2025 (12) TMI 1066 - HC - Indian Laws

Cheque dishonour as 'account blocked' during insolvency moratorium and liquidation-directors not liable under NI Act s.138; proceedings quashed

Where cheques were presented after commencement of CIRP and subsequent liquidation, the directors could not be proceeded against under s.138 NI Act ... Dishonour of Cheque due to Account blocked - to be covered in the term insufficiency of funds or not - absence of a contractual relationship or a legally enforceable debt - failure to note that the essential ingredients of Section 138 NI Act were not fulfilled - Petitioners seek quashing of the three summoning Orders and consequently, the respective Criminal Complaints. Whether the Complaint survives in view the Insolvency proceedings being admitted by the NCLT? - HELD THAT:- The facts under consideration, are para materia with the facts in Ganesh Chandra Bamrana & Ors. vs. Rukmani Gupta, [2024 (12) TMI 1230 - DELHI HIGH COURT], wherein the cheques in question were dated 15.01.2020 and 15.03.2020. However, the IRP was appointed in 2019 i.e. prior to the dates of cheques. Consequently, the account was blocked due to the order issued by the NCLT, and the authority and control of the account holder over the account ceased to exist. The Coordinate Bench held held that once CIRP commences and moratorium under Section 14 IBC is imposed, the directors lose control over the company’s bank accounts, and therefore cannot be prosecuted for dishonour of cheques presented thereafter. Thus, it was held that “post-moratorium”, the accused “cannot be held vicariously responsible for the dishonour of the cheques”. The summoning orders were therefore, quashed. Applying the above ratio to the present case, it is evident that the alleged dishonour of cheques on 05.10.2020 occurred nearly 18 months after CIRP had commenced on 15.04.2019 and nearly 11 months after the Liquidator had taken charge on 03.12.2019. The remark “ACCOUNT BLOCKED” is a direct consequence of the moratorium and liquidation process and not attributable to the Petitioners. The Petitioners/Farhad Suri and Dhiren Navlkakha had no control over the Company’s accounts after April 2019, the impugned summoning Orders dated 19.01.2021, 21.01.2021, 22.01.2021, are unsustainable and liable to be quashed - even assuming liability of directors despite loss of control, the Complaints would nonetheless fail on the second ground relating to the nature of dishonour of the three cheques. Whether Dishonour of Cheques due to “account blocked”, would Constitute an Offence Under Section 138 NI Act? - to be covered in the term insufficiency of funds, as mandated in Section 138 NI Act or not - HELD THAT:- 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. Likewise, merely showing that the holder of an account with the particular bank would also not sufficient to show that it is being maintained by the account holder, unless he has the authority and control over the said account. 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. The impact of NCLT proceedings in the context of Section 138 NI Act, was examined by the Apex Court in the case of Vishnoo Mittal vs. Shakti Trading [2025 (3) TMI 839 - SUPREME COURT], in 2018, wherein the moratorium was imposed and management of the Corporate Debtor was taken over by the IRP as per Section 17 IBC (Management of Affairs of Corporate Debtor by Interim Resolution Professional). When the Notice was issued to the Appellant in the Complaint under Section 138 NI Act, he was not in charge of the Corporate Debtor as he was suspended from his position as the Director of the Corporate Debtor as soon as IRP was appointed in 2018. It was thus, held that all the bank accounts of the Corporate Debtor were operating under the instructions of the IRP, hence, it was not possible for the Appellant to repay the amount in light of Section 17. In the present case as well, the cheques presented in 2020, were dishonoured with remarks of “account blocked”. 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. Thus, the necessary ingredient to bring home the offence under Section 138 NI has not been proved - the dishonour of the cheques on the ground of “account blocked” due to proceedings under NCLT and Accounts being taken over by IRP/Liquidator, precludes liability under Section 138 NI Act as it cannot be said that he is maintaining the Account. Therefore, the offence under Section 138 NI Act, would not be made out. Thus, all the three Complaints along with the summoning Orders and all the proceedings emanating therefrom, are quashed - application disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether complaints under Section 138 of the Negotiable Instruments Act, 1881 could be sustained in respect of cheques dated 07.09.2020 when, prior thereto, a corporate insolvency resolution process and subsequent liquidation had been initiated against the company under the Insolvency and Bankruptcy Code, 2016, and control of its bank accounts had vested in the IRP/Liquidator. 1.2 Whether dishonour of cheques with the bank's remark 'ACCOUNT BLOCKED', arising from moratorium and liquidation proceedings, fulfils the mandatory requirement of dishonour 'for insufficiency of funds' or 'account maintained by him' under Section 138 of the Negotiable Instruments Act, 1881. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Effect of insolvency proceedings and loss of control over company accounts on liability under Section 138 NI Act Legal framework 2.1 The Court referred to Section 138 NI Act (offence of cheque dishonour for discharge of a legally enforceable debt) and Section 141 NI Act (vicarious liability of persons in charge of the company, contingent on the primary offence by the company). It also considered Section 14 IBC (moratorium on proceedings against the corporate debtor) and Sections 17 and 18 IBC (vesting of management, control and assets of the corporate debtor in the IRP/Liquidator). 