Dishonour Due to ‘Account Blocked’ Not Attributable to Drawer—No Offence Under Section 138 NI Act: Delhi High Court Quashes Criminal Proceedings

“Once account control is taken over by the IRP/Liquidator, cheque dishonour due to ‘account blocked’ cannot be treated as dishonour for insufficiency of funds” – In a crucial decision reinforcing the intersection of insolvency law and criminal liability for cheque dishonour, the Delhi High Court quashed three criminal complaints under Section 138 of the Negotiable Instruments Act, 1881.

Justice Neena Bansal Krishna, while allowing the petitions filed under Section 482 Cr.P.C., held that dishonour of cheques with the remark “ACCOUNT BLOCKED”, arising after initiation of CIRP and appointment of a Liquidator, does not constitute an offence under Section 138 NI Act. The judgment underscores that the essential ingredients of the offence—primarily that the dishonour must occur due to insufficiency of funds—were not satisfied, and that directors cannot be held vicariously liable when the company’s bank accounts were statutorily taken over.

“Offence Under Section 138 NI Act Not Made Out If Account Was Blocked Due to CIRP”

At the heart of the case lay three cheques issued in September 2020 by the petitioners allegedly to settle prior friendly loans and rental dues. These cheques were dishonoured in October 2020 with the bank remark “Account Blocked”. The complaints under Section 138 were filed shortly after.

However, the Court noted that Corporate Insolvency Resolution Process (CIRP) against M/s Sumeru Processors Pvt. Ltd. had been admitted by NCLT on 15.04.2019, and a Liquidator was appointed on 03.12.2019. As a result, all assets, accounts, and control over company operations were vested with the IRP/Liquidator from April 2019 onwards.

“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 held [Para 67].

This loss of authority rendered the petitioners incompetent to issue cheques, and the dishonour due to “account blocked” was not due to any fault or intention on their part.

“‘Account Blocked’ Is Not a Substitute for ‘Insufficiency of Funds’” – Statutory Ingredients Not Satisfied

Justice Bansal Krishna clarified the strict statutory requirement under Section 138 NI Act, which mandates that the dishonour must result from insufficient funds or account closure attributable to the drawer.

Citing Rajesh Meena v. State of Haryana, the Court reiterated that: “The expression ‘account maintained by him’ must necessarily mean that the account is not only alive and operative, but the drawer must have authority and control to issue commands for transactions.”

The dishonour here occurred not because of lack of funds, but due to statutory prohibitions and blocking of the account by virtue of Section 14 and 17 of the IBC, which impose a moratorium and vest control in the IRP/Liquidator.

“It is not every dishonour that leads to prosecution under Section 138 NI Act. Where the dishonour is due to freezing of the account by a statutory authority, the offence is not made out,” the Court reiterated [Para 76].

“Once the Principal Offence Fails, Vicarious Liability Under Section 141 NI Act Cannot Survive”

Another important legal finding in the judgment is the inapplicability of Section 141 NI Act, which extends liability to directors and other officers of a company. The Court held that vicarious liability is contingent upon the existence of a principal offence under Section 138.

“Where the company itself cannot be held guilty due to absence of a valid cheque and dishonour on the statutorily prescribed grounds, the question of vicarious liability of the directors also does not arise,” the Court observed [Para 64].

It also relied on the decision in Govind Prasad Todi v. State of NCT of Delhi (2023 SCC OnLine Del 3717) to affirm that once the IRP takes charge, directors lose operative authority, and therefore, any liability for post-CIRP transactions cannot be fastened on them.

Complaint Based on a Time-Barred Loan Also Held Unsustainable

In addition to the CIRP issue, the petitioners also argued that the alleged loan was extended in 2016, and in absence of any acknowledgment of debt, the debt was time-barred by 2020 when the cheque was issued. The Court, though primarily deciding the matter on CIRP grounds, took note of this argument as further strengthening the petitioner’s position.

Quashing Criminal Proceedings Under Section 482 Cr.P.C. Justified to Prevent Abuse of Process

Upholding the petitioners’ right to be free from unjustified prosecution, the Court found merit in their contention that continuation of the proceedings would be an abuse of the process of law, as the essential ingredients of Section 138 were lacking and the petitioners lacked authority to issue the cheques.

“Continuation of the complaint in the absence of the essential elements of the offence would be oppressive and contrary to the settled principles of criminal jurisprudence,” the Court concluded.

The Delhi High Court has added clarity to the jurisprudence surrounding dishonour of cheques issued post-CIRP, and has harmonised the provisions of the NI Act with the IBC. It firmly reiterated that statutory moratorium and account control under IBC override the general criminal liability for cheque dishonour, and that directors cannot be prosecuted when they lack control over company accounts due to insolvency proceedings.

The decision ensures that the criminal justice system is not misused to harass individuals for consequences beyond their control, and preserves the sanctity of both negotiable instruments law and insolvency regime.

Date of Decision: 16 December 2025