The Delhi High Court has held that the dishonour of cheques because an account was blocked during insolvency proceedings does not attract criminal liability under Section 138 of the Negotiable Instruments Act.
Justice Neena Bansal Krishna passed the ruling while setting aside three criminal complaints filed in 2020 against company directors over cheques that were returned unpaid by the bank.
The court observed that where accounts are frozen due to proceedings before the National Company Law Tribunal (NCLT) and taken over by an interim resolution professional or a liquidator, the essential ingredients of an offence under Section 138 are not satisfied. It noted that in such circumstances, the accused cannot be said to be maintaining or operating the account.
In this case, the complainants claimed that the directors had issued cheques to repay loans or clear dues for the use of business premises. However, the cheques dated September 7, 2020, were returned with the remark “account blocked”.
The High Court pointed out that the company had entered the Corporate Insolvency Resolution Process in April 2019 and was ordered into liquidation in December of the same year, after which a liquidator assumed control of its affairs, Bar and Bench reported.
As a result, the directors no longer had authority over the company’s bank accounts well before the cheques were issued.
The court said this meant there was no valid issuance of cheques by the drawers and no dishonour arising from insufficient funds, both of which are mandatory conditions under Section 138. It further explained that liability under the provision presupposes that the drawer maintains and controls the account at the time the cheque is presented.
Since that condition was absent, the court ruled that the directors could not be prosecuted and accordingly quashed the complaints along with the summoning orders.
The company’s directors, who were the petitioners in the case, were represented by advocates Nalin Tripathi and Shivansh Pandey, while the complainants were represented by advocate Ankit Tandan.