The Karnataka High Court (Bengaluru Bench) has held that where a cheque is allegedly issued in the name of a company after the company has already been struck off and dissolved, the cheque is not a legally enforceable instrument and prosecution under Section 138 of the NI Act is not maintainable against the former director. The Court clarified that this is different from a case where the cheque was validly issued while the company existed and only later, during the pendency of proceedings, the company goes into liquidation, winding up, or faces some other legal impediment. In such later-event cases, proceedings may continue against the persons covered by Section 141, but not where the very cheque itself post-dates the dissolution.
A Single Judge Bench of Justice M. Nagaprasanna found that the company on whose account the cheque was drawn had already been struck off and dissolved long before the cheque was allegedly issued. The record showed that the company had applied for closure in 2010, and the Registrar of Companies struck off its name and declared it dissolved on March 16, 2011. Despite this, the legal notice was issued in September 2017 and the complaint was filed in October 2017 on the basis of a cheque allegedly issued in the company’s name after its dissolution.
The Bench observed that once a company is struck off and dissolved, it loses its juristic personality and cannot validly operate as a legal entity unless restored in accordance with law. A cheque allegedly issued in the name of such a dissolved company after its dissolution cannot become a legally enforceable instrument and would be void ab initio. Therefore, proceedings under Section 138 of the NI Act cannot be sustained on the basis of such a cheque.
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The Bench drew support from decisions dealing with moratorium, liquidation and winding up, and explained that where a person no longer has legal control over the company or its bank account, the statutory ingredients of Section 138 are not satisfied. It emphasized that Section 138 requires the cheque to be drawn on an account “maintained” by the drawer, and this presupposes legal authority and control over the account at the relevant time. In the present case, the company had ceased to exist in 2011 itself, so the former director could not be made criminally liable for a cheque allegedly issued in 2017 in the company’s name.
The Bench also examined the complaint and found that it did not contain the necessary averment that the petitioner was in charge of and responsible for the day-to-day affairs of the company at the relevant time. The complaint only stated that accused No. 2 was represented by accused No. 1 and that accused No. 1 had issued the cheque. Since the cheque was drawn on the account of the company, and there was no proper pleading satisfying the requirements for fastening director liability, this was an additional reason why the proceedings could not be allowed to continue.
Briefly, a petition was filed under Section 482 CrPC seeking quashing of a cheque bounce case pending under Section 138 of the Negotiable Instruments Act. The petitioner was a former director of Giga Networks Private Limited, and the complainant alleged that in November 2014 he had advanced a hand loan of Rs. 60 lakhs to the petitioner, to be repaid within 30 months. It was further alleged that in July 2017 a cheque for Rs. 60 lakhs were issued towards discharge of that liability, but when presented, it was dishonoured with the endorsement “account closed”.
