
- 28 Feb 2014: The cheque was returned un-encashed with remarks “funds insufficient” and “account frozen” (Bank Memo).
- 10 Mar 2014: NSEL served a demand notice; A2 and A3 defaulted on payment of the cheque amount.
- 10 Mar 2014: NSEL lodged a criminal complaint under Section 138 read with Section 141 of the NI Act against A2 and A3, alleging dishonour of the cheque.
- 13 May 2024: A2 filed an application under Section 94 of the IBC before the NCLT, Delhi, seeking initiation of the corporate insolvency resolution process (IRP).
- Various dates 2024-2025: Multiple writ petitions and applications (WP-2228/2025, WP-2229/2025, WP-6264/2024, etc.) were filed seeking a stay of the criminal proceedings on the ground of the IBC moratorium.
- 23 Jul 2026: The matter was listed for hearing; the bench was N. J. Jamadar, J.
- 18 Aug 2026: Judgment pronounced, dismissing all applications and vacating interim orders.
Procedural History
- 13 May 2024: A2’s application under Section 94 IBC filed before NCLT, Delhi.
- Subsequent 2024-2025: A2 and other directors filed numerous applications (Application No. 1749/2024, 1690/2024, 1694/2024, 1743/2024, 1742/2024, 1745/2024, 1750/2024, 1744/2024, 1748/2024, 1746/2024, 1756/2024, 1757/2024, 1758/2024, 1754/2024, 1838/2024, 1839/2024, 1840/2024, 1841/2024, 1885/2024, 1883/2024, 1886/2024, 1882/2024, 501/2024) seeking a stay of the Section 138 prosecution on the basis of the interim moratorium.
- 2024-2025: Writ petitions WP-2228/2025 and WP-2229/2025 filed by Prashant Boorugu; WP-6264/2024 filed by Lotus Refineries Pvt. Ltd.; each sought similar relief.
- Various lower courts: Learned Magistrates rejected the stay applications, holding that the moratorium applies only to the corporate debtor, not to natural persons.
- 23 Jul 2026: Applications and petitions were heard together as a representative case (Application No. 1749/2024).
- 18 Aug 2026: The High Court delivered the judgment.
Parties' Positions
- Applicants/Petitioners (directors A2, A3 and other related applicants) argued that the moratorium under Section 96 IBC, once triggered by the filing of an IRP, automatically stays any legal action “in respect of any debt”, which should include the criminal prosecution under Section 138 NI Act. They relied on Supreme Court decisions in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., Ajay Kumar Goenka v. Tourism Finance Corp., and Rakesh Bhanot v. Gurdas Agro Pvt. Ltd. to contend that the quasi-civil nature of Section 138 warrants its inclusion within the moratorium.
- Respondent (NSEL) contended that Section 96 is limited to civil actions concerning the corporate debtor and does not extend to penal proceedings against natural persons. It emphasized the vicarious liability under Section 141 NI Act and cited Supreme Court holdings in Rakesh Bhanot and Ajay Kumar Goenka that the moratorium does not bar criminal prosecutions.
The Legal Issue
Is the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 applicable to stay a criminal prosecution under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 against directors of a corporate debtor?
Arguments Presented
For the Applicants/Petitioners
- The moratorium language “any legal action or proceeding … in respect of any debt” is broad and, per P. Mohanraj, includes Section 138 proceedings because they are “in respect of a debt”.
- Section 138 is a quasi-civil proceeding aimed at recovery; therefore, the moratorium’s protective purpose should cover it.
- Citing Sheetal Gupta v. NSEL and Dilip B. Jiwrajka to argue an expansive interpretation of “debt” under the IBC.
For the Respondent
- Section 96 is expressly confined to civil actions; criminal prosecutions retain their penal character and are excluded by legislative intent.
- Supreme Court decisions in Rakesh Bhanot and Ajay Kumar Goenka unequivocally hold that the moratorium does not stay criminal liability of directors.
- The “debt” in the cheque case belongs to the corporate entity; directors are liable vicariously under Section 141, not as primary debtors.
The Court's Analysis
The Court began by parsing the statutory language of Section 96(1)(b), noting that the phrase “any legal action or proceeding … in respect of any debt” must be read in its ordinary sense and in harmony with Section 14 of the IBC, which deals with corporate debtors. It observed that the legislature deliberately differentiated the moratorium under Section 14 (broad, covering all suits against the corporate debtor) from the interim moratorium under Section 96 (narrow, limited to actions “in respect of any debt”).
"The moratorium provisions under Section 96 of IBC 2016 cannot be used to interdict the criminal aspect of Section 138 proceedings."
The Court then turned to Supreme Court jurisprudence. While P. Mohanraj described Section 138 as a “civil sheep in a criminal wolf’s clothing”, the Court stressed that the Supreme Court later clarified that the criminal nature of the offence cannot be eclipsed by the moratorium. It highlighted paragraphs 31, 35.2, 35.3, 36 of P. Mohanraj and reiterated the holdings in Rakesh Bhanot and Ajay Kumar Goenka that the moratorium does not extend to penal actions against natural persons.
The Court distinguished the compensatory component of a Section 138 case (the award of compensation under Section 395 of the BNSS) from the penal component (imprisonment or fine). It accepted that the compensatory aspect, being a civil recovery, may fall within the ambit of the moratorium, but the criminal trial itself must proceed.
Finally, the Court noted that the applications were filed while the underlying criminal trials had already progressed for over a decade. Granting a stay would prejudice the prosecution and contravene the Supreme Court’s emphasis on preserving the deterrent effect of Section 138.
The Verdict
The Court dismissed all the applications and writ petitions, vacated the interim orders, and refused any stay of the criminal prosecution under Section 138 read with Section 141 of the NI Act. No monetary relief or alteration of the criminal proceedings was ordered.
What This Means For Similar Cases
Moratorium Does Not Shield Directors
- Practitioners cannot rely on Section 96 IBC to halt criminal prosecutions against directors for cheque dishonour.
- The moratorium’s protective shield is confined to the corporate debtor; personal liability remains untouched.
Criminal Prosecution Continues Irrespective of Insolvency
- Initiating an IRP under Section 94 or 95 does not extinguish or stay penal actions.
- Courts will treat Section 138 as a distinct criminal offence, preserving its punitive purpose.
Compensatory Aspect May Be Stayed
- While the trial proceeds, any civil compensation awarded under Section 395 BNSS can be subject to the moratorium if the debt is deemed “in respect of any debt”.
- Lawyers should segregate the criminal and compensatory components when advising clients undergoing insolvency.
Practical Takeaways
- File separate applications for stay of civil recovery, not for the criminal trial.
- Anticipate that the moratorium will not affect imprisonment or fine components.
- Counsel directors to prepare robust criminal defences independent of insolvency strategies.
