Delhi HC holds directors not liable under Section 138 NI Act where cheques are dishonoured due to account blockage after IBC moratorium.
- rit arora
- Dec 30, 2025
- 2 min read
The intersection of cheque dishonour proceedings under Section 138 of the Negotiable Instruments Act, 1881 and insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) has been a recurring area of litigation. In a significant decision delivered on 16 December 2025, the Delhi High Court has reiterated that criminal liability under Section 138 NI Act cannot survive where cheques are dishonoured due to statutory insolvency proceedings and loss of control over company accounts.
Background of the Case
Multiple complaints under Section 138 NI Act were filed alleging dishonour of cheques issued by a private limited company and its directors. The cheques, dated September 2020, were returned unpaid with the remark “ACCOUNT BLOCKED”.
However, crucially:
The company had already entered Corporate Insolvency Resolution Process (CIRP) in April 2019.
A Liquidator was appointed in December 2019, and
All bank accounts, cheque books, and financial control stood vested with the IRP/Liquidator, in terms of Sections 14, 17, and 18 of the IBC.
Despite this, criminal complaints were pursued against the directors.
Key Legal Issues Before the Court
The High Court examined two fundamental questions:
Whether directors can be prosecuted under Section 138 NI Act for cheques issued or presented after initiation of CIRP / liquidation?
Whether dishonour of a cheque due to “ACCOUNT BLOCKED” satisfies the statutory requirement of dishonour for insufficiency of funds?
Findings of the Delhi High Court
1. No Liability Once CIRP / Liquidation Commences
Relying on settled law, including P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., the Court held that:
Once CIRP is admitted and moratorium under Section 14 IBC is imposed,
Directors lose all authority and control over the company’s bank accounts, and
Cheques allegedly issued thereafter cannot be attributed to them.
Accordingly, prosecution under Section 138 NI Act cannot be sustained when the accused had no legal capacity to operate the account.
2. “Account Blocked” Is Not Equivalent to Insufficiency of Funds
The Court further clarified that:
Section 138 NI Act is attracted only when dishonour is due to insufficiency of funds or analogous reasons attributable to the drawer.
Where a cheque is returned unpaid because the account is blocked due to statutory insolvency proceedings, the essential ingredient of Section 138 is not satisfied.
The expression “account maintained by him” under Section 138 requires not only ownership of the account, but actual authority and control over it at the time of presentation.
The Delhi High Court Quashed all summoning orders, and held that continuation of criminal proceedings in such circumstances would amount to abuse of the process of law.
Conclusion
The Delhi High Court’s decision brings much-needed certainty to cheque dishonour jurisprudence in insolvency scenarios. By reaffirming the primacy of the IBC and the limited scope of Section 138 NI Act, the Court has protected directors from unwarranted criminal prosecution where statutory mechanisms prevent honouring cheques.
Find the judgment here
