Closed Bank Accounts and Prosecution under Section 138 of Negotiable Instruments Act, 1881

Closed Bank Accounts and Prosecution under Section 138 of Negotiable Instruments Act, 1881

Payment Stopped by Drawer and Prosecution under Section 138 of Negotiable Instruments Act, 1881

Legislative Intent behind Section 138 of Negotiable Instruments Act, 1881

Requirements to Maintain a Complaint for Offence under Section 138 of Negotiable Instruments Act, 1881 

"Account Maintained by him" - Meaning of Expression in S.138 of Negotiable Instruments Act, 1881 

IBC, 2016 and Effect of Proceedings under IBC in case of Cheque Dishonour under Negotiable Instruments Act, 1881

In case of Rajesh Meena v. State of Haryana [2019] GCtR 6462 (P&H) dealing with Section 138 of Negotiable Instruments Act, 1881 it was argued by complainant (C) that "these provisions have been interpreted on number of occasions wherein it was held that in cases where the account is “closed” or “payment was stopped” by drawer even then complaint under Section 138 NI Act would be maintainable."

It was held that provisions of Section 138 of NI Act, 1881 cannot be interpreted narrowly because if argument of the drawer is accepted, it would defeat the legislative intent. 

There was no merit in the argument of accused (A) that only either of the two grounds i.e. “insufficient funds” or “the amount exceeds the arrangement” must exist as a reason for dishonour of cheque in order to launch prosecution against the accused. Resultantly, the said argument of accused was rejected.

A careful analysis of Section 138 of NI Act reveals that the first and foremost requirement to maintain the complaint under Section 138 of NI Act is that the cheque issued by the account holder must be from the account maintained by account holder with the drawer-Bank for discharge in whole or in part of any debt or other liability.

The expression "account maintained by him" as appearing in Section 138 of NI Act carries great significance and meaning. The dictionary meaning of “Maintain” (as contained in Oxford Dictionary) is defined as:- the act of making the state or situation continue. Therefore, the said expression “account maintained by him” cannot be construed narrowly to mean that if the account belongs to the accused, the necessary ingredient would be complete. This expression “account maintained by him” must necessarily include that the said account is not only alive and operative, but the account holder is capable of executing command to govern the financial transactions which include the clearance of cheques etc. The authority and control of the account holder upon the account must exist on the effective date i.e. when the cheque becomes valid for presentation in the bank. It is settled law that mere issuance of a cheque is not an offence, but it becomes punishable when the said cheque is dishonoured. Mere fact that the record of the drawer bank shows a particular name as account holder would not be sufficient to establish that account is being maintained by the account holder, unless the said account holder holds the authority and control over the said account. In other words, if an account holder is deprived off his authority, control and dominion over the bank account, it cannot be said that the account is being maintained by the said account holder.

The provisions of Insolvency and Bankruptcy Code, 2016 ("IBC") makes it absolutely clear that whenever a corporate debtor is facing the proceedings before the adjudicating authority (NCLT), then the control and management of the said corporate debtor can be vested with the Interim Resolution Professional. Admittedly, the post dated cheques were given containing the dates as 27.06.2017 and 27.07.2017, but prior to the effective dates the said account was blocked, which cannot at all be attributed to the account holder, as it was a result of the order passed by NCLT, New Delhi and therefore, by virtue of the said order, the authority and control of the account holder over the account ceased to exist. Here, it was noted that because of prohibitory orders by NCLT New Delhi, the account in question stood blocked and therefore, the request was made to the complainant to withdraw the legal notice. It was also noted that accused had further requested that as and when the accused would get the permission to operate the account of the company, the payment in respect of the cheques in question would be made to the complainant. 

The proceedings under S.138 of NI Act were quashed.