Section 138 NI Act Not Attracted When Cheque Bounces Due To Subsequent Freezing Of Drawer's Account: Karnataka High Court

When the drawer of the cheque could not have exercised real control or authority upon the relevant bank account on which a cheque is drawn, its dishonour would not warrant proceedings under the Negotiable Instruments Act, held the Karnataka High Court.

“…The ostensible reason for dishonouring of the cheque has to be a voluntary act in the control of the accused and if the cheque has been dishonoured for being debit frozen, it cannot be the voluntary act of the accused. The accused should be capable of executing the command to govern financial transaction which include clearance of cheques…”, the single judge bench of Justice M.Nagaprasanna held.

The complainant/payee had purchased a flat in the first petitioner company's (ND Developers) project called ND Passion Elite. According to the complainant/ payee, there was a breach of contractual obligation between the two parties that led to the issuance of the cheque to the tune of Rs. 41 lakhs as compensation for not handing over the possession of the flat.

The account over which the cheque was issued on 09.03.2024 became debit frozen on 24.05.2024. At a later point in time, i.e., on 05.06.2024, the complainant/payee presented the cheque for realization. The cheque got dishonoured. The endorsement for cheque dishonour issued by the bank noted that 'Account blocked covered in 2125'.

As per Annexure D of Model List of Objections in the Reserve Bank of India Uniform Regulations and Rules for Bankers' Clearing Houses (2012), a situation covered under 21 would mean that the payment is stopped by an attachment order. Covered under 25 would mean that withdrawal is stopped in lieu of insolvency of the account holder.

The court clarified that, in order to attract S.138 of the Negotiable Instruments Act, the accused should have control over the account when the cheque becomes due for presentation. The drawer of the cheque can't be said to possess authority or control over an account if there is a live debit freeze on it.

The court, therefore, wondered whether the proceedings under Section 138 of the Act could be permitted to continue due to dishonor of cheque caused by blockage or debit freezing of the account.

In the current case, the court observed that the petitioner/drawer of cheque has sufficiently demonstrated the relevant account to be active at the time of issuing the cheque. It was only two months later that the account freeze came into effect because of the instructions from the Police Department. The police notice issued to the Bank of Maharashtra mentioned that the accounts of the Company, ND Developers, and its Managing Director should be frozen. The notice reasoned that the debit freeze was necessary in furtherance of an ongoing investigation regarding offences under Sections 406, 506 and 420 of the IPC r/w Section 34 of the IPC involving the petitioners.

The court also noted that the case laws referred to by the complainant pertained to specific instances where a 'stop payment' instruction was given by the drawer of the cheque or when payments were stopped by a court order.

“…The complaint, in a few cases, was held to be maintainable when cheque was dishonoured, as it was for the accused to demonstrate that he was not aware of the freezing of the account when the cheque was drawn and the account had sufficient balance”, the court noted.

Even when the petitioners replied to the legal notice issued by the complainants, the former were not aware of the account freeze, as evident from their reply to the notice. It was only after a month that the drawee-bank communicated the same to them.

As a result, the single judge bench quashed C.C.No.1446 of 2025 pending before the XIII Additional Chief Judicial Magistrate, Bengaluru for the offence under Section 138.

Case Title: M/S. ND Developers Private Ltd & Ors. v. Ritesh Raushan

Case No: Criminal Petition No.11207 OF 2025

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