Section 138 Case Not Maintainable Against Director Once Liquidator Takes Control: Delhi High Court

The Delhi High Court on 4 May quashed cheque bounce proceedings against a director of P.R.J Enterprises Limited, holding that once a Provisional Liquidator is appointed and takes control of the company's affairs, the directors lose authority over its bank accounts and cannot be prosecuted under Section 138 of the Negotiable Instruments Act.

Justice Vikas Mahajan observed that the petitioner-director could not be fastened with criminal liability since he was divested of control over the company's banking operations upon appointment of the Provisional Liquidator. He wrote:

“Under this judicial arrangement, the company‟s business operations, the administration of its assets, and the validity of its contractual engagements are contingent upon the oversight and formal authorization of the liquidator, who serves as the custodian of the corporate estate.”

The case arose from a petition filed by the director of P.R.J Enterprises seeking quashing of proceedings under Section 138 NI Act arising from dishonour of cheques amounting to Rs 45 lakh.

The company had entered into an arrangement with the Municipal Corporation of Delhi for deployment of auto tippers in Shahdara Zone and, in that context, Shree Balaji Enterprises executed a Memorandum of Understanding with P.R.J Enterprises for purchase of 18 auto tippers, paying Rs 45 lakh as advance.

Subsequently, disputes arose between the parties, following which P.R.J Enterprises issued cheques towards refund of the advance amount. The cheques were dishonoured on multiple occasions due to insufficiency of funds, leading to issuance of a statutory demand notice and filing of a complaint under Section 138 NI Act against the company and its director.

Before the dishonour of the cheques and issuance of the demand notice, the High Court had already appointed a Provisional Liquidator in winding up proceedings in May 2012 and restrained the company, its directors, and officers from dealing with its assets or operating bank accounts. The company was later dissolved in 2020.

The petitioner contended that he had no control over the company's affairs at the relevant time and could not ensure honouring of the cheques, as the cause of action arose after the Provisional Liquidator had taken charge.

Accepting the contention, the Court held that once the powers of a director stand transferred to the Provisional Liquidator by operation of law, the director becomes incapable, both legally and practically, of operating the company's bank accounts. It held:

“…..it is clear that once the powers vested in the petitioner (in his capacity as a director) stood transferred to the Provisional Liquidator by operation of law, the petitioner was legally and practically rendered incapable of controlling the bank accounts of respondent no. 2/company.”

The Bench further held that the expression “an account maintained by him” under Section 138 NI Act requires the accused to have operational control over the account on the relevant date, including the ability to govern financial transactions such as clearance of cheques.

Since the Provisional Liquidator had assumed control over the company's affairs, the Court held that the petitioner could not be said to be maintaining or operating the account when the cause of action arose. It concluded that the essential ingredients of Section 138 NI Act were not satisfied and the complaint was not maintainable.

Accordingly, the High Court quashed the proceedings against the petitioner-director.

For Petitioner: Advocate Sangeeta Jain

For Respondents: Advocates Ram Ekbal Roy, Aman Nihal, Shekhar Jha and Sunil Kumar Jha