Cheque Dishonour During Insolvency: Why “Account Blocked” Cases Fail Under Section 138 NI Act (Delhi HC)
EduLaw EditorialLandmark JudgementsA cheque that bounces because an NCLT-appointed IRP has taken over the company’s bank account is not the same as a cheque that bounces for want of money and the Delhi High Court has now said so in unambiguous terms, quashing three criminal complaints and drawing a sharp statutory line between genuine payment default and insolvency-driven incapacity. Title: Dishonour of Cheque Due to “Account Blocked” Amid Insolvency Proceedings Does Not Attract Section 138 NI Act Liability Case Name: Farhad Suri & Anr. v. Praveen Choudhary & Ors. Case Number: CRL.M.C. 113/2021, CRL.M.C. 117/2021 and connected petitions Court: High Court of Delhi at New Delhi Judges: Justice Neena Bansal Krishna Judgment Date: December 16, 2025 Citation: 2025:DHC:11418 Abstract A cheque bounces for a hundred different reasons, but Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) was drafted with only one of them in mind — a drawer who had the money, or was supposed to have it, and simply didn’t pay. What happens when the dishonour has nothing to do with the drawer’s solvency at all, but with the fact that an Interim Resolution Professional or Liquidator has already taken charge of the account under a moratorium declared pursuant to Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) ? The Delhi High Court confronted precisely this question in Farhad Suri & Anr. v. Praveen Choudhary & Ors. (2025:DHC:11418) , and answered it by quashing three criminal complaints filed under Section 138 against the former directors of a company that had already gone into liquidation. This case analysis unpacks the facts, the statutory architecture of Section 138 and Section 141 NI Act read against Section 14 IBC, the Court’s reasoning, and the wider doctrinal significance of the ruling for creditors, directors, resolution professionals, and criminal courts dealing with cheque-bounce litigation arising out of insolvent companies. Table of Contents Introduction: When a Bounced Cheque Is Not a Crime Factual Background of the Case The Core Legal Question Before the Delhi High Court Statutory Framework: Section 138, Section 141 NI Act, and Section 14 IBC The Court’s Reasoning: Why “Account Blocked” Falls Outside Section 138 Precedents Relied Upon and the Broader Jurisprudence Significance of the Ruling for the Insolvency-NI Act Interface Practical Implications for Creditors, Directors and Insolvency Professionals Conclusion and Key Takeaways 1. Introduction: When a Bounced Cheque Is Not a Crime Cheque dishonour litigation is, by volume, one of the busiest categories of criminal prosecution in Indian courts, and Section 138 NI Act has long been treated almost reflexively as a tool of debt recovery dressed up in penal clothing. But the provision was never meant to criminalise every bounced cheque; it was meant to punish a very specific wrong — a drawer who issues a cheque against an account he controls, knowing or having reason to know that it will not be honoured for want of sufficient funds or because it exceeds the arrangement made with the bank. The Delhi High Court’s decision in Farhad Suri is a reminder that this specificity matters, and that courts cannot allow Section 138 to be stretched to cover dishonour that has an entirely different, statutorily-mandated cause. Where a company’s bank account has already passed out of the directors’ control because of a Corporate Insolvency Resolution Process (“CIRP”) or liquidation, a cheque bearing the return memo “ACCOUNT BLOCKED” tells a story that has nothing to do with the mens rea Section 138 is built around. 2. Factual Background of the Case The petitioners before the Delhi High Court were former directors of a company that had become the subject of complaints under Section 138 read with Section 141 NI Act. In one complaint, the company had taken a friendly loan from the complainant, paid interest on it for some time, and then — after the parties purportedly settled the dues — issued a post-dated cheque that was returned unpaid marked “ACCOUNT BLOCKED.” In another complaint, the company had allegedly defaulted on rent and utility payments over several years, later settled the matter for a lump sum, and issued a cheque that met the identical fate. What both complainants had not accounted for was that the company’s affairs had already been taken over by an Interim Resolution Professional well before either cheque was signed and presented: the National Company Law Tribunal (“NCLT”) had admitted the company into CIRP, directed that all cheque books, securities, and bank operations be handed over to the IRP, and declared a moratorium under Section 14 IBC . The company subsequently went into liquidation, triggering a fresh moratorium. The cheques in question were dated roughly eighteen months after CIRP had commenced and nearly eleven months after the Liquidator had formally taken charge — meaning the petitioners, as erstwhile directors, no longer had any authority whatsoever over the account on which the cheques were purportedly drawn. 