Introduction
Can a drawer be held criminally liable under Section 138 of the Negotiable Instruments Act when a cheque is dishonored not due to a voluntary act, but because the bank account was frozen by a government or judicial authority? This question sits at the heart of the judgment delivered by the High Court of Karnataka on September 25, 2025, in the case of M/s. ND Developers Private Ltd. v. Ritesh Raushan1. Presided over by the bench of Hon’ble Mr. Justice M. Nagaprasanna, the court decisively answered that for an offense to be made out, the drawer must maintain “authority and control” over the account at the time of presentation. If an account is debit-frozen by an external agency, the account holder is legally incapacitated from executing commands or ensuring sufficiency of funds; therefore, the essential ingredients of Section 138 specifically the requirement that the account be “maintained” by the drawer are not fulfilled.
The factual matrix of this dispute began when the respondent, purchased a flat from ND Developers under a “No Pre-EMI Scheme,” which required the company to pay interest on his home loan until possession was delivered. Following a breach of this contract, the company issued a cheque for ₹41,00,000 on March 9, 2024, to settle the resulting liability. However, before the cheque was presented, the company’s accounts were debit-frozen on May 24, 2024, by police authorities investigating unrelated crimes. When the respondent finally presented the cheque in June 2024, it was returned with the endorsement “account blocked situation covered in 21 25”. Despite the petitioner’s lack of awareness regarding the freeze at the time of their initial reply to the statutory notice, the complainant proceeded to file a criminal complaint, leading to the issuance of summons by the Magistrate.
Judicial Precedents Reinforcing the Principle
In quashing these proceedings, the High Court’s rationale centered on the definition of an “account maintained by the drawer”. The court observed that “maintain” implies an active, operative state where the holder is capable of governing financial transactions. Relying on the Delhi High Court’s findings in Vijay Chaudhary v. Gyan Chand Jain2, the court noted that an attachment by a court or authority disables the petitioner from operating the account, effectively stripping them of the ability to either deposit funds or issue binding instructions to the banker. This principle was further reinforced by Best Buildwell Pvt. Ltd. v. R.D. Sales3, which clarified that even if funds were insufficient, the freeze makes it impossible for a drawer to “maintain” sufficiency, thus failing to meet the penal criteria of the Act.
The court further integrated the Punjab and Haryana High Court’s view from Rajesh Meena v. State of Haryana4, emphasizing that the authority of the account holder must exist on the “effective date” the cheque becomes valid for presentation. In that case, accounts were blocked due to a moratorium under the Insolvency and Bankruptcy Code, which the court held was not attributable to the account holder. Similarly, in Farhad Suri v. Praveen Choudhary5, the Delhi High Court reiterated that a statutory prohibition on payments during winding-up proceedings falls outside the ambit of Section 138 because the essential ingredient of dishonor due to inadequate funds remains unestablished.
The court also considered the impact of the Supreme Court’s decision in Vishnoo Mittal v. Shakti Trading6, where a moratorium was imposed and management was taken over by an Interim Resolution Professional (IRP). The Apex Court held that because bank accounts were operating under the instructions of the IRP, it was impossible for the suspended director to repay the amount. Additionally, the court noted Ceasefire Industries Ltd. v. State7, which observed that while “Account Closed” or “Payment Stopped” can sometimes fall under Section 138 if funds were insufficient, a dishonor because the account was frozen by a statutory authority does not constitute an offense. Finally, reference was made to Challani Rank Jewellery v. Ashok Kumar Jain8, where the Madras High Court explored the nuances of quashment versus trial when the accused must demonstrate their lack of awareness regarding the freeze at the time of drawing the cheque.
Ultimately, the judgment reinforces that Section 138 is not a provision of strict liability for every returned cheque, but one anchored in the drawer’s failure to manage an account they actually control. By quashing the proceedings, the court prevented what would have been a miscarriage of justice, acknowledging that a citizen cannot be prosecuted for a financial default caused by the state’s own intervention in their banking operations. This narrative clarifies that legal “maintenance” of an account requires more than just a name on a ledger; it requires the functional power to honor the commitment made.
Conclusion
The judgment of the High Court of Karnataka in present ruling clarifies that liability under Section 138 of the Negotiable Instruments Act, 1881 arises only when the drawer has effective authority and operational control over the bank account at the time the cheque is presented. Where an account is frozen or attached by a governmental or judicial authority, the account holder is legally incapable of operating the account or ensuring the availability of funds, thereby failing to satisfy the statutory requirement that the account must be “maintained” by the drawer. The ruling therefore affirms that Section 138 does not impose strict liability for every dishonored cheque, but applies only where the default stems from the drawer’s own conduct, not from circumstances created by external legal intervention.
Citations
Expositor(s): Adv. Aparna Shukla
