Cheque dishonour not offence under Section 138 NI Act where account is blocked due to insolvency: Delhi High Court

The Delhi High Court recently ruled that the dishonour of cheques due to the account being blocked during insolvency proceedings does not amount to an offence under Section 138 of the Negotiable Instruments (NI) Act. [Farhad Suri & Anr. v. Praveen Choudhary & Ors.]

Justice Neena Bansal Krishna delivered the ruling while quashing three criminal complaints filed in 2020 against the directors (petitioners) of a company over the cheques dishonored by the bank.

"The dishonour of the cheques on the ground of “ACCOUNT BLOCKED” due to proceedings under NCLT and Accounts being taken over by IRP/ Liquidator, precludes liability under Section 138 NI Act as it cannot be said that he is maintaining the Account. Therefore, the offence under Section 138 NI Act, would not be made out," the Court held.

In the present case, the complainants alleged that the company directors had either taken loans or used their premises for business purposes and later issued cheques to settle the amounts. However, all the cheques, dated September 7, 2020, were later returned by the bank with the remark “account blocked”.

The High Court found that the company had been admitted into Corporate Insolvency Resolution Process (CIRP) on April 15, 2019, and subsequently went into liquidation on December 3, 2019, with a liquidator appointed to manage its affairs.

As a result, it held that the directors had lost control over the company’s bank accounts prior to the issuance of the cheques.

"Thus, there was no “valid issuance of cheque by the drawer”, and no “dishonour due to insufficiency of funds”, as required under Section 138 NI Act," it said.

The Court explained that Section 138 of the NI Act requires the account to be maintained and controlled by the drawer at the time the cheque is presented.

Since the directors no longer had authority over the accounts after CIRP and liquidation proceedings began, they could not be held liable for the dishonour, the Court ruled.

"The dishonour occurred not due to insufficiency of funds, but due to statutory prohibition on payments during winding-up proceedings and appointment of IRP (Interim Resolution Professional). This circumstance falls squarely outside the ambit of Section 138, as the essential ingredient of dishonour due to inadequate funds, remains unestablished. Thus, the necessary ingredient to bring home the offence under Section 138 NI has not been proved," it reasoned.

The Court, thus, quashed the complaints as well as the summoning orders issued to the accused.

The directors of the company (petitioners ) were represented by advocates Nalin Tripathi and Shivansh Pandey.

The complainants were represented by advocate Ankit Tandan.

[Read Order]