Delhi HC: Cheque Bounce Cases Invalid Against Dissolved Firms

Delhi High Court Rules: Cheque Bounce Cases Not Maintainable Against Dissolved Companies

Justice Arun Monga Clarifies That a Struck-Off Company Loses Its Legal Personality

Court Quashes Criminal Proceedings Under Section 138 NI Act in Two Petitions

By Our Legal Reporter

New Delhi: October 30, 2025: In a significant judgment, the Delhi High Court has held that criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) cannot be maintained when the cheque in question is issued by or presented on behalf of a dissolved or struck-off company. The ruling came from Justice Arun Monga, who quashed two pending criminal complaints against directors of a company that had been dissolved before the cheque dishonour cases were filed.

The decision clarifies an important legal principle: once a company is struck off the register of companies and ceases to exist, it loses its juristic personality. As a result, any cheque issued in its name cannot be treated as a legally enforceable instrument.

Background of the Case

The petitions were filed by directors of a company that had been struck off under the Companies Act. Despite the company’s dissolution, criminal complaints under Section 138 NI Act were filed against them for dishonour of cheques issued by the company.

The directors argued that:

The company had already been dissolved and no longer existed in the eyes of law.
A dissolved company cannot be treated as a valid drawer of a cheque.
Proceedings under Section 138 NI Act require a legally enforceable debt or liability, which cannot exist when the company itself has ceased to exist.

Court’s Observations

Justice Arun Monga made several key observations:

Loss of Juristic Personality: Once a company is struck off and dissolved, it loses its legal identity. Any act done on its behalf is void ab initio (invalid from the beginning).
Invalid Cheques: A cheque issued in the name of a dissolved company cannot be considered a valid instrument because there is no existing drawer or account holder in law.
Section 138 NI Act Requirements: For a cheque bounce case to be sustained, there must be a validly issued cheque drawn on an existing account. Since a dissolved company has no valid account, the basic requirement of Section 138 is not met.
Restoration Option: The only way such a company can regain its legal personality is through restoration under Section 252 of the Companies Act, 2013. Until then, no proceedings can be initiated against it under the NI Act.

The Court’s Decision

The High Court allowed the petitions and quashed the criminal complaints pending against the directors. It held that continuing such proceedings would be an abuse of the legal process.

Justice Monga emphasized that the law cannot recognize actions taken in the name of a non-existent entity. Therefore, the complaints filed under Section 138 NI Act were not legally sustainable.

Why This Judgment Matters

This ruling has wide implications for cheque bounce cases involving companies:

For Business Owners: Directors of dissolved companies cannot be dragged into criminal proceedings for cheques issued in the company’s name after dissolution.
For Creditors: Those holding cheques from companies that have been struck off may find themselves without a legal remedy under Section 138 NI Act. Their only option may be to seek restoration of the company under Section 252 of the Companies Act.
For Legal Clarity: The judgment reinforces the principle that legal personality is essential for liability under the NI Act.

Legal Precedents and Similar Rulings

This is not the first time Indian courts have dealt with this issue. Other High Courts have also held that proceedings under Section 138 NI Act cannot be sustained when the complainant or accused company has been struck off.

For example:

The Madras High Court and Bombay High Court have previously ruled that a struck-off company cannot maintain or face proceedings under the NI Act.
The Supreme Court has also emphasized that the existence of a legally enforceable debt is a precondition for Section 138 cases.

The Delhi High Court’s ruling adds further weight to this line of judicial reasoning.

Wider Impact on Corporate Law and Banking

The judgment highlights the intersection of corporate law and banking law:

Banks must ensure that accounts of dissolved companies are promptly closed to avoid issuance of invalid cheques.
Creditors must exercise caution when accepting cheques from companies with uncertain legal status.
Legal practitioners must verify the status of a company before initiating cheque bounce proceedings.

Conclusion

The Delhi High Court’s ruling in this case is a landmark clarification on the scope of Section 138 NI Act. By holding that cheque bounce cases cannot be sustained against dissolved companies, the court has reinforced the principle that legal existence is a prerequisite for liability.

This decision will likely influence future litigation involving corporate entities and cheque dishonour cases, ensuring that only validly existing companies and their directors can be held accountable under the NI Act.