The Delhi High Court has ruled that if a cheque is dishonoured due to the drawer's bank account being frozen, rather than for lack of funds, then prosecution under Section 138 of the Negotiable Instruments Act, 1881, does not apply. Justice Ravinder Dudeja gave this decision while quashing a criminal case filed against M/s Best Buildwell Pvt. Ltd. and its directors.
In this case, the petitioners issued two cheques to the respondent, M/s R.D. Sales, in November and December 2023, for a payment of ₹2.4 lakh each. The cheques were meant to be presented only after prior consent. However, before they could be presented, the Central Goods and Services Tax (CGST) Department attached the petitioners' bank account on 22 January 2024 under Section 83 of the CGST Act, thereby freezing it.
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Despite being informed about this, the respondent presented the cheques in February 2024. As expected, they were returned unpaid. The bank return memo cited “insufficient funds,” but it was later confirmed that the account had been frozen, making transactions impossible.
"Even though the cheque return memo may mention its reason for dishonor as 'insufficient funds', the fact remains that the petitioners' account was frozen by the CGST Department, and thus, it could not be said to be 'maintained' by them at the relevant time," the Court said.
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The Court highlighted that for Section 138 of the NI Act to be applicable, the account must be “maintained” by the drawer. A frozen account, as the Court clarified, does not meet this requirement because the account holder cannot issue valid instructions or ensure sufficient funds.
The petitioner had also submitted that they informed the respondent about the freezing of the account and requested them not to present the cheques until the issue was resolved. Nevertheless, the respondent proceeded with the presentation and then initiated criminal proceedings.
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"Even if the funds in the account were insufficient at the time of presentation of the cheques, the account having been frozen by the CGST, it would not have been possible for the petitioner to maintain sufficiency of funds in his account for the cheques to be honoured," Justice Dudeja noted.
Relying on previous judgments including Deepinder Singh Bedi v. State, the Court held that freezing of the account due to legal action by tax authorities is beyond the drawer's control and hence cannot be a ground for criminal liability.
Thus, the Court quashed the summoning order dated 18 September 2024 issued by the trial court and granted relief to the petitioners.
Case title: M/S Best Buildwell Pvt. Ltd. & Ors. M/S R.D. Sales
Case no.: CRL.M.C. 1326/2025
