Cheque Bounce Not an Offence If Account Blocked Due to Insolvency: Delhi High Court
The Delhi High Court has ruled that cheque dishonour does not amount to an offence under Section 138 of the Negotiable Instruments Act if the bank account is blocked due to insolvency proceedings. The Court clarified that when an account is taken over by an Interim Resolution Professional (IRP) or liquidator, the account holder no longer has control over it, and therefore cannot be said to be “maintaining” the account.
Justice Neena Bansal Krishna passed this ruling while quashing three criminal complaints filed in 2020 against company directors. The complaints were related to cheques that were returned unpaid with the remark “account blocked”.
In this case, the complainants claimed that the company directors had issued cheques to repay loans or settle dues for using their premises. However, all the cheques dated September 7, 2020 were dishonoured by the bank because the account had been blocked.
The High Court noted that the company had already been admitted into the Corporate Insolvency Resolution Process (CIRP) on April 15, 2019, and later went into liquidation on December 3, 2019. A liquidator had taken control of the company’s affairs, including its bank accounts, much before the cheques were issued.
The Court held that once insolvency proceedings begin, the directors lose authority and control over the company’s bank accounts. As a result, there is no valid issuance of a cheque by the drawer, which is a key requirement under Section 138 of the NI Act.
It further explained that Section 138 applies only when a cheque is dishonoured due to insufficient funds in an account maintained by the drawer. In this case, the dishonour happened due to a legal bar on operating the account during insolvency, and not because of lack of funds.
Since the essential ingredients of the offence were not met, the Court ruled that criminal liability under Section 138 could not arise. Accordingly, the Delhi High Court quashed the complaints as well as the summoning orders issued against the directors.