2.2 The Court noted the settled position that, under Section 14 IBC, proceedings under Section 138 NI Act cannot continue against the corporate debtor, though they may continue against natural persons covered by Section 141 NI Act, subject to satisfaction of other statutory ingredients. Interpretation and reasoning 2.3 The company was admitted into CIRP by NCLT on 15.04.2019. All securities, cheque books and operation of the bank account were directed to be handed over to the IRP and a moratorium was imposed. On 03.12.2019, the company went into liquidation, a Liquidator was appointed, and a fresh moratorium commenced. From April 2019 onwards, the petitioners ceased to have authority, control or right to operate the relevant bank account. 2.4 The cheques in question are all dated 07.09.2020 and were dishonoured on 05.10.2020, i.e., about 18 months after commencement of CIRP and about 11 months after the Liquidator took charge. The dishonour remark was 'ACCOUNT BLOCKED'. 2.5 The Court applied the principle that once CIRP commences and moratorium is imposed, the directors lose control over the company's bank accounts, which are managed exclusively by the IRP/Liquidator. In such circumstances, the directors cannot be treated as persons 'maintaining' the account for purposes of Section 138 NI Act, nor can they be vicariously liable for post-moratorium dishonour. 2.6 The Court held that any cheque purportedly issued in September 2020, after powers stood divested under IBC orders, could not be regarded as a 'valid issuance of cheque by the drawer' within the meaning of Section 138 NI Act. 2.7 The remark 'ACCOUNT BLOCKED' was found to be the direct consequence of moratorium and liquidation orders and the statutory takeover of the account by the IRP/Liquidator, and not an act or omission attributable to the petitioners as directors. Conclusions 2.8 Since, from April 2019, the petitioners had no authority or control over the company's bank accounts, the essential condition that the cheque be drawn on an account 'maintained by' the drawer was not satisfied. There was no valid issuance by the petitioners post-moratorium, and consequently no primary offence by the company on which vicarious liability under Section 141 NI Act could rest. 2.9 On this ground alone, the summoning orders dated 19.01.2021, 21.01.2021 and 22.01.2021 and the underlying complaints under Section 138 NI Act were held to be unsustainable and liable to be quashed. Issue 2 - Whether dishonour for 'ACCOUNT BLOCKED' due to statutory moratorium attracts Section 138 NI Act Legal framework 2.10 The Court reiterated that, under Section 138 NI Act, an offence is made out only where (i) a cheque is drawn on an account maintained by the drawer; (ii) it is issued for discharge of a legally enforceable debt or liability; and (iii) it is returned unpaid, inter alia, due to insufficiency of funds or because the amount exceeds the arrangement made with the bank. 2.11 The expression 'account maintained by him' and the nature of the reason for dishonour (such as 'account closed', 'payment stopped', or 'account blocked') have been judicially interpreted to determine whether they fall within the mischief of Section 138 NI Act, particularly depending on whether insufficiency of funds existed and whether the drawer retained authority and control over the account. Interpretation and reasoning 2.12 The Court emphasised that mere issuance of a cheque is not enough; the dishonour must be referable to insufficiency of funds in an account that is actually maintained and controlled by the drawer at the relevant time. If the drawer has been deprived of authority and control, the account cannot be said to be 'maintained by him'. 2.13 The Court noted that while dishonour with reasons such as 'account closed' or 'payment stopped' may still attract Section 138 NI Act where it is shown that there was insufficiency of funds at the time of presentation, this principle does not automatically extend to cases where the account has been frozen or blocked pursuant to a statutory order or legal process not attributable to the account holder. 2.14 Referring to the interpretation of 'account maintained by him', the Court endorsed the view that the term necessarily includes that the account is alive, operative, and under the effective control of the account holder, who must be capable of issuing commands governing financial transactions, including honour of cheques, on the date when the cheque becomes valid for presentation. 2.15 The Court held that where an account is 'blocked' due to operation of law (such as moratorium and liquidation under IBC) and the drawer no longer has control over it, dishonour with the remark 'ACCOUNT BLOCKED' cannot be equated with dishonour for 'insufficiency of funds' within the meaning of Section 138 NI Act. 2.16 In the present case, the cheques presented in 2020 were dishonoured solely because the account was blocked consequent upon NCLT orders and the assumption of control by the IRP/Liquidator. The dishonour did not result from lack of funds or any volitional act of the petitioners. 2.17 The Court observed that, under these circumstances, it cannot be said either that (a) the cheques were drawn on an account 'maintained by' the petitioners at the relevant time; or (b) that the dishonour was due to insufficiency of funds or any similar ground contemplated in Section 138 NI Act. Conclusions 2.18 Dishonour of the cheques with the endorsement 'ACCOUNT BLOCKED', where blocking arose from IBC proceedings and control of the account stood transferred to the IRP/Liquidator, falls outside the ambit of Section 138 NI Act. The statutory ingredient of dishonour for insufficiency of funds in an account maintained by the drawer is not met. 2.19 Consequently, the offence under Section 138 NI Act was held not to be made out on the facts of the three complaints. On this independent ground also, the summoning orders and all consequential proceedings in the three complaints were quashed.