The moratorium question beneath the new personal guarantor framework

6 days before the Insolvency and Bankruptcy Board of India (IBBI) issued its June 2, 2026 amendments to the personal guarantor insolvency framework, the Supreme Court in Dineshchand Surana v. UCO Bank (2026) referred to a larger bench the question of whether Section 138 Negotiable Instruments (NI) Act proceedings fall within the scope of the Part III moratorium under the Insolvency and Bankruptcy Code (IBC).

The referral is narrow in form, but its consequences may not be. Any insolvency professional advising a director facing personal insolvency proceedings after May 27, 2026 must now qualify an assumption they could previously have stated with confidence: that the moratorium under Sections 96 and 101 of the IBC will hold Section 138 prosecutions at bay while the insolvency process runs. That advice is no longer straightforward.

The IBBI’s June 2 amendments add a coordinated, committee-supervised asset management framework to both the insolvency resolution and the bankruptcy stages of personal guarantor proceedings. The framework is well-constructed and addresses real operational gaps. It also, by design, depends on the insolvency process running without disruption from parallel creditor action. The Surana referral introduces a specific, high-probability source of exactly that disruption.

The two regulations implement the asset transfer framework introduced by Section 28A of the IBC, inserted by the IBC Amendment Act, 2026. The Bankruptcy Process (Second Amendment) Regulations address the bankruptcy stage: where a creditor has taken possession of a personal guarantor’s asset before or during the CIRP, the resolution professional may now place a proposal before the committee of creditors (CoC) for transferring that asset as part of the corporate resolution. The bankruptcy trustee of the personal guarantor must coordinate with the corporate debtor’s RP. The corporate CoC must approve and the guarantor’s own creditors’ meeting must also consent where the guarantor's proceedings are running in parallel. The proposed transfer must be disclosed in the information memorandum. The resolution plan must specify how proceeds are treated. The IRP Amendment Regulations mirror this architecture at the earlier resolution stage.

The practical effect is that coordinating the estates of a corporate debtor and its personal guarantor now requires two simultaneous insolvency processes, two sets of creditors able to deliberate and vote, a resolution professional and bankruptcy trustee working in tandem and a personal guarantor capable of participating in the process. Disruption at any one point creates friction throughout the rest. That is not a design flaw in the amendments. It is a structural feature of a framework whose logic depends upon orderly parallel proceedings.

In P Mohanraj v. Shah Brothers Ispat Pvt Ltd (2021), the Supreme Court held that Section 138 proceedings fall within the moratorium’s protection because their essential character is debt recovery, not criminal punishment. In Dineshchand Surana, Justice Pardiwala’s bench expressed reservations about that characterisation and referred the question to a larger bench. The referral does not disturb P Mohanraj as existing law. t does, however, unsettle a legal position that insolvency professionals could previously treat as settled.

The directors of distressed companies who give personal guarantees to lenders are overwhelmingly in the category of personal insolvent that the Part III framework was built for. They are also the category most likely to face Section 138 prosecution. Security cheques given to banks against credit facilities are standard practice. When those facilities are not repaid and the cheque is presented and dishonoured, the lender has both a civil debt recovery claim and a Section 138 prosecution available. P Mohanraj said the moratorium covers both. After Surana, a creditor’s counsel has a legitimate argument that P Mohanraj is under reconsideration and that argument will be tested in courts across the country before the larger bench decides.

Creditors who read Surana as signalling a possible shift in approach will press the point in courts across the country. Even if P Mohanraj continues to govern, litigants will test its boundaries and judges will be asked to confront arguments that seemed settled a week earlier. The personal guarantor facing a Section 138 prosecution in Chennai may, therefore, encounter a different litigation environment from one in Delhi. The uncertainty created by the referral lies not in the formal state of the law, but in the confidence with which its application can be predicted.

The June 2 amendments require the personal guarantor’s creditors’ meeting to vote on asset transfers. They require the guarantor to participate in a coordinated process with the corporate debtor’s RP. They assume, implicitly but necessarily, that the guarantor is not simultaneously consumed by criminal proceedings that the moratorium was meant to stay.

A director who faces a CIRP against the company, a Section 95 insolvency resolution process admitted against them personally, an active Section 138 prosecution and creditors holding personal assets is not a hypothetical. This is a familiar fact pattern in personal guarantor litigation. For such directors, the new regulatory framework depends upon active participation in a committee-supervised process. A Section 138 prosecution that is not stayed does more than create inconvenience. It diverts attention and resources from the insolvency process, imposes reputational and practical burdens and makes coordinated participation across parallel proceedings materially more difficult.

The counter-argument that a larger bench may confine its ruling to Section 138 proceedings, while leaving ordinary civil recovery proceedings within the moratorium’s scope, is correct as far as it goes. Most of the coordination contemplated by the new framework concerns asset administration and creditor decision-making in civil insolvency processes, not cheque bounce prosecutions. If the larger bench limits itself to the treatment of Section 138 proceedings, the core mechanics of the amendments may remain largely unaffected. That is an important qualification.

What this objection misses is a category of creditors that sits at the intersection of both regimes. Banks that advance secured credit and require security cheques may be both the complainant in a Section 138 prosecution and the largest financial creditor entitled to vote in the guarantor's insolvency process. For such creditors, the scope of the moratorium is no longer a peripheral issue. It affects the position they take in parallel proceedings arising from the same underlying debt. That overlap is not incidental to the June 2 framework; it is embedded within it.

The IBBI has, over the past 2 years, built a progressively more elaborate operational architecture for personal guarantor insolvency. Each amendment has added procedural specificity and closed gaps the prior round left open. The June 2 amendments are technically sound additions to that architecture. The problem they expose is not regulatory; it is legislative.

Sections 96 and 101 of the IBC have not been amended since 2016. The Part III moratorium provisions were drafted before the personal guarantor regime became operational, before experience revealed the volume and character of personal guarantor cases and before the practical realities of the directors most likely to enter the framework were fully understood. The Surana referral will likely take a year or more to decide. The June 2 amendments take effect now. In the interval between a regulatory tightening and a judicial clarification of what the underlying moratorium covers, practitioners advising personal insolvents are working with a framework whose protective scope is genuinely contested.

Parliament does not need to wait for the larger bench to legislate. The specific question the larger bench is considering - whether Section 138 proceedings are ‘legal action or proceeding in respect of any debt’ within Sections 96 and 101 - is a drafting question as much as an interpretive one. Parliament could resolve it by amendment. The case for doing so is not that judicial resolution is inadequate in principle. It is that the operational architecture of personal guarantor insolvency is evolving more quickly than the legal certainty on which it depends. Closing that gap through legislation would be both faster and more predictable than awaiting a decision from a bench whose composition and timeline remain unknown.

The IBBI has demonstrated a sustained commitment to building a workable personal guarantor insolvency regime. The latest amendments are the latest evidence of that effort. What the framework now requires is greater legislative clarity regarding the scope of the Part III moratorium, a question that the Surana referral has returned to active contestation. The challenge is not one of regulatory design; it is one of institutional coordination. As the operational architecture of personal guarantor insolvency becomes more sophisticated, the statutory foundation on which it rests should be made equally certain.

Apeksha Kachhawaha is a graduate from MNLU, Nagpur.

Kshitij Saruparia is a graduate from NALSAR, Hyderabad.