Cheque Dishonour Due to Account Blockage Not Grounds for Criminal Action, Rules Court
In a significant ruling, the Karnataka High Court has quashed criminal proceedings against V.B. Nagaraj under Section 138 of the Negotiable Instruments Act, 1881. The court found that the dishonour of a cheque due to account blockage did not meet the criteria for initiating action under this provision. The decision was delivered by Justice H.P. Sandesh on September 25, 2026, in Criminal Petition No. 4428 of 2019.
The case involved a partnership firm, Shree Vinayaka Traders, which had been managed by two partners, one of whom, T.M. Prabhakaraiah, passed away on May 21, 2017. Following his death, the firm's bank account was blocked. Despite being aware of Prabhakaraiah's demise, the complainant, M/s. Peregrine Phosphate (P) Ltd., presented a cheque from the firm on March 28, 2018, which was dishonoured with the endorsement "account blocked."
Justice Sandesh noted that under the Negotiable Instruments Act, proceedings for cheque dishonour are applicable when the dishonour is due to insufficient funds or exceeding the agreed arrangement, not when the account is blocked. He emphasized that the blockage resulted from the death of a partner, not financial inadequacy, thus falling outside the ambit of Section 138.
The court also highlighted the implications under the Partnership Act, 1932, noting that the death of a partner in a two-member partnership leads to automatic dissolution unless a contract states otherwise. The ruling referenced several precedents, including the Supreme Court's verdict in Commissioner of Income Tax v. Seth Govindram Sugar Mills, which underscored that a new partnership does not automatically include heirs of deceased partners.
This judgment aligns with previous decisions from other high courts, affirming that the reason for cheque return must be scrutinized to determine its validity under Section 138. The ruling underscores the necessity for legislative provisions to be interpreted strictly, ensuring that criminal liability is not imposed in scenarios where statutory ingredients are absent.
Bottom Line :
Proceedings under Section 138 of the Negotiable Instruments Act cannot be initiated if the dishonour of the cheque is due to the account being blocked, rather than due to insufficiency of funds. Additionally, a cheque issued after the death of a partner managing the firm's transactions and beyond its validity period does not attract Section 138 of the NI Act.
Statutory provision(s):
Negotiable Instruments Act, 1881 Section 138, Partnership Act, 1932 Section 42, Partnership Act, 1932 Section 25
V.B. Nagaraj v. M/s. Peregrine Phosphate (P) Ltd., (Karnataka) : Law Finder Doc id # 2986218
