The High Court of Karnataka has held that criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881 cannot be initiated when a cheque is dishonoured on the ground of “account blocked” following the death of a partner, as Section 138 is attracted only in cases of insufficiency of funds. Quashing the criminal proceedings initiated against a surviving partner, Justice H.P. Sandesh ruled that a partnership consisting of only two partners automatically stands dissolved upon the death of one partner, rendering the subsequent presentation of a dated blank cheque legally unsustainable.
Background of the Case
The matter arose from a private complaint filed under Section 138 of the Negotiable Instruments Act (NI Act) in C.C. No. 25126/2018, pending before the XLII Additional Chief Metropolitan Magistrate (CMM) at Bengaluru.
A partnership firm named Shree Vinayaka Traders was constituted on June 20, 2011, between accused No. 2 (T.M. Prabhakaraiah) and accused No. 3 (V.B. Nagaraj, the petitioner). The firm was engaged in dealing fertilizers and pesticides, which were supplied by the complainant, M/s. Peregrine Phosphate (P) Ltd.
In the course of business, the complainant had obtained signed blank cheques of the firm represented by accused Nos. 2 and 3. Accused No. 2 managed the affairs of the business, while accused No. 3 was not involved in its operations. On May 21, 2017, accused No. 2 passed away, and the firm’s bank account with Karnataka Bank, Hoovinahadagali Branch, was consequently blocked after intimating his death.
Representatives of the complainant attended the obsequies of accused No. 2, and on June 6, 2017, the complainant retrieved the leftover stock from the firm under a written acknowledgment. However, on March 28, 2018—nearly ten months after the death of accused No. 2—the complainant presented one of the signed blank cheques in its custody, claiming it was issued on that date.
The bank returned the cheque unpaid with the endorsement “account blocked” (situation covered in Sl. No. 21-25). Following the dishonour, the complainant issued a statutory legal notice to all three accused. The notice sent to accused No. 1 was returned with the endorsement “party left,” the notice to accused No. 2 was returned as “party expired,” and accused No. 3 replied to the notice. Despite this, the complainant initiated proceedings under Section 138 of the NI Act, and the trial court took cognizance of the offence.
Arguments of the Parties
Appearing for the petitioner, learned counsel Sri B.M. Halaswamy contended that the cheque was returned exclusively due to the account being blocked following the death of the signatory. He submitted that upon the death of accused No. 2, the two-partner firm ceased to exist, and accused No. 3 could not continue the partnership alone. He emphasized that the complainant was fully aware of the partner’s death on May 21, 2017, making the claim that accused Nos. 2 and 3 issued the cheque on March 28, 2018, impossible.
In support of his submissions, the petitioner’s counsel relied on the Supreme Court ruling in Commissioner of Income Tax v. Seth Govindram Sugar Mills, pointing out that under Section 42(c) and Section 31(1) of the Partnership Act, if one of two partners dies, the firm automatically comes to an end. He also cited the Delhi High Court judgment in Farhad Suri and Another v. Praveen Choudhary and Others, which held, referencing Rajesh Meena v. State of Haryana of the Punjab and Haryana High Court, that an “account blocked” endorsement falls outside Section 138 of the NI Act. Further reliance was placed on the Karnataka High Court’s order in Criminal Petition No. 11207/2025 and the Punjab and Haryana High Court’s decision in Arvinderjit Kaur v. State of Haryana and Another, both holding that dishonour due to account blockage does not attract Section 138.
Resisting the petition, learned counsel for the respondent Sri K. Palanimuthu argued that under Section 25 of the Partnership Act, every partner is jointly and severally liable for all acts of the firm done while being a partner. He contended that a post-dated cheque had been issued and the death of accused No. 2 was not intimated. Relying on the Supreme Court’s decision in Dhanasingh Prabhu v. Chandrasekar and Another, the counsel maintained that criminal liability of partners under Section 25 read with Section 145 of the NI Act involves statutory presumptions that can only be rebutted at trial.
In reply, the petitioner’s counsel reiterated that Section 42 of the Partnership Act applied, and because the account was blocked due to the partner’s death, Section 138 could not be invoked.
The Court’s Analysis
The High Court framed the primary question for consideration as whether the trial court committed an error in taking cognizance of the offence under Section 138 of the NI Act in view of the endorsement “account blocked” (situation covered in Sl. No. 21-25).
Examining the records, the Court observed that the death of accused No. 2 on May 21, 2017, was undisputed. The complainant had knowledge of his demise, having attended the cremation, taken back leftover stock on June 6, 2017, and received the returned notice with the endorsement “he is no more.” The Court noted that despite knowing of the death, a blank cheque was dated March 28, 2018—almost ten months after accused No. 2 died.
The Court observed:
“In terms of the notification of the RBI, the cheque is not valid and apart from that, the executant of the cheque is also no more. It is also not in dispute that the reason covered for return of the cheque is “account blocked” (situation covered in Sl.No.21-25). Sl. No.23 is very clear that withdrawal stopped owing to death of account holder. It has to be noted that on account of the death of one of the partner, account was blocked.”
Addressing the status of the partnership, the Court reiterated the principles in Seth Govindram Sugar Mills, observing that:
“Section 42(c) of the Partnership Act can appropriately be applied to a partnership where there are more than two partners. If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, there is then no partnership for a third party to be introduced therein and, there is no scope for applying clause (c) of Section 42 in such a situation.”
Although covenant No. 8 of the partnership deed provided that death, retirement, or insolvency would not dissolve the firm and remaining partners could carry on business or admit legal heirs, the Court noted that no material was placed to show any such continuation.
Distinguishing the respondent’s reliance on Dhanasingh Prabhu, the Court noted that while that decision discussed Section 25 of the Partnership Act and Section 141 of the NI Act regarding joint liability, it laid down no law regarding the endorsement of “account blocked.”
Reaffirming the line of precedents in Farhad Suri, Rajesh Meena, Arvinderjit Kaur, and Criminal Petition No. 11207/2025, the Court held:
“When such being the case, the judgments are very clear that Section 138 proceedings could be invoked in case of insufficiency of funds and not an account of account blocked and hence, there is a force in the contention of the learned counsel for the petitioner that when the account is blocked, it will not attract Section 138 of NI Act.”
Decision of the Court
Justice Sandesh concluded that because the cheque was dated almost ten months after the death of the managing partner, was invalid under the RBI notification, and was returned due to the account being blocked rather than for insufficiency of funds, criminal prosecution under Section 138 of the NI Act could not be sustained.
Accordingly, the High Court allowed the petition and quashed the proceedings pending in C.C. No. 25126/2018 against the petitioner.
Case Title: V.B. Nagaraj v. M/s. Peregrine Phosphate (P) Ltd.
Case No.: Criminal Petition No. 4428 of 2019
Bench: Justice H.P. Sandesh
Date: September 25, 2026
