Cheque Dishonour Due To ‘Account Blocked’ Cannot Attract Section 138 NI Act When Drawer Had No Control Over Frozen Account: Karnataka High Court

“Where the bank account is debit frozen by statutory authorities and the drawer has no control over it, dishonour of cheque cannot be attributed to insufficiency of funds so as to constitute an offence under Section 138 of the Negotiable Instruments Act.”, held by Karnataka High Court

The has held that criminal proceedings for cheque dishonour cannot be sustained when the cheque is returned unpaid because the bank account was frozen due to police investigation and not due to insufficiency of funds.

Justice M. Nagaprasanna quashing the proceedings pending before the XIII Additional Chief Judicial Magistrate, Bengaluru in a complaint filed under Section 138 of the Negotiable Instruments Act, 1881.

The Court ruled that the essential ingredients of Section 138 are not satisfied where the cheque is dishonoured because the account was “debit frozen” by authorities, since such freezing deprives the drawer of control over the account and therefore the dishonour cannot be treated as a voluntary act of the accused.

“Whether Proceedings Can Continue When Cheque Is Dishonoured Due To Debit Freeze Of Account?”

The Court framed the central legal question in the case as:

“Whether proceedings could be initiated against the petitioners on dishonor of cheque when the reason for dishonor is the account being debit frozen?”

Answering this issue in favour of the accused, the Court held that where the dishonour occurs due to account blockage imposed by investigating authorities, the offence under Section 138 NI Act cannot be made out.

Background of the Case

The complainant had purchased a flat in a residential project developed by ND Developers Pvt. Ltd. under a “No Pre-EMI Scheme,” under which the developer was required to pay interest on the buyer’s housing loan until possession was delivered.

When possession was allegedly delayed, the complainant claimed he was compelled to pay ₹41,75,634 towards loan liability. To settle this liability, the company issued a cheque for ₹41 lakh dated 09 March 2024.

However, before the cheque was presented, the company’s bank accounts were debit frozen by police on 24 May 2024 during investigation of criminal cases registered against the company under Sections 406, 420, 504 and 506 IPC.

When the complainant presented the cheque on 05 June 2024, the bank returned it with the endorsement:

“Account blocked situation covered in 2125.”

Subsequently, a statutory demand notice was issued and a private complaint was filed under Section 138 NI Act before the Magistrate, who took cognizance and issued summons to the accused.

Challenging the criminal proceedings, the accused approached the High Court seeking quashing of the case.

Court’s Observations

The Court noted that the crucial requirement for invoking Section 138 NI Act is that the cheque must be returned unpaid due to insufficiency of funds or failure to maintain the account properly.

However, the Court found that in the present case the cheque was dishonoured because the bank account had been frozen by police authorities during investigation.

Referring to RBI clearing house guidelines, the Court observed that the endorsement “Account blocked situation covered in 21-25” signifies stoppage of payments due to legal attachment or insolvency-related restrictions.

The Court emphasized that where the account holder has no control or authority over the bank account, the fundamental ingredient of Section 138 cannot be satisfied.

The judgment observed:

“In order to become liable for offence under Section 138 of the Act, the accused is required to have control over the account when the cheque becomes due for presentation.”

Since the account had been frozen due to police investigation and the petitioners could not operate the account, the dishonour could not be attributed to any voluntary act of the drawer.

Reliance on Judicial Precedents

The Court also examined several precedents including:

Vijay Chaudhary v. Gyan Chand Jain (Delhi High Court)
Rajesh Meena v. State of Haryana (Punjab & Haryana High Court)
Best Buildwell Pvt. Ltd. v. R.D. Sales (Delhi High Court)

These judgments consistently held that when a bank account is attached, frozen or placed under statutory restriction, the account holder cannot be said to be maintaining the account in terms of Section 138 NI Act.

Final Decision

In light of the above reasoning, the Karnataka High Court concluded that continuation of criminal proceedings would amount to miscarriage of justice.

Accordingly, the Court allowed the criminal petition and quashed the entire proceedings in C.C. No. 1446 of 2025 pending before the XIII ACJM, Bengaluru.

 The Court held that dishonour of cheque due to “account blocked” or “debit freeze” imposed by authorities cannot be equated with dishonour due to insufficiency of funds, and therefore prosecution under Section 138 NI Act cannot be sustained.

Date of Decision: 04 March 2026