3. The Core Legal Question Before the Delhi High Court The petitions were filed under Section 482 of the Code of Criminal Procedure, 1973 (the erstwhile provision for quashing criminal proceedings, now substantially mirrored by Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023), seeking to quash the summoning orders issued against the directors. The question the Delhi High Court had to answer was narrow but consequential: can a person be prosecuted under Section 138 NI Act for a cheque that bounced not because he failed to maintain sufficient funds, but because a statutory moratorium had already stripped him of any authority to operate the account at all? Put differently, does “ACCOUNT BLOCKED” due to CIRP or liquidation amount to the same thing, in the eyes of the law, as “insufficient funds” or “exceeds arrangement” — the only two grounds Section 138 recognises as triggering criminal liability? 4. Statutory Framework: Section 138, Section 141 NI Act, and Section 14 IBC Section 138 NI Act creates an offence only where three cumulative ingredients are satisfied: the cheque must be drawn on an account maintained by the drawer; it must be issued in discharge, in whole or in part, of a legally enforceable debt or liability; and it must be dishonoured either for insufficiency of funds or because it exceeds the amount arranged with the bank. Section 141 NI Act extends liability to persons who, at the time the offence was committed, were in charge of and responsible for the conduct of the company’s business — but this vicarious liability is entirely parasitic on the primary offence being made out against the company itself. If the company cannot be said to have committed an offence under Section 138, Section 141 has nothing to attach to. Running alongside this is Section 14 IBC , which imposes a moratorium the moment CIRP is admitted, prohibiting the institution or continuation of suits and proceedings against the corporate debtor and effectively divesting the existing management of control over the company’s assets, including its bank accounts, which pass to the IRP or Resolution Professional under Sections 17 and 18 IBC . 5. The Court’s Reasoning: Why “Account Blocked” Falls Outside Section 138 Justice Neena Bansal Krishna held that once CIRP commenced and the moratorium under Section 14 IBC took effect, the petitioners “ceased to have any authority, control or right to operate” the company’s account, and any cheque purportedly issued thereafter could not have been validly issued by them at all. The Bench drew a sharp conceptual line between two categories of dishonour that are often conflated in cheque-bounce litigation: dishonour attributable to the drawer’s own conduct — such as genuine insufficiency of funds — and dishonour that results from an external, statutory incapacity that removes the drawer’s control over the account altogether. The Court held in terms that the dishonour of the cheques on the ground of “ACCOUNT BLOCKED” due to proceedings under the NCLT and the accounts being taken over by the IRP or Liquidator precludes liability under Section 138 NI Act , because it cannot be said that the drawer is “maintaining” the account within the meaning of the provision. Since there was no valid issuance of the cheques by the drawer and no dishonour attributable to insufficiency of funds, the essential ingredients of the offence remained unproved, and the complaints along with the summoning orders were quashed in their entirety. 6. Precedents Relied Upon and the Broader Jurisprudence The Delhi High Court anchored its reasoning in its own earlier ruling in Ganesh Chandra Bamrana & Ors. v. Rukmani Gupta (2022) , which had already held that once CIRP commences and the Section 14 IBC moratorium is imposed, directors lose control over the company’s bank accounts and cannot be prosecuted for cheques dishonoured thereafter. This line of reasoning sits comfortably within the larger arc of Supreme Court jurisprudence on the interface between the IBC and the NI Act. In P. Mohanraj & Ors. v. M/s Shah Brothers Ispat Pvt. Ltd. (2021) , a three-judge Bench of the Supreme Court held that proceedings under Sections 138 and 141 NI Act against a corporate debtor are themselves covered by the moratorium under Section 14(1)(a) IBC and cannot continue once CIRP is admitted — recognising Section 138 as a hybrid, quasi-criminal provision that primarily enforces a civil remedy. Later decisions, including the Supreme Court’s reasoning in cases such as Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. , clarified that while the moratorium shields the corporate debtor