The Delhi High Court has quashed a criminal complaint under Section 138 of the Negotiable Instruments Act, 1881, ruling that a director cannot be held liable for cheque dishonor if the company’s bank accounts were placed under the control of a Provisional Liquidator before the offence crystallized. Justice Vikas Mahajan held that the appointment of a liquidator divests directors of their authority to “maintain” or operate company accounts, creating a “legal and practical impossibility” to satisfy a demand for payment.
Background of the Case
The dispute arose from a Memorandum of Understanding (MOU) between M/S PRJ Enterprises Ltd. (Respondent No. 2) and M/S Shree Balaji Enterprises (Respondent No. 1/Complainant) regarding the supply of Auto Tippers for the Municipal Corporation of Delhi (MCD). Following disagreements, the petitioner, Raj Kumar Jain—a director of Respondent No. 2—issued cheques to return an advance of Rs. 45,00,000.
The cheques were presented multiple times and ultimately dishonored on June 15, 2012, due to “Funds Insufficient.” A demand notice was issued on July 2, 2012, followed by a complaint on August 4, 2012. Crucially, however, the High Court had already admitted a winding-up petition against the company on May 23, 2012, appointing a Provisional Liquidator and restraining the directors from dealing with any assets or funds.
Arguments of the Parties
The petitioner argued that the cause of action for the Section 138 complaint arose only after the company went into liquidation. Since the Court’s May 23 order had already stripped the directors of their power to operate bank accounts, the petitioner contended he was not in a position to ensure the cheques were honored.
The respondent/complainant did not dispute the timeline of the liquidation proceedings or the fact that the dishonor occurred after the liquidator took over.
Court’s Analysis and Observations
The Court scrutinized the impact of Sections 450, 456, and 457 of the Companies Act, 1956. Justice Mahajan observed that upon the appointment of a Provisional Liquidator, a company’s Board of Directors becomes functus officio, meaning their authority ceases by operation of law.
Justice Mahajan noted:
“Under this judicial arrangement, the company’s business operations, the administration of its assets, and the validity of its contractual engagements are contingent upon the oversight and formal authorization of the liquidator, who serves as the custodian of the corporate estate.”
The Court specifically interpreted the phrase “an account maintained by him” as used in Section 138 of the NI Act. It held that “maintenance” implies a continuous, affirmative authority to govern financial transactions.
The Court further stated:
“For an account to be maintained by an account holder, it is essential that he is in a position to operate the said account by either depositing monies therein or by withdrawing money therefrom… in the present case, once the account has been attached by an order of the Court, the said account could not be operated by the petitioner.”
The Court cited several precedents, including M.L. Gupta vs. Ceat Financial Services Ltd. and M/S Pec Ltd. vs. M/S Sabari Exim Pvt Ltd & Ors., to affirm that once a company is in liquidation, the directors cannot be held liable for the company’s inability to pay, as the failure to honor the cheque is beyond their control.
Decision
The Court concluded that the appointment of the Provisional Liquidator on May 23, 2012—preceding both the final dishonor and the demand notice—effectively divested the petitioner of managerial control.
The Court held:
“Since the statutory mandate of Section 138 of the N.I. Act requires the account to be ‘maintained’ by the accused at the time of the offence, the transition of executive power to the Provisional Liquidator created a legal and practical impossibility for the petitioner to satisfy the demand or operate the accounts.”
Finding that the essential ingredients of the offence were not met, the High Court allowed the petition and quashed the complaint and all related proceedings against Raj Kumar Jain.
Case Details:
- Case Title: Raj Kumar Jain vs. M/S Shree Balaji Enterprises and Anr.
- Case No.: CRL.M.C. 1665/2023 & CRL.M.A. 6359/2023
- Bench: Justice Vikas Mahajan
- Date: May 04, 2026
