Moratorium under Part III IBC stays compensatory aspect of Section 138 NI Act but not criminal prosecution.

The appellant, former Managing Director of M/s. Surana Power Ltd. (SPL), issued a cheque for ₹5,03,21,250 to UCO Bank to discharge credit liabilities

The cheque was dishonoured on June 18, 2015, leading to a complaint under Section 138 of the Negotiable Instruments (NI) Act

While the complaint was pending, the National Company Law Tribunal (NCLT) admitted insolvency applications against the appellant under Section 95 of the Insolvency and Bankruptcy Code (IBC) in 2022, followed by a bankruptcy order in 2025

The appellant sought to quash the Section 138 proceedings, arguing they were stayed by the interim moratorium under Section 96 and subsequent moratoriums under Sections 101 and 128 of the IBC

The Madras High Court dismissed the plea, holding Section 138 is a criminal enactment not covered by the debt recovery moratorium

The Court examined the "deeming fiction" in Section 138 of the NI Act which criminalizes a civil default to ensure commercial trust

It relied on P. Mohanraj v. Shah Bros. Ispat (P) Ltd., which characterized Section 138 as a "civil sheep in a criminal wolf’s clothing"

It further applied Section 395 of the BNSS (formerly Section 357 CrPC) regarding the court's power to award compensation out of fine

It interpreted Sections 96, 101, and 128 of the IBC regarding moratoriums "in respect of any debt" and Section 79(15) of the IBC, which defines "excluded debt" to include fines imposed by a court

It also considered Ajay Kumar Radheshyam Goenka v. Tourism Finance Corp. regarding the personal nature of criminal liability for directors

The Court departed from the "purely civil" characterization in P. Mohanraj, asserting that Section 138 is predominantly criminal due to its deterrent objective and punitive consequences

However, it identified a "tiered" structure: Tier I (Criminal Aspect: imprisonment/fine) and Tier II (Compensatory Aspect: restitution to the victim)

The Court reasoned that since Section 79(15) IBC expressly excludes "fines" from the insolvency process, the criminal liability (Tier I) cannot be stayed by an IBC moratorium

Conversely, the compensatory aspect (Tier II) is inherently a "claim" related to a "debt" and thus falls within the moratorium’s purpose of providing "breathing space" to debtors

For directors, the Court held that while they cannot escape personal criminal trial/prison, the recovery of compensatory amounts from their personal estates must be stayed if they are undergoing personal insolvency, as such recovery would deplete the asset pool intended for all creditors

Noting a conflict with the logic in P. Mohanraj and the need for clarity on the "quasi-criminal" tilt of the law, the Division Bench referred the matter to a larger three-judge Bench

Pending this, the registry was directed to place the matter before the Chief Justice of India