The Delhi High Court has quashed criminal proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) against the former directors of a private limited company. The Court held that dishonour of cheques with the remark “ACCOUNT BLOCKED” due to ongoing insolvency and liquidation proceedings does not constitute an offence under Section 138, as the directors cease to have control over the company’s bank accounts once an Interim Resolution Professional (IRP) or Liquidator is appointed.
Case Background
The judgment was delivered in a batch of petitions filed by Farhad Suri and Dhiren Navlakha (Petitioners), challenging the summoning orders issued by the Metropolitan Magistrate in January 2021.
The complaints were filed by Praveen Choudhary and Jitendra Choudhary (Respondents) against M/s Sumeru Processors Pvt. Ltd. and its directors. The complainants alleged that they had extended friendly loans and provided premises on rent to the accused persons. It was alleged that in discharge of their liabilities, the accused issued three cheques dated September 7, 2020, for amounts of Rs. 75,00,000, Rs. 24,00,000, and Rs. 1,10,00,000.
When presented for encashment, the cheques were returned unpaid on October 5, 2020, with the remark “ACCOUNT BLOCKED”. Consequently, the complainants issued legal notices and filed complaints under Section 138 of the NI Act, leading to the summoning of the petitioners.
Arguments of the Parties
The Petitioners contended that the summoning orders were legally unsustainable. They submitted that the National Company Law Tribunal (NCLT) had admitted the company into the Corporate Insolvency Resolution Process (CIRP) on April 15, 2019, and subsequently, a Liquidator was appointed on December 3, 2019.
They argued that from April 2019 onwards, all securities, cheque books, and bank accounts were handed over to the IRP and later the Liquidator. Therefore, on the date the cheques were purportedly issued (September 7, 2020), the petitioners had no control over the accounts. They further argued that the remark “ACCOUNT BLOCKED” does not fall within the scope of Section 138, which specifically penalizes dishonour due to “insufficiency of funds.”
The Respondents opposed the plea, alleging that the petitioners had concealed the ongoing NCLT proceedings, which amounted to cheating. They argued that the petitioners, as directors, issued the cheques both on behalf of the company and in their personal capacity and should be held liable for misusing funds.
Court’s Observations and Analysis
Justice Neena Bansal Krishna, hearing the matter, observed that the core legal issue was whether the complaint under Section 138 NI Act survives when the dishonour is due to an account being blocked following NCLT proceedings.
Referencing the Supreme Court’s decision in P. Mohanraj & Ors. vs. Shah Brothers Ispat Pvt. Ltd., the Court noted that while the statutory bar under the Insolvency and Bankruptcy Code (IBC) typically applies to the Corporate Debtor, the specific facts of this case required an examination of “control” over the accounts.
The Court observed:
“Thus, from April 2019 onwards, the Petitioners ceased to have any authority, control or right to operate the said Account. Any cheque purportedly issued in September 2020, after divesting of powers, could not have been validly issued by the Petitioners.”
The Court relied on the coordinate bench decision in Ganesh Chandra Bamrana & Ors. vs. Rukmani Gupta, holding that post-moratorium, accused persons cannot be held vicariously responsible for the dishonour of cheques as they lose control over the company’s bank accounts.
On the issue of the “ACCOUNT BLOCKED” remark, the Court analyzed the essential ingredients of Section 138 NI Act. The Court stated:
“To constitute an offence under Section 138 NI Act, mere issuance of a cheque is not sufficient; it becomes punishable only when the cheque is dishonoured for the reason insufficiency of funds… If the holder is deprived of his authority and control over the bank account, it cannot be said that the account was being maintained by him.”
Citing the Punjab & Haryana High Court judgment in Rajesh Meena vs. State of Haryana, the Court affirmed that the expression “account maintained by him” implies that the account holder must be capable of executing commands to govern financial transactions.
The Court concluded:
“The dishonour occurred not due to insufficiency of funds, but due to statutory prohibition on payments during winding-up proceedings and appointment of IRP. This circumstance falls squarely outside the ambit of Section 138, as the essential ingredient of dishonour due to inadequate funds, remains unestablished.”
Decision
The High Court held that since the petitioners had no control over the company’s accounts after April 2019 due to the appointment of the IRP and Liquidator, the summoning orders were unsustainable.
The Court quashed the summoning orders dated January 19, 2021, January 21, 2021, and January 22, 2021, along with the underlying criminal complaints.
Case Details:
Case Title: Farhad Suri & Anr. vs. Praveen Choudhary & Ors.
Case No.: CRL.M.C. 1347/2021, CRL.M.C. 1360/2021, CRL.M.C. 1624/2021
Coram: Justice Neena Bansal Krishna
Citation: 2025:DHC:11418
