Supreme Court Orders No Coercive Steps In Plea Seeking Bar On NI Act Proceedings During Personal Insolvency

Another plea has been filed in the Supreme Court seeking a declaration that proceedings under the Negotiable Instruments Act and the Payment and Settlement Systems Act cannot continue against personal guarantors once the interim moratorium under the Insolvency and Bankruptcy Code is triggered.

The plea has been filed by Karan Bhatia, suspended director of Uttam Cylinders Pvt Ltd and a personal guarantor for the company's loans.

A Bench of Chief Justice Surya Kant, Justice Joymalya Bagchi and Justice Vipul M. Pancholi issued notice on the petition. The bench also directed that no coercive steps be taken against Bhatia in pending proceedings under Section 138 of the Negotiable Instruments Act. The matter has been tagged with a similar pending petition.

“Issue notice, returnable on 29.07.2026. Tag with W.P.(Crl.) No.500/2025. Meanwhile, no coercive steps shall be taken against the petitioner with respect to the proceedings pending as against him before the respective courts under Section 138 of the Negotiable Instruments Act, 1881.”

Bhatia has approached the Court seeking interpretation of Section 96 of the Insolvency and Bankruptcy Code, which imposes an interim moratorium from the date an insolvency application is filed under Sections 94 or 95.

The petition argues that the provision stays “any pending legal action or proceeding” in respect of any debt.

The plea seeks a ruling on whether this protection extends to proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, as well as proceedings under the Payment and Settlement Systems Act.

The petition states that proceedings under Section 138 of the Negotiable Instruments Act are essentially compensatory and recovery-oriented despite being criminal in form.

It further argues, “That by allowing parallel criminal prosecution to proceed mechanically, the door is effectively closed on any meaningful opportunity for restructuring and repayment through the insolvency process. The continuation of criminal cases undermines this very rehabilitative purpose of the IBC, hindering the Petitioner from obtaining a fresh start.”,

It relies on P Mohanraj v Shah Brothers Ispat Pvt Ltd to contend that such proceedings are covered by insolvency moratorium protection.

The petition specifically asks the Court to decide, “Whether the proceedings U/s 138 read with Section 141 of the NI Act, being essentially compensatory and civil in nature, are covered by and hence ought to be stayed by the moratorium U/s 96 of the IBC.”

It also asks the court to decide on "Whether continuation of criminal prosecutions U/s 138 NI Act against a personal guarantor undergoing insolvency proceedings, defeats the rehabilitative and collective-resolution objectives of the IBC?"

It also challenges the recent Supreme Court ruling in Rakesh Kumar Bhanot v Gurdas Agro Pvt Ltd, which treated cheque bounce prosecutions as purely criminal, arguing that this is contrary to earlier binding precedent.

Bhatia states that lenders initiated multiple proceedings against him following alleged defaults of approximately Rs 19.23 crore.

As individual relief, the petition seeks quashing or stay of proceedings initiated against him under the Negotiable Instruments Act and the Payment and Settlement Systems Act during the pendency of his personal insolvency proceedings.

More broadly, the petition seeks a declaration that the interim moratorium under Section 96 bars continuation of proceedings under the Negotiable Instruments Act and the Payment and Settlement Systems Act against personal guarantors.