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Can a director be held criminally liable for cheque dishonour when he was legally prohibited from operating the company’s bank account at the relevant time? This important question came before the Delhi High Court in Raj Kumar Jain v. Raj Kumar Jainshree Balaji Enterprises1, where the Court examined the scope of liability under Sections 138 and 141 of the Negotiable Instruments Act, 1881 in the context of corporate liquidation. The judgment is significant because it addresses a recurring issue in insolvency and cheque dishonour litigation. The Court answered this in the negative and held that criminal liability under Section 138 cannot survive where the accused no longer “maintained” the bank account due to legal restrictions imposed by the winding-up process.
The dispute arose from a commercial transaction involving M/s PRJ Enterprises Ltd., which had issued two cheques amounting to Rs. 45 lakh in favour of the complainant. The cheques were issued in January 2012 in relation to liabilities arising out of a failed MCD auto-tipper deployment contract. However, before the cheques were presented for encashment, the Delhi High Court had already admitted a winding-up petition against the company under Section 433(e) of the Companies Act, 1956 and appointed a Provisional Liquidator on 23 May 2012. The order specifically restrained the directors from dealing with or operating the company’s assets and bank accounts.
Despite the appointment of the Provisional Liquidator, the cheques were later dishonoured on 15 June 2012 with the remark “Funds Insufficient.” A statutory demand notice under Section 138 NI Act was thereafter issued, followed by criminal proceedings against the company and its director. The petitioner-director challenged these proceedings before the Delhi High Court under Section 482 CrPC2, arguing that once the liquidator assumed control over the company’s affairs, he no longer had the legal authority to operate the account or ensure payment of the cheques.
The central issue before the Court was the interpretation of the phrase “an account maintained by him” appearing in Section 138 of the Negotiable Instruments Act. The Court emphasized that Section 138 creates criminal liability only when the accused maintains and controls the bank account from which the cheque is issued. Justice Vikas Mahajan clarified that merely being named as a director or being the original signatory to the cheque does not automatically satisfy the statutory requirement. According to the Court, the expression “maintained” implies actual and effective control over the account. A person must possess the authority to issue binding instructions to the bank, deposit funds, and ensure clearance of the cheque at the time when the cheque is presented and dishonoured.
The Court held that this operational control completely ceased once the Provisional Liquidator was appointed. Under Sections 450, 456, and 457 of the Companies Act, 1956, the liquidator becomes the exclusive authority empowered to manage the company’s affairs and deal with its assets and negotiable instruments. Consequently, the directors effectively become functus officio and lose all executive authority over the company’s financial operations, the Court concluded that one of the essential ingredients of Section 138 was absent.
An important aspect of the judgment is the Court’s discussion on the legal consequences of appointing a Provisional Liquidator. The Court observed that although the company itself continues to exist during liquidation proceedings, the directors lose their authority to independently manage the company’s assets and affairs.
The Provisional Liquidator acts as the custodian of the company’s estate and acquires exclusive authority to operate the company’s accounts and handle financial transactions. Therefore, once the winding-up order and consequential restrictions came into effect, the petitioner-director could neither operate the account nor legally comply with the demand notice issued under Section 138.
The Court emphasized that criminal liability cannot be imposed in situations where compliance becomes legally impossible. Since the petitioner had been divested of operational authority by operation of law itself, he could not be prosecuted for failure to honour the cheque. This reasoning reflects a broader legal principle that criminal statutes must be interpreted in a manner that does not punish a person for acts beyond his legal control.
The Court referred to M.L. Gupta v. CEAT Financial Services Ltd.3, where it was held that once a company enters liquidation and directors lose authority over the company’s affairs, liability under Section 138 cannot continue merely because the cheque had originally been issued under their management. The Court in that case recognized that the dishonour resulted from legal restrictions and not from deliberate default. The judgment also relied upon M/S PEC Ltd. v. M/S Sabari Exim Pvt. Ltd.4, where the Delhi High Court had similarly quashed proceedings against directors after appointment of a Provisional Liquidator. The Court observed that under Section 457(2)(iii) of the Companies Act, only the liquidator possesses authority to draw, endorse, or deal with negotiable instruments on behalf of the company.
The Court further referred to Best Buildwell Pvt. Ltd. v. R.D. Sales5, where bank accounts had been frozen by GST authorities. In that case, the Court held that Section 138 liability could not arise because the accused no longer had operational control over the account. Similarly, in Vijay Chaudhary v. Gyan Chand Jain6, it was held that once a bank account is attached by court orders, the account holder loses the ability to issue binding instructions to the bank. After examining the statutory framework and earlier precedents, the Delhi High Court held that the complaint against the petitioner-director was legally non-maintainable. As a result, the Court quashed the complaint, summoning orders, and all proceedings pending against the petitioner under Sections 138, 141, and 142 of the Negotiable Instruments Act.
The decision provides important guidance on the limits of vicarious criminal liability in corporate cheque dishonour cases. By closely examining the interaction between company law and the Negotiable Instruments Act, the Delhi High Court underscored that criminal prosecution must rest upon the existence of a legally enforceable obligation capable of being discharged by the accused. The ruling serves as a reminder that statutory liability cannot be detached from the legal realities governing corporate administration and liquidation. As insolvency-related disputes increasingly intersect with cheque dishonour proceedings, the judgment offers a clear framework for determining responsibility where control over a company’s affairs has shifted by operation of law.
Citations
Expositor(s): Adv. Aparna Shukla, Intern Anushka Gupta