itself, it does not automatically immunise individual signatories or directors for cheques issued and dishonoured before the moratorium began. The Delhi High Court’s ruling in Farhad Suri extends this reasoning to its logical conclusion for cheques presented and dishonoured after the moratorium had already stripped the directors of control, treating the absence of “maintenance” of the account as fatal to the complaint, rather than resolving the matter solely through the moratorium bar. It is worth noting that this reasoning parallels — though is doctrinally distinct from — the Delhi High Court’s own more recent ruling that a cheque dishonoured because an account was frozen by a statutory authority such as the GST Department also falls outside Section 138, since an attached or frozen account cannot be said to be “maintained” by the drawer at the relevant time. 7. Significance of the Ruling for the Insolvency-NI Act Interface The practical significance of this judgment lies in the clarity it brings to a fact pattern that insolvency practitioners and criminal courts increasingly encounter: post-moratorium cheques that bounce not because anyone defaulted in the ordinary commercial sense, but because the statutory insolvency machinery has already taken over the account. By grounding its decision in the absence of “maintenance” of the account — a core ingredient of Section 138 itself — rather than relying purely on the moratorium as a procedural bar, the Delhi High Court has reinforced that such prosecutions fail on substantive, not merely jurisdictional, grounds. This distinction matters because a purely procedural bar (the moratorium) could, in theory, be revisited once CIRP concludes or the company exits insolvency, whereas a finding that the essential ingredients of the offence were never satisfied closes the door more permanently. The ruling also serves a cautionary function: it discourages the use of Section 138 complaints as a coercive pressure tactic against former directors of companies that have already passed into the hands of an IRP or Liquidator, where the real remedy for the creditor lies in filing a claim before the Resolution Professional or Liquidator under the IBC’s claims-and-distribution mechanism, not in criminal prosecution of individuals who no longer control the cheque book. 8. Practical Implications for Creditors, Directors and Insolvency Professionals For creditors, the judgment is a signal to check the status of a corporate debtor’s insolvency proceedings before presenting a cheque or initiating a Section 138 complaint; a cheque obtained from a company already under CIRP or liquidation, or presented after a moratorium has commenced, carries a material legal risk of the resulting complaint being quashed at the threshold. For directors and erstwhile promoters, the ruling offers a defensible basis to seek quashing under Section 482 CrPC (or its BNSS equivalent) where the dishonour memo itself — “ACCOUNT BLOCKED” rather than “insufficient funds” — evidences that the cause of dishonour lies in the insolvency process rather than any act or omission on their part. For Resolution Professionals and Liquidators, the case reaffirms that once statutory control over a corporate debtor’s accounts vests in them under Sections 17 and 18 IBC, that control is not merely administrative but has substantive legal consequences for how dishonour of instruments drawn on those accounts must be characterised. Courts dealing with Section 138 complaints are, correspondingly, expected to examine the dishonour memo and the surrounding factual matrix — including the timeline of CIRP admission, moratorium declaration, and transfer of account control — before mechanically issuing summons. 9. Conclusion and Key Takeaways Farhad Suri & Anr. v. Praveen Choudhary & Ors. is a useful reaffirmation that Section 138 NI Act, despite its routine use as a debt-recovery lever, remains anchored to specific statutory ingredients that cannot be presumed away. The Delhi High Court’s holding — that a cheque dishonoured because the account was blocked under an NCLT-sanctioned moratorium and taken over by an IRP or Liquidator cannot attract liability, since the drawer cannot be said to be “maintaining” the account — brings welcome precision to a fact pattern courts will see with growing frequency as insolvency proceedings under the IBC continue to intersect with commercial disputes. The broader lesson, consistent with the Supreme Court’s reasoning in P. Mohanraj, is that the legal position in any given cheque-dishonour case depends closely on the underlying facts — the precise reason recorded for dishonour, the timeline of insolvency proceedings, and who in fact exercised control over the account at the relevant time — and that criminal courts must examine these circumstances carefully before allowing Section 138 proceedings to proceed to trial.