Recently, the Delhi High Court held that proceedings under Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as ‘NI Act’) cannot be maintained against a company director once a Provisional Liquidator has already been appointed prior to dishonour of the cheque and issuance of the statutory demand notice. The Court observed that once the management and control of the company stand transferred to the Provisional Liquidator, the erstwhile directors become functus officio and lose authority over the company’s bank accounts.
Brief facts:
The case arose from a petition under Section 482 of the CrPC seeking quashing of proceedings initiated under Sections 138/141/142 of the NI Act, against a company director in relation to dishonour of cheques issued towards repayment of money advanced under a commercial arrangement connected with deployment of auto tippers for municipal work. The dispute emerged after multiple cheques issued by the company were dishonoured for insufficiency of funds. However, before dishonour of the cheques and issuance of the statutory demand notice under Section 138 of the NI Act, winding-up proceedings under Sections 433(e), 434 and 439 of the Companies Act, 1956 had already been admitted against the company, and a Provisional Liquidator had been appointed, restraining the company and its directors from dealing with company assets or operating its bank accounts. Despite these developments, criminal proceedings under the NI Act were instituted against both the company and its director.
Contentions of the Petitioner:
The Petitioner contended that once the company entered liquidation and a Provisional Liquidator was appointed, all powers relating to the management and operation of the company's accounts stood transferred to the liquidator by operation of law. The Counsel argued that the dishonour of cheques, issuance of statutory notice, and filing of complaint all occurred after the appointment of the Provisional Liquidator, thereby rendering the petitioner incapable of ensuring encashment of the cheques or complying with the demand notice. The Petitioner argued that complaints under Section 138 of the NI Act are not maintainable where liquidation proceedings and appointment of a liquidator precede dishonour of the cheque.
Contentions of the Respondent:
The complainant did not dispute the factual chronology relating to the appointment of the Provisional Liquidator, dishonour of cheques, issuance of legal notice, or subsequent dissolution of the company. No reply controverting the petitioner’s assertions was filed before the Court. The Respondent primarily sought continuation of the proceedings initiated under Section 138 of the NI Act against the petitioner and the company in respect of the dishonoured cheques.
Observation of the Court:
Justice Vikas Mahajan observed that “In view of the settled legal position as rendered in M/S PEC LTD (Supra) and M.L Gupta (Supra) the appointment of a Provisional Liquidator, occurring prior to the dishonour of the cheques and the issuance of the demand notice, effectively divested the petitioner of his managerial authority and control over the company‟s bank accounts. Since the statutory mandate of Section 138 of the N.I. Act requires the account to be “maintained” by the accused at the time of the offence, the transition of executive power to the Provisional Liquidator created a legal and practical impossibility for the petitioner to satisfy the demand or operate the accounts. Concomitantly, as the petitioner was neither in charge of the company‟s affairs nor capable of ensuring the encashment of the cheques on the date the cause of action crystallized, therefore, the essential ingredients of the offence are not met, and the complaint against the petitioner is held to be legally non-maintainable.”
The Court observed that the appointment of a Provisional Liquidator under the Companies Act, 1956, does not dissolve the company as a legal entity, but fundamentally alters its internal management structure by divesting the directors of their executive authority. The Bench explained that once a Provisional Liquidator is appointed, the directors become functus officio and cease to exercise effective control over the affairs, assets, and bank accounts of the company. According to the Court, all business operations and financial dealings thereafter remain subject to the supervision and authorization of the liquidator, who assumes custody of the corporate estate by operation of law. The Court thus clarified that the legal authority to deal with company accounts and financial transactions no longer remains with the erstwhile directors once liquidation proceedings commence.
The Bench held that for constituting an offence under Section 138 of the NI Act, the accused must retain effective control over the bank account on the date when the cheque is dishonoured and the statutory cause of action crystallises. The Court observed that the requirement extends beyond mere ownership of the account and necessarily implies continuous authority to operate and maintain the account in a legally functional state. The Court emphasised that if the account holder is legally disabled from operating the account because of judicial intervention or appointment of a liquidator, the foundational ingredients of the offence itself fail. The Bench further clarified that the law contemplates actual operational control and not merely historical association with the account.
The Court emphasised that the dishonour of cheques in the present case occurred after the company had already gone into liquidation and after restrictions had been imposed upon the directors from operating company accounts. The Bench observed that once the powers of the petitioner were transferred to the Provisional Liquidator, the petitioner was rendered legally incapable of ensuring encashment of the cheques or complying with the statutory demand notice issued under Section 138 NI Act. Referring to earlier precedents, the Court reiterated that when dishonour of cheque and issuance of demand notice occur after commencement of liquidation proceedings, continuation of prosecution against directors becomes legally unsustainable. According to the Court, criminal liability cannot be imposed where compliance with the statutory obligation itself becomes impossible due to the operation of law.
The decision of the Court:
The Court allowed the petition and quashed the Complaint Case along with all consequential proceedings pending before the Judicial Magistrate First Class, insofar as they related to the petitioner. The Court reaffirmed that for prosecution under Section 138 of the NI Act, the accused must retain effective control and authority over the bank account at the time the cheque is dishonoured and the statutory cause of action arises. Where a Provisional Liquidator has already assumed control over the company and its accounts prior to dishonour of the cheque, continuation of criminal proceedings against the erstwhile directors becomes legally untenable.
Case Title: Raj Kumar Jain Vs. M/S Shree Balaji Enterprisies and Anr.
Case No.: CRL.M.C. 1665/2023 & CRL.M.A. 6359/2023
Coram: Hon'ble Mr. Justice Vikas Mahajan
Advocate for the Petitioner: Adv. Sangeeta Jain
Advocate for the Respondent: Adv. Ram Ekbal Roy, Adv. Aman Nihal, Adv. Shekhar Jha, Adv. Sunil Kumar Jha
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