Cheque Dishonour Prosecution Barred When Accounts Are Blocked By Insolvency Law: Delhi High Court

The Delhi High Court has quashed three criminal cases linked to cheque dishonour, reiterating that cheques returned with the remark “account blocked” due to insolvency proceedings cannot lead to criminal prosecution.

A single bench of Justice Neena Bansal Krishna passed the order while allowing petitions filed by Farhad Suri and Dhiren Navlakha, directors of Sumeru Processors Pvt. Ltd. The court said the section 138 of the Negotiable Instruments Act pertaining to cheque dishonor apply only when a payment fails because of lack of funds.

Here, payments were stopped by operation of law. “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 court said.

The case arose from complaints filed in 2020 by two individuals who claimed that Sumeru Processors had issued cheques towards repayment of friendly loans and settlement of rental dues.

The cheques were dated September 2020 and ranged from Rs 24 lakh to Rs 1.10 crore. All three cheques were returned unpaid with the endorsement “account blocked.” Criminal complaints were then filed, and summons were issued by a metropolitan magistrate in 2021.

The directors challenged these cases, pointing out that the company had entered insolvency in April 2019 under an NCLT, Delhi order. They said that once insolvency began, control over the company's bank accounts shifted to the interim resolution professional.

Liquidation proceedings followed in December 2019. As a result, they argued, they had no authority over the accounts in September 2020 and could not have legally issued the cheques.

The High Court agreed. It said that once insolvency proceedings start, directors lose control over the company's finances and bank accounts. Referring to the Supreme Court's ruling in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., the court said cheques issued after insolvency begins cannot be the basis for criminal prosecution.

It also clarified that criminal liability for cheque dishonour arises only when the drawer has control over the bank account at the relevant time, which was clearly absent in this case.

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