COURTKUTCHEHRY SPECIAL ON IBC & NI ACT CONFLICT
Delhi High Court: Cheque Dishonour Due to NCLT Account Block Not Criminal Under Section 138 NI Act
Court Quashes Complaints Where Cheques Bounced Because of Insolvency Proceedings
Judgment Clarifies Link Between NI Act and Insolvency Code
By Our Legal Reporter
New Delhi: December 30, 2025:
In a landmark ruling, the Delhi High Court has held that dishonour of cheques on the ground of “account blocked” due to insolvency proceedings before the National Company Law Tribunal (NCLT) does not amount to an offence under Section 138 of the Negotiable Instruments Act, 1881. The judgment came in the case of Farhad Suri v. Praveen Choudhary (2025), where multiple cheque dishonour complaints were challenged.
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This decision is significant because it resolves the conflict between the Insolvency and Bankruptcy Code (IBC) and the NI Act, ensuring that companies undergoing insolvency proceedings are not subjected to parallel criminal liability for cheque dishonour.
Case Background
- The petitioners faced criminal complaints under Section 138 NI Act for dishonoured cheques.
- The cheques were returned unpaid with the remark “account blocked”.
- The blocking of accounts was due to moratorium orders under the IBC, where an Interim Resolution Professional (IRP) had taken control of the company’s accounts.
- The Delhi High Court quashed the complaints, ruling that dishonour was not due to insufficiency of funds but due to statutory prohibition.
Court’s Observations
- Section 138 NI Act applies only when cheques bounce due to insufficiency of funds or exceeding arrangement.
- In this case, dishonour occurred because of legal prohibition under IBC, not financial incapacity.
- Once insolvency proceedings begin, control of accounts shifts to the IRP, and directors lose authority.
- Therefore, criminal liability under Section 138 cannot be imposed.
Implications for Taxpayers and Businesses
1. Relief for Companies Under Insolvency
- Businesses facing insolvency will not face criminal prosecution for cheque dishonour.
- This prevents double jeopardy—civil insolvency proceedings plus criminal liability.
2. Clarity for Creditors
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- Creditors must pursue remedies under the IBC framework rather than filing cheque dishonour cases.
- This ensures consistency in insolvency resolution.
3. Legal Certainty
- The judgment harmonises the NI Act with the IBC, reducing conflicting interpretations.
Broader Context
- Cheque Dishonour Cases: Section 138 NI Act has been widely used by creditors to recover dues.
- IBC Framework: Once insolvency proceedings begin, a moratorium is imposed, freezing accounts and halting recovery actions.
- Judicial Balance: Courts must balance creditor rights with insolvency protections
Expert Views
- Legal Experts: The ruling is seen as a progressive step aligning insolvency law with cheque dishonour provisions.
- Business Analysts: It reduces harassment of companies already under insolvency stress.
- Policy Analysts: The judgment strengthens the IBC as the primary route for creditor claims.
Challenges Ahead
- Creditors’ Concerns: Creditors may feel deprived of a powerful recovery tool under Section 138.
- Awareness Gap: Many creditors may still file cheque dishonour cases without understanding the IBC moratorium.
- Need for Uniformity: Other High Courts must adopt similar interpretations to ensure nationwide consistency.
Also Read: Delhi High Court: Cheque Dishonour Due to NCLT Account Block Not Criminal Under Section 138 NI Act
Conclusion
The Delhi High Court’s ruling in Farhad Suri v. Praveen Choudhary is a landmark decision that clarifies the scope of Section 138 NI Act in the context of insolvency proceedings. By holding that cheque dishonour due to “account blocked” under NCLT orders does not attract criminal liability, the court has provided relief to companies under insolvency and ensured consistency with the IBC framework. This judgment strengthens India’s insolvency regime while protecting businesses from parallel criminal prosecution.
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