A Proceeding Divided Against Itself: The Bifurcation Holding in Dineshchand Surana and the Unresolved Fate of P Mohanraj

[Apeksha and Kshitij are graduates from Maharashtra National Law University, Nagpur, and National Academy of Legal Studies and Research, respectively.]

On 27 May 2026, a two-judge bench of the Supreme Court (Pardiwala and Viswanathan JJ) delivered a 151-page ruling in Dineshchand Surana v. UCO Bank. The court bifurcated Section 138 of the Negotiable Instruments Act 1881 (NI Act) into a criminal aspect (prosecution and punishment) and a compensatory aspect (recovery of the cheque amount), holding that the Part III Insolvency and Bankruptcy Code 2016 (IBC) moratorium applies only to the latter. It then referred to a three-judge bench the foundational question on which that distinction rests. The court applied a rule, then asked a larger bench to decide whether the premise justifying that rule is correct. For the time being, magistrates hearing Section 138 complaints against personal insolvents must stay enforcement of any compensation order but proceed with prosecution.

The judgment does not formally overrule P Mohanraj v. Shah Brothers Ispat Private Limited, the three-judge bench decision that described Section 138 as a “civil sheep in a criminal wolf's clothing” and held that the Section 14 IBC moratorium bars Section 138 proceedings against a corporate debtor, nor does it follow P Mohanraj. It reaches a different result in a closely related context, expresses doubts about P Mohanraj's characterisation of Section 138 as predominantly civil, and refers that question to a larger bench. Our view is that the larger bench should resolve this without choosing a side in that contest. The “predominantly civil or criminal” inquiry that both judgments treat as decisive is the wrong test for Part III. The right test is already in the statute, and it points to Surana’s result without requiring P Mohanraj to be disturbed.

What the Bench Actually Held

Dineshchand Surana, former Managing Director of a company in liquidation under the IBC, faced prosecution under Section 138 for a dishonoured cheque issued to UCO Bank. Admitted to personal insolvency under Part III, with a moratorium operative under Section 101 from the date of admission, he sought a stay of the complaint. The Madras High Court refused. The Supreme Court was asked whether the Part III moratorium bars Section 138 proceedings entirely.

The answer proceeds in two stages. On the criminal aspect: the moratorium under Sections 96 and 101 IBC cannot stay prosecution because the “predominant nature” of the offence is criminal (para 132). Section 79(15) IBC excludes “liability to pay fine” from the definition of “excluded debt” protected by the moratorium, and allowing the moratorium to shield criminal liability would convert Section 138 into a debt recovery mechanism the legislature never intended. On the compensatory aspect: once a criminal court orders compensation under Section 395 BNSS, that order is civil in character and its enforcement is stayed (para 158). The Court further held that a director undergoing personal insolvency is protected under this moratorium even when the compensatory liability attaches through Section 141 NI Act rather than as a personal debt (para 186), because the expression “any debt” in Sections 96 and 101 is broad enough to include liabilities assumed by statute.

The Doctrinal Problem

The strongest objection to reading Surana as internally inconsistent is that the distinction between punishment and compensation is not contingent on the overall characterisation of Section 138. Rajendra Bhagwanji Umraniya v. State of Gujarat, cited in Surana itself, confirms that compensation under Section 395 of the Bharatiya Nagarik Suraksha Sanhita 2023 cannot substitute for punishment and that the two operate independently. On this account, the Tier I/Tier II distinction merely reflects a separation already embedded in criminal procedure.

This objection does not meet the specific problem raised by the moratorium. The question under Sections 96 and 101 IBC is whether a Section 138 proceeding constitutes a “legal action or proceeding in respect of any debt,” and Surana answers that question by first deciding whether Section 138 itself is predominantly criminal or predominantly civil. P Mohanraj resolved the coverage question the same way: because Section 138 was civil in substance, the moratorium applied. Both judgments treat the global nature of the proceeding as the gateway to the analysis and reach different conclusions because they characterise that nature differently. The characterisation each reaches is reasoned, not arbitrary, which is what makes the two positions difficult to reconcile without one giving way to the other.

