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Landmark ruling by Karnataka HC: No criminal liability for cheque bounce if police freeze your bank account
The Karnataka High Court quashed proceedings against ND Developers, stating that criminal liability for a cheque bounce requires the accused to have active control over the account.
To become liable for an offence, The accused must have control over the account, the Karnataka HC ruled (Image generated using AI).
In a significant ruling in commercial litigation, the Karnataka High Court last week held that cheque-bounce proceedings under Section 138 of the Negotiable Instruments (NI) Act cannot continue if the dishonour was caused by a “blocked” or “debit-frozen” account resulting from external criminal investigations.
Justice M Nagaprasanna, in the order dated March 4, allowed the petition filed by ND Developers Private Limited and its directors and quashed the proceedings initiated against them under the NI Act.
The bench in the order held that to be liable for an offence under Section 138 of the Act, the accused must have control over the account when the cheque becomes due for presentation or realisation.
Cheque bounce
The complainant, Ritesh Raushan, had purchased a flat from the developer under a “no pre-EMI” scheme. When the company failed to pay the interest on his home loan, Raushan paid the bank himself. To reimburse him, the company issued a cheque on March 9, 2024.
However, a separate cheating case registered against the company in 2022 led the police to issue a “debit freeze” notice to the Bank of Maharashtra. This freeze was implemented on May 24, 2024, after the cheque was issued but before it was presented for payment on June 5, 2024.
The bank returned the cheque with the endorsement “account blocked situation”. Raushan then filed a private complaint, and the court issued a summons to the accused after taking cognisance of the complaint.
While the complainant argued that the “presumption of debt” under Sections 118 and 139 of the NI Act should apply regardless of the freeze, the petitioners countered that they had no power to honour the cheque once the bank acted on police orders.
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Advocate Sumathi Pauline, appearing for the petitioners, argued that the cheque was dishonoured due to the debit-freeze endorsement, which means the petitioners cannot be hauled up for the proceedings, as the account was frozen and the complainant could not realise the amount.
Additionally, the petitioners stated that the entire amount had been reimbursed to the complainant, which the complainant acknowledged in the complaint and had also entered into a settlement by executing a deed before RERA.
Advocate Chinmay J Mirji, appearing for Raushan, contended that the cheque was issued against a legally enforceable debt to settle the liability arising from the breach of a contractual obligation under the ‘no pre-EMI scheme’. The presumption under sections 118 and 139 of the NI Act would operate against the petitioners, and whether the account is frozen or otherwise is immaterial, he argued.
Court findings
The bench noted in its order that the account related to the issued cheque was debit-frozen after the cheque was issued. The petitioners had shown that at the time they issued the cheque, the account was active and had sufficient funds. They were unaware that the account was frozen, which occurred two months later, it said.
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Justice Nagaprasanna held, “The very registration of crime against the petitioners would be rendered unsustainable, as the cheque is dishonoured for stop payment not for want of sufficient funds, but account block situation.”
Accordingly, the court allowed the petition and said, “I deem it appropriate to obliterate the proceedings, failing which, it would result in miscarriage of justice.”
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