Dishonour Due To 'Account Blocked' Not An Offence Under Section 138 NI Act: Karnataka HC

Criminal prosecution under Section 138 of the Negotiable Instruments Act, 1881 cannot be sustained when a cheque is dishonoured due to an 'account blocked' status triggered by the death of a partner, as such circumstances fall outside the statutory ambit of 'insufficiency of funds'. The High Court of Karnataka has ruled that a partnership firm automatically stands dissolved upon the death of one of only two partners, rendering subsequent presentations of blank cheques held by creditors legally invalid.

A single-judge bench of Justice H.P. Sandesh heard the petition seeking to quash criminal proceedings initiated against the petitioner. The case centered on whether the dishonour of a cheque with the specific bank endorsement "account blocked" resulting from the demise of a signatory partner could attract the penal provisions of the Negotiable Instruments Act, 1881.

Exclusion of 'Account Blocked' from Criminal Liability

The court observed that for a prosecution under Section 138 of the Negotiable Instruments Act, 1881 to succeed, the dishonour must arise from insufficiency of funds or exceeding the arrangement with the bank. In this instance, the bank returned the cheque with an endorsement citing "account blocked" due to the death of a partner. The Court, in its reasoning, observed: "Section 138 proceedings could be invoked in case of insufficiency of funds and not an account of account blocked and hence, there is a force in the contention of the learned counsel for the petitioner that when the account is blocked, it will not attract Section 138 of NI Act."

The Court has following directions:

"The petition is allowed. The initiation of proceedings under Section 138 of the NI Act against the petitioner is hereby quashed."

Background

The dispute arose from a partnership firm, Shree Vinayaka Traders, consisting of two partners. The respondent-complainant, a supplier of pesticides, held signed blank cheques of the firm. One partner died on May 21, 2017, leading to the freezing of the firm's bank account. Despite having knowledge of the death and taking back leftover stock in June 2017, the complainant presented a cheque dated March 28, 2018 ten months after the partner's demise. The bank returned the cheque as the account was blocked.

The petitioner argued that the firm dissolved upon the partner's death, citing Commissioner Of Income Tax V. Seth Govindram Sugar Mills, which interprets Section 42(c) of the Partnership Act. The petitioner also relied on Farhad Suri And Another V. Praveen Choudhary And Others And Arvinderjit Kaur V. State Of Haryana And Another to argue that "account blocked" endorsements fall outside the scope of Section 138. The respondent, relying on Dhanasingh Prabhu V. Chandrasekar And Another, argued that partners remain jointly and severally liable under Section 25 of the Partnership Act. However, the High Court found that the specific circumstances of the account blockage and the dissolution of the firm precluded criminal liability.

Case Details:
Case No.: CRIMINAL PETITION NO.4428 OF 2019
Case Title: V.B. NAGARAJ v. M/S. PEREGRINE PHOSPHATE (P) LTD.
Appearances:
For the Petitioner(s): SRI. B.M. HALASWAMY, ADVOCATE
For the Respondent(s): SRI. K. PALANIMUTHU, ADVOCATE

Source: 2026 CaseBase(KAR) 21833