The “civil sheep” characterisation in P Mohanraj was not merely rhetorical. The three-judge bench held, at paragraph 47, that Sections 96 and 101 IBC would include a Section 138/141 proceeding because the moratorium objective under Part III was identical to that under Section 14 IBC. Surana agrees with that statement of the moratorium's objective (para 165) but departs from its conclusion on coverage, a combination possible only if P Mohanraj's reason for extending coverage was not doing the analytical work the larger bench believed it was. Paragraph 194 says as much: the predominantly criminal nature of Section 138 was not brought to the attention of the P Mohanraj bench, meaning the earlier judgment was decided on an incomplete record without formally disapproving its holding.

The Test Both Judgments Use is the Wrong Test

Neither judgment needed to ask whether Section 138 is predominantly criminal or predominantly civil. The phrase that governs Sections 96 and 101 is "in respect of any debt," and that phrase describes a relationship between a proceeding and a debt, not a classification of the proceeding as a whole. A Section 138 conviction produces two distinct legal consequences: a sentence, which is not a debt under any ordinary use of the word, and a compensation order, which is. Asking whether the proceeding is “predominantly” one or the other is asking the statute a question it does not pose. The statute asks only whether the specific relief sought in the proceeding is, in substance, recovery of a debt.

Section 79(15) confirms this reading by legislating at the level of the consequence rather than the proceeding. It excludes “liability to pay fine” from excluded debt, which only makes sense if Parliament anticipated that a single proceeding could yield both a fine, outside the moratorium’s reach by definition, and a separate civil consequence governed by ordinary principles. Parliament did not need to settle whether Section 138 prosecutions are generally criminal or civil to draft that exclusion. It drafted directly to the consequence. Surana reaches the correct practical result, prosecution proceeds and compensation recovery is stayed, but it reaches that result by a route the statute does not require and that creates the appearance of conflict with P Mohanraj.

That apparent conflict dissolves once the predominant-character question is set aside. P Mohanraj decided whether Section 14’s moratorium, which protects a corporate debtor generically and contains no equivalent to Section 79(15), covers a Section 138 proceeding against that debtor. Section 14 does not isolate the compensatory consequence from the punitive one, so a court applying it must decide whether the proceeding as a whole falls within the moratorium, and P. Mohanraj's answer is defensible on that text. Part III is different: Section 79(15) speaks directly to the consequence in dispute. The three-judge bench does not need to decide P Mohanraj was wrong. It needs to decide P Mohanraj was answering a question Section 79(15) makes unnecessary to ask in a Part III case.

What the Three-Judge Bench Should Hold

The questions referred are whether Section 138 is quasi-criminal with a tilt toward the criminal side, and whether the Part III moratorium applies to the entire proceedings or only the compensatory aspect. Our submission is that the bench should decline the first question as framed. It should hold that characterisation is not the correct method for determining moratorium coverage under Part III, and that Section 79(15) supplies the operative rule directly: a fine is excluded debt by definition, a compensation order is not, and the moratorium tracks that line without any antecedent finding about Section 138’s general character.

This avoids the two outcomes that would otherwise follow. Affirming Surana’s predominantly-criminal finding would settle a question about Section 138’s character well beyond the IBC, on the strength of a provision never drafted to carry that weight. Reinstating P Mohanraj’s predominantly-civil finding for Part III would require reading past Section 79(15) entirely. A consequence-based rule needs neither move. It leaves P Mohanraj undisturbed for Section 14, where no equivalent carve-out exists, and gives Surana’s outcome a foundation that does not depend on winning an argument about what Section 138 fundamentally is.

Until the three-judge bench rules, the operative position is Surana’s bifurcation, reached by a route the statute does not actually require. The better outcome is the same bifurcation, reached by the route Section 79(15) already supplies. A bench that takes that path settles the reference without forcing a choice between two precedents that were never, in truth, deciding the same question.