Cheque Dishonour from Frozen Account – Is Section 138 NI Act Attracted?

The Negotiable Instruments Act, 1881 (NI Act), particularly Section 138, aims to ensure the reliability of cheques as a payment method by criminalizing their dishonour due to insufficiency of funds or other reasons.

However, if cheque is dishonoued after the issue of a cheque for the reason that the bank account is freezed in compliance of orders from Government authorities/ Enforcement agencies or Courts, a question arises whether such a dishonour of cheque, for reasons beyond the control of the drawer, can give rise to valid proceedings u/s 138 of the NI Act. This article explores the legal position, judicial precedents, and interpretative principles surrounding such dishonour.

Key Ingredients to Attract Section 138 of the NI Act

• Drawing of a cheque for discharge of a legally enforceable debt.
• Presentation of the cheque within its validity period.
• Dishonour of the cheque due to insufficiency of funds or “any other reason”.
• Issuance of a notice to the drawer within 30 days of dishonour.
• Failure to make payment within 15 days of receipt of notice.

The aforesaid phrase “for the reason of insufficiency of funds or any other reason” has been subject to judicial interpretation, especially where the account is frozen.

Dishonour Due to Freezing of Account – Whether Attracts Section 138?

The Courts have dealt with dishonour of cheques and have elaborated where the same attracts Section 138 of the NI Act.

The following cases are pertinent:

1. Aparna A. Shah v. Sheth Developers Pvt. Ltd., (2013) 8 SCC 71

   The Apex Court held that the liability under Section 138 is penal and must be strictly construed. The Court held that criminal liability is attracted only when the account holder is personally liable for the dishonour.

   Although the case focused on joint account holders, it set the tone for strict interpretation in penal statutes.

2. M/s Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375

   Cheques were returned with endorsements like “Account closed”, “Payment stopped”, “Referred to drawer”, etc. The Apex Court held that dishonour for reasons like these falls within the ambit of “other reasons” under Section 138, if the drawer is responsible for the dishonour.

   This case implies that if dishonour is not due to the drawer’s fault (e.g., a third-party freezing the account), Section 138 may not apply.

3. NEPC Micon Ltd. v. Magma Leasing Ltd., (1999) 4 SCC 253

   The phrase “any other reason” must be construed ejusdem generis with “insufficiency of funds”. It must relate to the drawer’s inability to make a payment. This implies that freezing of accounts by third-party orders is not necessarily indicative of insufficiency or default by the drawer.

4. Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd., (2000) 2 SCC 745

   “…If BIFR has issued a direction under Section 22A restraining the company or its directors from disposing of assets, a cheque dishonoured during this period due to such restraints cannot constitute an offence under Section 138.”

Freezing by Enforcement or Court Order

Where the drawer’s account is frozen due to enforcement actions (e.g., by the Income Tax Department, ED, or by court orders), courts have held that the element of default or negligence by the drawer is lacking; hence, criminal liability under Section 138 is not sustainable.

Exceptions and Grey Areas

If the drawer deliberately orchestrates the freezing or closure to defeat payment, it could be argued that the dishonour was intentional and Section 138 may apply. Where the drawer was aware of the freezing but still issued the cheque, knowledge and intent become critical factors.

Relevant High Court Judgments

1. Deepinder Singh Bedi & Anr vs State & Anr. (Delhi HC, 30 Sept 2024)

   CRL.M.C. 5965/2019 & CRL.M.A. 40920/2019

   • Cheque dishonoured due to account being frozen by IT department.
   • Held: Not maintainable under Section 138, as account was not “maintained” by drawer at the time.

   “…Once the account has been attached by an order of the Court, the said account could not be operated by the petitioner. He could not have issued any binding instructions to his banker…”

2. M/S Best Buildwell Pvt. Ltd. & Ors. v. M/S R.D. Sales (Delhi HC, 5 June 2025)

   CRL.M.C. 1326/2025

   “…Even though the cheque return memo may mention its reason for dishonor as ‘insufficient funds’, the fact remains that the petitioners’ account was frozen… the essential ingredients of Section 138 are not fulfilled.”

3. Ceasefire Industries Ltd. v. State (2017 SCC OnLine Del 8280)

   Held that Section 138 cannot be resorted to when the bank account is frozen by statutory authority.

4. Onkar Nath Goenka v. Gujarat Lease Finance Ltd. (2008 SCC OnLine Del 1593)

   Held that freezing due to DRT/CBI orders protected drawer from Section 138 prosecution.

5. Standard Chartered Bank v. State (2007 SCC OnLine Del 1105)

   Held that attachment under CGST Act rendered account inoperable and prosecution under Section 138 unsustainable.

Mens Rea and Legislative Intent

While Section 138 is a strict liability provision, courts have infused it with considerations of fault and fairness, especially when dishonour is beyond the drawer’s control. The Supreme Court in M/s Laxmi Dyechem emphasized that not all dishonours automatically trigger criminality.

Conclusion

A cheque returned unpaid due to the subsequent freezing of the bank account does not automatically constitute an offence under Section 138 of the NI Act. The essential test is whether the drawer had knowledge, intent, or control over the freezing and whether the dishonour was due to their default.

Where freezing is by operation of law or due to no fault of the drawer, courts have consistently held that criminal prosecution under Section 138 is not maintainable. However, this does not bar a civil suit for recovery based on the underlying debt.

Legal Remedies Available to Payee

• Civil Recovery Suit – For recovery of the cheque amount with interest.
• Summary Suit under Order XXXVII CPC – For quicker civil recovery.
• Complaint to regulatory authorities – If freezing appears mala fide or strategic.

Written By: Inder Chand Jain
Ph no: 8279945021, Email: [email protected]