Why in the News
On 27 May 2026, a two-judge bench of the Supreme Court referred important questions on the relationship between cheque dishonour and the personal insolvency process to a three-judge bench. The dispute is whether the stay under the insolvency process applies to the whole cheque bounce proceeding or only to its compensation part.
The bench gave its own analysis separating the criminal and the compensation aspects, but in its final conclusion it said a larger bench was needed for a broad and authoritative decision. This should not be understood as two judges finally overturning an earlier larger-bench decision.
What Is Cheque Dishonour?
In everyday language, a bank not paying a cheque is called a cheque bounce. But not every cheque returned for a technical reason automatically proves an offence under Section 138 of the Negotiable Instruments Act, 1881. In law, questions such as the conditions for its application, a legally enforceable liability, notice and an opportunity to pay are examined.
The purpose of Section 138 is to maintain the credibility of payment by cheque. When the relevant conditions are met, it provides for imprisonment, a fine or both. The court may also direct compensation to the complainant. This dual character makes its relationship with insolvency law complex.
Insolvency and Moratorium:
The insolvency process is a legal route to resolve debt and the debtor's financial condition in an orderly way. A "moratorium" means a temporary stay on certain legal actions. Its purpose is not the automatic waiver of debt but to keep assets and claims in order during the process.
If every creditor started recovering separately, the debtor's assets could be scattered and some creditors could be paid in full before others. A stay helps limit this race and gives the collective process a chance. But its scope depends on the relevant section and the proceeding.
The Company and the Individual Are Separate Questions:
The Insolvency and Bankruptcy Code, 2016 has separate provisions for the process of a company and the process concerning an individual. Section 14 is the important provision on the stay linked to a company's insolvency resolution process. The present dispute is mainly linked to the stay in personal insolvency and bankruptcy under Part III.
The framework for bringing the provisions of Part III into force has been phased. So it would be wrong to treat this case as a general relief applying automatically to every kind of debt of every person in the country. The eligibility of the individual, the applicable notification and the stage of the process must be examined.
Difference between Sections 96 and 101:
Section 96: relates to the interim stay that comes with the filing of the relevant insolvency application.
Section 101: relates to the stay after the application is admitted.
The judgment also discussed Sections 124 and 128, which relate to the later bankruptcy process. So a general sentence such as "insolvency has begun" should not be taken to mean that the stay at every stage has the same scope. In this case too, the process had reached different stages over time.
Where Is the Main Clash?
The criminal aspect: To maintain the credibility of cheque payments, the law provides punishment for violation. If an insolvency application stops every criminal proceeding, personal penal accountability could be weakened.
The compensation aspect: Getting money for the complainant from the debtor's assets can affect the interests of other creditors. The aim of the insolvency process is the orderly use of assets; separate recovery of one claim can clash with this arrangement.
So the question is not only "will there be a stay or not". It must also be seen which part of the proceeding is going on, at which stage and for what purpose.
The Bench Put Forward Two Levels:
In the 27 May judgment, the bench linked the first level with determining the offence, conviction and punishment. It linked the second level with the compensation aspect, which raises the question of financial relief to the complainant from the debtor's assets.
The bench's view was that the personal insolvency stay should not cover the criminal aspect, while the question of assets being reduced by recovery of compensation is separate. The last part of the judgment again directed that an authoritative view on these same complexities be taken by a three-judge bench. So it is not appropriate to describe it as the final, undisputed practical result for every pending case.
Role of the Earlier Judgment:
In the 2021 judgment of a three-judge bench in P. Mohanraj, the relationship between the company's Section 14 stay and Section 138 proceedings was explained. The May 2026 bench expressed the need to reconsider the analysis of the criminal and compensation character of cheque dishonour.
A smaller bench does not change the binding decision of a larger bench merely by expressing disagreement. Because of judicial discipline, the question is placed before an appropriate larger bench. In the exam, the difference between "a reference was made" and "the law finally changed" is important.
Position of Directors:
In a case concerning a company's cheque, the question of directors' responsibility can also arise. The conditions applicable under Section 141 and the person's role are relevant. Not every director becomes guilty automatically merely because of the designation.
If the person concerned is himself or herself in the personal insolvency process, criminal accountability against that person and recovery of compensation from that person's assets can be separate questions. This distinction has been examined in the analysis of this judgment. It cannot be taken as an order acquitting a particular person or waiving a loan.
Practical and Policy Importance:
On one side, the creditor needs payment and a reliable cheque system. On the other, the interests of similarly placed creditors in the collective insolvency process and the debtor's chance of restructuring have to be protected. Recognising the separate roles of the two laws is the beginning of balance.
This article explains the May reference judgment. It does not confirm any later final decision of the larger bench. In an actual case, the current order and the applicable law must be checked separately.
Mains-Style Practice Question
Explain the need to balance the penal accountability for cheque dishonour with the collective interest of creditors in the insolvency process. (150 words, 10 marks)
Answer Outline
Introduction: The cheque dishonour law builds trust in the payment system, while the insolvency law gives a framework for the orderly settlement of debt and assets. Although their purposes differ, they can clash in one case.
Main Body: If personal insolvency stops all criminal accountability, the penal test of the cheque dishonour law will weaken. On the other hand, if a complainant is allowed separate compensation recovery, other creditors may be left behind and assets may shrink. For these reasons the May 2026 bench analysed the criminal and compensation aspects separately and referred the questions to a larger bench. In deciding the scope of the stay, the difference between company and individual, the stage of the process and the applicable section is necessary.
Conclusion: The aim of balance is neither to make insolvency a shield against crime nor to let one creditor's recovery defeat the collective process.
Sources and Limits
- Supreme Court: the original reference judgment of 27 May 2026 (read): https://api.sci.gov.in/supremecourt/2024/37189/37189_2024_7_1501_71653_Judgement_27-May-2026.pdf
- Insolvency Board: introduction to the process for personal guarantors (read): https://ibbi.gov.in/uploads/whatsnew/cabcef714322b0eaf0de706f3c135ed3.pdf
- India Code: text of the Negotiable Instruments Act: https://www.indiacode.nic.in/bitstream/123456789/15327/1/negotiable_instruments_act%2C_1881.pdf
- Legal explainer article of 4 June 2026 (read): https://indianexpress.com/article/explained/explained-law/can-insolvency-proceedings-shield-you-in-a-cheque-bounce-case-the-legal-conflict-explained-10723998/
- Independent legal report of 29 May 2026 (read): https://www.verdictum.in/supreme-court/dineshchand-surana-v-uco-bank-2026-insc-579-part-iii-ibc-moratorium-conflict-to-larger-bench-1614920
- Limits: The 27 May judgment refers the questions to a three-judge bench; it is not a final reversal of the earlier larger-bench decision. The status of the later three-judge bench proceedings is not determined in this article. The content of Section 138 was read from the text quoted in the original judgment; the full primary text of the Act was not independently verified. The introductory leaflet on the personal guarantor process is old; no universal claim is made that it applied to all individuals by October 2026.
Prelims (facts) article on the same topic: Cheque bounce and insolvency process - key facts
