Insolvency moratorium and blocked accounts can defeat Section 138 cheque prosecution when control over the account has shifted.

Once a corporate debtor enters CIRP, moratorium under the Insolvency and Bankruptcy Code divests the company's management and bank-account control from its directors and places it with the IRP or liquidator. Cheques issued after that transfer of control cannot satisfy the foundational requirement of Section 138 of the Negotiable Instruments Act that the drawer maintain the account, so prosecution against the directors is not maintainable. Dishonour marked "ACCOUNT BLOCKED" in these insolvency circumstances is not treated as dishonour for insufficiency of funds in an operative account maintained by the drawer, and the statutory ingredients of the offence are not met.

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Issues: (i) Whether complaints under Section 138 of the Negotiable Instruments Act, 1881 survived after the corporate debtor had entered insolvency and liquidation proceedings under the Insolvency and Bankruptcy Code, 2016. (ii) Whether dishonour of cheques with the remark "ACCOUNT BLOCKED" attracted liability under Section 138 of the Negotiable Instruments Act, 1881.

Issue (i): Whether complaints under Section 138 of the Negotiable Instruments Act, 1881 survived after the corporate debtor had entered insolvency and liquidation proceedings under the Insolvency and Bankruptcy Code, 2016.

Analysis: Once the corporate debtor was admitted into CIRP, moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 came into force and management and control of the company's affairs vested in the IRP and thereafter the liquidator. The accused directors ceased to have authority over the company's bank account and could not validly issue cheques from the account after the insolvency process had taken over. In such a situation, the foundational requirement of a cheque drawn by a person maintaining the account was not satisfied, and the directors could not be fastened with liability on the basis of cheques allegedly issued after they had lost control.

Conclusion: The complaints were not maintainable against the petitioners in view of the insolvency and liquidation proceedings.

Issue (ii): Whether dishonour of cheques with the remark "ACCOUNT BLOCKED" attracted liability under Section 138 of the Negotiable Instruments Act, 1881.

Analysis: Section 138 is attracted when a cheque is dishonoured for insufficiency of funds or where the account continues to be maintained by the drawer but payment fails for a reason legally covered by the provision. Where the account is blocked because of insolvency proceedings and the drawer has already been divested of authority and control over the account, the dishonour is not attributable to insufficiency of funds in a live and operative account maintained by the drawer. The statutory ingredients of the offence therefore remain unfulfilled.

Conclusion: Dishonour for "ACCOUNT BLOCKED" in the facts of the case did not constitute an offence under Section 138 of the Negotiable Instruments Act, 1881.

Final Conclusion: The summoning orders and the connected criminal complaints were unsustainable and had to be quashed in consequence of the insolvency proceedings and the nature of the cheque dishonour.

Ratio Decidendi: Where a corporate debtor has entered CIRP and its bank accounts come under the control of the IRP or liquidator, a cheque presented thereafter cannot found prosecution under Section 138 of the Negotiable Instruments Act, 1881 if dishonour results from the account being blocked pursuant to insolvency proceedings rather than from insufficiency of funds in an account maintained by the drawer.

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