The Insolvency and Bankruptcy Board of India (IBBI) introduced significant amendments to the personal guarantor insolvency framework on June 2, 2026. However, just six days prior, the Supreme Court, in the case of Dineshchand Surana v. UCO Bank (2026), referred a critical question to a larger bench. The issue at hand is whether proceedings under Section 138 of the Negotiable Instruments Act (NI Act) fall within the moratorium under Part III of the Insolvency and Bankruptcy Code (IBC).
Navigating the Intersection of Moratorium and Section 138
The referral, while specific, carries broad implications. Insolvency professionals advising directors in personal insolvency proceedings after May 27, 2026, must now reconsider the previously clear assumption that the moratorium under Sections 96 and 101 of the IBC would protect against Section 138 prosecutions during insolvency. This assumption is no longer simple.
The amendments by IBBI introduce a coordinated, committee-supervised asset management framework during personal guarantor insolvency proceedings. This framework effectively addresses operational gaps but relies heavily on the insolvency process proceeding without interference from parallel creditor actions. The Surana referral, however, presents a potential disruption source.
Parallel Proceedings: A Structural Feature
The new regulations implement the asset transfer framework introduced by Section 28A of the IBC, which came with the IBC Amendment Act, 2026. The Bankruptcy Process (Second Amendment) Regulations focus on the bankruptcy stage, allowing the resolution professional to propose asset transfers to the committee of creditors (CoC) if a creditor has seized a guarantor’s asset. The corporate CoC must approve, and the guarantor’s creditors’ meeting must consent if proceedings run concurrently.
Coordinating the estates of a corporate debtor and its personal guarantor now necessitates two simultaneous insolvency processes, each with its own set of deliberating creditors. Any disruption can create friction within this framework, which relies on orderly parallel proceedings.
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The Implications of the Surana Referral
In P Mohanraj v. Shah Brothers Ispat Pvt Ltd (2021), the Supreme Court ruled that Section 138 proceedings fall under the moratorium’s protection due to their debt recovery nature. However, in Dineshchand Surana, the bench expressed doubts and referred the matter for a larger bench’s interpretation. While P Mohanraj remains the law, this new referral unsettles previously established legal positions.
Directors of distressed companies providing personal guarantees are often the target of Section 138 prosecutions, as security cheques are standard practice. The possibility of a shift in legal interpretation due to the Surana referral introduces uncertainty, prompting courts nationwide to reconsider arguments previously deemed settled.
Impact on the June 2 Framework
The new amendments require the personal guarantor’s creditors to vote on asset transfers, assuming the guarantor is not engulfed by criminal proceedings meant to be stayed by the moratorium. Directors facing multiple legal challenges, including Section 138 proceedings, find participation in the insolvency process increasingly challenging.
Even if the larger bench limits its ruling to Section 138 proceedings without affecting civil recovery proceedings, the moratorium’s scope remains crucial. Creditor banks involved in both civil recovery and Section 138 prosecutions find their positions in parallel proceedings directly impacted.
The Legislative Gap
IBBI has progressively enhanced the personal guarantor insolvency framework. However, Sections 96 and 101 of the IBC remain unchanged since 2016, creating a gap between regulatory advancements and statutory clarity. While the Surana referral awaits resolution, legislative action could provide the necessary clarity and predictability.
The IBBI’s commitment to building a robust personal guarantor insolvency regime is evident, but greater legislative clarity on the moratorium’s scope is essential. As personal guarantor insolvency processes become more sophisticated, the statutory foundation must be equally robust to support this evolution.
Apeksha Kachhawaha is a graduate from MNLU, Nagpur. Kshitij Saruparia is a graduate from NALSAR, Hyderabad.
