In a significant ruling on the intersection of insolvency law and cheque dishonour cases, the Supreme Court has held that proceedings under Section 138 of the Negotiable Instruments Act cannot be treated merely as debt recovery actions protected by the moratorium provisions of the Insolvency and Bankruptcy Code (IBC).
A Bench of Justice J.B. Pardiwala and Justice K. V. Viswanathan clarified that cheque bounce proceedings carry criminal consequences and are intended to preserve trust in commercial transactions.
The judgment came in appeals filed by former Surana Power Ltd. Managing Director Dineshchand Surana against UCO Bank.
Background of the Case
The dispute arose from financial facilities granted by UCO Bank to Surana Power Ltd. for the purchase of Indonesian coal. According to court records, a cheque issued towards repayment of over ₹5 crore was dishonoured in 2015 due to “funds insufficient.”
Following the dishonour, UCO Bank initiated proceedings under Section 138 of the Negotiable Instruments Act before a Chennai magistrate court.
Years later, Surana approached the insolvency forum under Part III of the Insolvency and Bankruptcy Code dealing with personal insolvency and bankruptcy. He argued that once insolvency proceedings were initiated, the interim moratorium under Sections 96 and 101 of the IBC barred continuation of cheque dishonour proceedings.
The Madras High Court rejected this contention in October 2023, holding that Section 138 proceedings are criminal in nature and not merely recovery actions. Surana then moved the Supreme Court.
What the Supreme Court Examined
The Court considered three central questions:
Whether cheque bounce proceedings are essentially actions for recovery of money;
Whether moratorium provisions under Part III of the IBC protect accused persons from Section 138 prosecution;
Whether directors facing vicarious liability under Section 141 of the NI Act can claim such protection during personal insolvency proceedings.
The Bench undertook an extensive examination of the nature and object of Section 138 of the Negotiable Instruments Act.
Court’s Observations
The Court observed that dishonour of a cheque is treated by law as a deemed criminal offence even though it arises from a civil transaction.
“The Parliament thought fit to provide for criminal consequences in cases of dishonour of cheques so as to deter people from dishonouring cheques and increase the faith of the public in its usage for settling debts,” the Bench noted.
The judgment explained that the offence is not the non-payment of debt itself, but the act of issuing a cheque that gets dishonoured.
At the same time, the Court acknowledged that cheque bounce cases contain a compensatory element because the law allows the drawer an opportunity to make payment after receiving statutory notice.
The Bench also discussed earlier decisions including P. Mohanraj v. Shah Bros. Ispat Pvt. Ltd. and Rakesh Bhanot v. Gurdas Agro Pvt. Ltd., which had dealt with the scope of moratorium provisions under the IBC.
Difference Between Debt Recovery And Criminal Liability
The Supreme Court drew a distinction between civil recovery proceedings and prosecution under Section 138.
According to the Bench, while cheque bounce proceedings originate from a financial liability, the law intentionally attaches criminal consequences to protect the credibility of negotiable instruments in commercial dealings.
The Court said proceedings under Section 138 cannot be reduced to a simple money recovery mechanism because the statute creates a separate penal consequence for dishonour of cheques.
Decision of the Court
The Supreme Court ultimately upheld the view that proceedings under Section 138 of the Negotiable Instruments Act are criminal in nature and are not automatically barred by the moratorium provisions applicable to personal insolvency proceedings under Part III of the IBC.
The Court held that directors and other persons facing liability under Section 141 of the NI Act cannot avoid cheque dishonour prosecution solely on the ground that insolvency or bankruptcy proceedings are pending against them.
Accordingly, the appeals challenging the continuation of the cheque bounce proceedings were dismissed.
Case Details
Case Title: Dineshchand Surana v. UCO Bank
Case Number: Criminal Appeal arising out of SLP (Crl.) No. 12135 of 2024
Judge: Justice J.B. Pardiwala and Justice K. V. Viswanathan
Decision Date: 27 May 2026
