Beyond the Cheque: Structuring Commercial Risk in the Shadow of Insolvency

The recent judgment of the Hon’ble National Company Law Appellate Tribunal (NCLAT) in Sunil Gutte v. Avil Menezes & Ors. (Company Appeal (AT) (Insolvency) No. 515 of 2025) has brought to light the far-reaching implications of the moratorium imposed under Section 14(1)(b) of the Insolvency and Bankruptcy Code, 2016 (IBC). Particularly, it raises critical questions on the legal treatment of post-dated cheques (PDCs) and by implication Post Dated Electronic Mandates issued prior to the initiation of CIRP but realised thereafter.

In Sunil Gutte, the suspended promoter of the Corporate Debtor challenged the NCLT’s order directing reversal of approximately INR 11.01 crore worth of transactions executed after the CIRP commencement date. The Resolution Professional (RP) had alleged that these payments were made in breach of the moratorium. The issue arose whether cheques issued before the CIRP commencement date, but cleared post-moratorium, were valid and binding or in violation of Section 14. The Appellant argued that these were routine and bona fide transactions. The NCLAT, however, rejected the defence and held that the relevant date is not the cheque issuance but its actual encashment.

Under the Negotiable Instruments Act, 1881, a post-dated cheque is treated as a bill of exchange payable at a future date. It does not become a legally payable instrument until the date specified arrives, upon which it attains the character of a cheque payable on demand. In Ashok Yeshwant Badave v. Surendra Madhavrao Nighojkar [(2001) AIR SC 1315], the Supreme Court held that “a post-dated cheque becomes a cheque within the meaning of Section 138 of the Act on the date which is written thereon and the 6 months’ period has to be reckoned…from the said date.” Supporting this, the Supreme Court in DCM Financial Services Ltd. v. J.N. Sareen [(2008) 8 SCC 1] reiterated that the legal obligation under a PDC arises only on its due date, and until then, it does not create any enforceable liability. Thus, a PDC or Electronic Mandate for that matter, does not constitute a “cheque” until the date it is dated, and any presentation or demand made prior to that would be legally ineffective. In the modern context, even electronic mandates will have similar effect based on the provisions of the Section 25 of the Payment and Settlement Act, 2007.

If these provisions are viewed in the context of performance of a contract under the contract law, particularly under Sections 2(d) and 37 of the Indian Contract Act, 1872, performance is not deemed completed until actual payment is made. Hence, mere issuance of a PDC or Post-dated Electronic Mandate, in discharge of an obligation, does not amount to payment unless it is honoured. Thus, encashment post-CIRP is a critical legal infraction, triggering the moratorium bar under Section 14(1)(b), thereby putting realisation of dues at risk.

Section 14(1)(b) imposes an automatic stay on all recovery or enforcement proceedings against the Corporate Debtor’s assets once CIRP commences. The NCLAT in Sunil Gutte underscored that any post-CIRP transfer of assets, even arising from earlier contractual obligations or PDCs, violates the statutory moratorium. The Tribunal clarified that effectuation of the transaction is determinative, not the date of the instruction. Accordingly, the post-CIRP clearing of PDCs issued earlier must be reversed and treated as non est.

This interpretation, although legally correct, may cause unintended hardship in cases where the transaction was bona fide and fully performed prior to CIRP, backed by post-dated instruments issued in good faith, and unrelated to the promoter group or insiders.

This calls for heightened vigilance among business entities dealing with financially distressed companies, especially in high-value or critical-supply contracts. As in the event of insolvency:

• Any pending receivables, even if evidenced by a PDC, will not be honoured if the cheque is cleared post-CIRP commencement.
• Such parties will be required to file claims before the IRP/RP as operational creditors.
• Recovery is then subject to the resolution plan and overall enterprise value and status and security of the claimant.

In this context it needs to be kept in mind that operational creditors rarely recover more than 5-10% in many CIRP outcomes, unless they are considered essential to the business continuity of the Corporate Debtor.

• Timely Realisation: Businesses must enforce stricter timelines for payment realisation, especially from clients under financial stress.
• Alternative Security Mechanisms: Consider use of escrow accounts, bank guarantees, or third-party assurance rather than reliance on PDCs.
• Due Diligence on Counterparty Solvency: Regular financial vetting, especially where exposures are high.
• Insolvency Risk Clauses in Contracts: Introduce protective contractual provisions such as immediate termination upon insolvency triggers.

Clauses allowing accelerated payment, contractual termination, or enforcement of rights upon the initiation of insolvency (often called ipso facto clauses) are common in commercial contracts. However, IBC restricts their enforceability once CIRP commences. Firstly Section 14(1)(a) imposes a moratorium on the institution or continuation of suits or proceedings and prohibits the execution of security interest or recovery. It also restricts termination of contract for essential goods or services under Section 14(2A) (inserted vide 2020 amendment) which limits the enforceability of termination clauses if the contract is for essential goods or services for the Corporate Debtor. Therefore, while such insolvency-trigger clauses can be contractually agreed to, they cannot override the statutory moratorium under Section 14 or alter the claim and priority mechanism laid out in the Code. Any contractual acceleration or early enforcement clause triggered after commencement of CIRP would be legally impermissible. However, the parties would still be free to provide for acceleration or enforcement in specified situation other than commencement of insolvency. Parties still be free to provide for MAC Clauses (Material Adverse Change) and agree to termination or demand of security if financial covenants are breached in normal course. Depending upon the size and criticality of the arrangement and stake involved for the contracting parties, clauses based on credit rating downgrade, cross-default in group entities, or pending litigation may provide risk control.

This evolving jurisprudence compels businesses, particularly in high-stake and high-value transactions, to re-evaluate their risk frameworks. Traditional instruments such as PDCs or deferred payment terms offer no real protection once CIRP is triggered. Therefore, it is imperative to proactively structure transactions with built-in insolvency mitigation mechanisms, such as pre-insolvency acceleration clauses, escrow arrangements, third-party security, and financial covenants that allow exit or enforcement before insolvency admission.

Since, IBC has also brought about a change of sort by putting a freeze on liability and payments once insolvency process is commenced, it has also put normal business at some sort of risk, if concluded and continued till or near CIRP commencement date. The businesses can reduce their exposure to post-CIRP impairment and protect value where recovery rates for operational creditors remain uncertain and often minimal. The key takeaway is clear: prudence in contract design is not merely advisable—it is essential in an insolvency-aware commercial environment.

 We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at   insights@elp-in.com or write to our authors:

 Mukesh Chand, Senior Counsel – Email – mukeshchand@elp-in.com