Sec.138 NI Act Not Maintainable On Cheque Issued After Company's Dissolution: Karnataka High Court

The Karnataka High Court on 1 July held that proceedings under Section 138 of the Negotiable Instruments Act, 1881 are not maintainable where a cheque is issued in the name of a company that had already been struck off and dissolved.

A Bench of Justice M Nagaprasanna allowed the petition and quashed the complaint proceedings initiated against Giga Networks Private Limited and its former director. He observed:

“On a blend of the judgments rendered by the Apex Court and that of the High Court of Delhi, what would unmistakably emerge is that, a cheque allegedly issued in the name of the company, after dissolution of the company, would not become a legally enforceable instrument, it would be void ab initio.”

The complainant alleged that the petitioner had borrowed Rs. 60 lakh as a hand loan in November 2014. It further stated that a cheque dated 30 July 2017 was issued towards repayment in the name of Giga Networks Private Limited.

The cheque was dishonoured on presentation with the endorsement “account closed”, following which a statutory demand notice was issued and proceedings under Section 138 were instituted. The Registrar of Companies had struck off and dissolved Giga Networks Private Limited on 16 March 2011.

The petitioner challenged the proceedings before the High Court, contending that the company had ceased to exist years before the alleged issuance of the cheque. It argued that neither the company nor its former director could be prosecuted under Section 138 in such circumstances. The complainant, however, maintained that the liability of the petitioner survived despite the dissolution of the company.

The Court relied on the judgment of the Supreme Court of India in Vishnoo Mittal v. Shakti Trading Company, which held that a director cannot be prosecuted under Section 138 when he had ceased to have control over the affairs of the company. It also referred to decisions of the High Court of Delhi holding that complaints under Section 138 are not maintainable where a cheque is issued after a company has been struck off or has gone into liquidation.

Further, the Bench noted that Giga Networks Private Limited had been dissolved on 16 March 2011, whereas the complaint was based on a cheque allegedly issued in 2017. It held that once the company had ceased to exist, the cheque could not give rise to a legally enforceable liability under Section 138 of the NI Act.

Accordingly, the High Court held that the former director could not be fastened with criminal liability and quashed the complaint proceedings.

For Petitioner: Advocate Nishit Kumar Shetty

For Respondent: Advocate M.R Balakrishna