TaxTMI 
TaxTMI 
Under the Negotiable Instruments Act, 1881 (‘Act’ for short) a criminal complaint may be made against a person who issued cheque and dishonoured on presentation of the same. The aggrieved party may, after observing the required formalities, file a criminal complaint before the Court which will take the case and punish the person who issued a cheque.
The issue to be discussed in this article is as to whether the Director of a company who issued a cheque is liable for the criminal liability when his powers are vested on the provisional liquidator appointed by the National Company Law Tribunal on the file of winding up petitioner or any other authority and punished under the Act with reference to decided case laws.
In Raj Kumar Jain Versus M/s. Shree Balaji Enterprises And Anr. - 2026 (5) TMI 635 - DELHI HIGH COURT, an agreement was entered into between the second respondent, the authorised dealer of the first respondent and the Shahdara South Zone, Delhi. The petitioner is the director of the second respondent company. According to the agreement the second respondent had to arrange 31 Auto Tippers with Hydraulic Lifting facilities, along with one driver and two Beldars for each Auto Tipper, including T & P fuel lubricants, etc for deployment in various wards of Shahdara South Zone, Delhi.
The respondent No. 1 entered into a Memorandum of Understanding with the respondent No.2. It was agreed that the respondent No. 1 would purchase 18 Auto Tippers from respondent no. 2/company. For this the respondent No. 1 paid Rs.45 lakhs to the respondent No.2. After some time a dispute arised between the said parties and the respondent No. 1 directed the respondent No.2 to return the amount Rs.45 lakhs to him. The respondent No. 2 issued to cheques one for Rs.25 lakhs and the another for Rs.20 lakhs on 28.12.2011 and on 26.12.2011 respectively.
On presentation of the above two cheques the same were returned dishonoured for the reason of insufficient funds on 18.04.2012. The respondent No.1 again presented the above cheques. This time also the same were dishonoured on 15.06.2012 for the same reason. The respondent No. 1 issued a notice to the respondent No. 2 and the petitioner who was the director of the respondent No.2 for the payment of Rs.45 lakhs. Since the dues were not paid within the time stipulated in the notice, the respondent No.1 filed a criminal complaint before the Court on 04.08.2012.
```In the meantime, a petition was filed by one under Section 433 (e) of the Companies Act, 1956 before the High Court on 23.05.2012. The said petition was admitted and the provisional liquidator of the High Court was appointed to carry out the winding up proceedings. The Official liquidator took over the charge of the entire assets and records of the respondent company No.2. By virtue of this order the respondent 2, its Directors, officers, employers, authorised representatives were restrained from selling, transferring, alienating, encumbering and parting with the possession of any movable and immovable assets and funds of the respondent company. They are also restrained from withdrawing any money from the accounts of the respondent company. On 20.01.2020 the respondent No.2 company was dissolved.
The Judicial Magistrate, on hearing the application of the petitioner seeking discharge from the criminal complaint, the Magistrate held that the Magistrate has no power to drop proceedings in a summons case filed on the basis of a complaint and that under Chapter XX of the CrPC there is no provision for discharge of the accused person. The petitioner challenged the said order before the High Court.
The petitioner submitted the following before the High Court-
- By the time demand notice dated 02.07.2012 was issued to respondent no. 2 against the cheques that got dishonoured on 15.06.2012, the Directors, officers, employers, authorized representatives including the petitioner, had already been restrained from selling, transferring, alienating, encumbering and parting with the possession of any moveable and immovable assets and funds of the respondent no. 2/company by virtue of order dated 23.05.2012, vide which Provisional Liquidator was also appointed.
- As the petitioner was not in a position to ensure honouring of the cheques in question when the same were presented, in view of the same, the complaint under Section 138 of the Negotiable Instruments Act was not maintainable.
The High Court heard the submissions of both the parties. The High Court observed that the liquidation proceeding was triggered on 23.05.2012, when notice was issued in the Company Petition filed for the winding up of respondent no. 2/company, and the same was admitted and a Provisional Liquidator was appointed. Crucially, this event occurred prior to the dishonour of the cheques in question, which took place on 15.06.2012. Furthermore, the statutory demand notice was issued by complainant/respondent no. 1 only subsequently, on 02.07.2012.
The High Court analysed the provisions of Section 450 (Appointment and powers of provisional liquidator), Section 456 (Custody of company’s properties) and Section 457 (Powers of Liquidator) of the Companies Act, 1956. From the said sections, the High Court observed that the appointment of a provisional liquidator does not result in the legal dissolution of the company, but rather leads to suspension of the Directors’ authority, rendering them functus officio. While the company maintains its corporate existence, its internal management is effectively displaced, transitioning its executive power to the Provisional Liquidator. 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 High Court relied on its own judgment in PEC LTD [2026 (5) TMI 575 - DELHI HIGH COURT] and M.L Gupta [2006 (11) TMI 346 - HIGH COURT OF DELHI]. In these two cases, the Delhi High Court held that the appointment of a provisional liquidator, occurring prior to the dishonour of the cheques and the issuance of the demand notice, effectively divested the petitioner of his managerial authority and control over the company’s bank accounts. Since the statutory mandate of Section 138 of the Negotiable 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. Concomitantly, as the petitioner was neither in charge of the company’s affairs nor capable of ensuring the encashment of the cheques on the date the cause of action crystallized, therefore, the essential ingredients of the offence are not met, and the complaint against the petitioner is held to be legally non-maintainable.
A complaint would not be maintainable when the cheque is presented after the Company has already been ordered to be wound up. When the company goes into liquidation and the cheque is presented thereafter, it cannot be said that the company has committed the offence as it is because of legal bar that it is precluded from making the payment. Once dishonour of the cheque by the Bank and failure to make payment of amount by the company is beyond its control, the Directors (who are in fact ex-Directors) can also not be held liable.
In the present case, the cheques were dishonoured on 21.05.2012 and the Legal Notice dated 04.06.2012 was subsequently sent by speed post dated 06.06.2012, meaning thereby that the 15 days for making payment after receipt of the Legal Notice expired on 21.06.2012. Thus as evident from the aforesaid, the cause of action for filing the complaint under Section 138 of NI Act arose after the respondent no. 2 company went into liquidation.
The High Court also relied on its another judgment in M/s. Best Buildwell Pvt. Ltd. & Ors. Versus M/s. R.D. Sales - 2025 (6) TMI 528 - DELHI HIGH COURT. In this case, the petitioners' account was frozen by the CGST Department, and thus, it could not be said to be “maintained” by them at the relevant time. Since the petitioners were unable to operate the account or issue valid instructions to the bank due to the attachment, the essential ingredients of Section 138 are not fulfilled. Even if the funds in the account were insufficient at the time of presentation of the cheques, the account having been frozen by the CGST, it would not have been possible for the petitioner to maintain sufficiency of funds in his account for the cheques to be honoured.
In view of the above, the High Court allowed the petition and set aside the impugned order.