The Karnataka High Court ruled that prosecution under Section 138 of the Negotiable Instruments Act cannot continue against a former director when a cheque was issued after the company’s dissolution. The Court held that a dissolved company lacks legal existence, making such cheques legally unenforceable.
The Karnataka High Court has held that criminal action under Section 138 of the Negotiable Instruments Act, 1881 for dishonour of a cheque cannot be sustained against a former director when the cheque was issued after the company had already been dissolved. Justice M. Nagaprasanna allowed the petition filed by Rakesh Ramakanth and quashed all proceedings pending before the IV Additional Senior Civil Judge and Additional Chief Metropolitan Magistrate, Bengaluru. The Court observed that a cheque drawn in the name of a dissolved company cannot be treated as a legally enforceable instrument.
Background of the Case
The accused included Accused No. 2: Giga Networks Private Limited, incorporated in 2003. On October 31, 2010, the company applied to the Registrar of Companies to close its operations. On the basis of this application, the company was struck off and formally dissolved on March 16, 2011.
In November 2014, Rakesh Ramakanth (Accused No. 1) allegedly borrowed Rs. 60 lakhs in cash from Somashekara Gowda R.G., with an assurance that the amount would be repaid within 30 months. In July 2017, a cheque for Rs. 60 lakhs, drawn on HDFC Bank, was issued in the name of the company.
When the cheque was presented on August 8, 2017, it was returned with the bank endorsement: “account closed.” The respondent issued a demand notice and then filed a complaint under Section 200 Cr.P.C. in PCR No. 13006 of 2017. Cognizance was taken, and the matter was registered as C.C. No. 263 of 2018. The accused then approached the High Court seeking to quash the proceedings.
Arguments of the Parties
Petitioner’s side: The petitioner argued that he had actually borrowed Rs. 20 lakhs, not the larger sum alleged, and that he had already repaid over Rs. 80 lakhs. He further submitted that since the company was dissolved in 2011, any cheque allegedly issued in 2017 could not represent a legally enforceable debt, rendering the criminal case not maintainable. He also claimed he was in Dubai in July 2017 when the cheque was allegedly issued.
To support his contention on director liability, he relied on the Supreme Court decision in Vishnoo Mittal v. Shakti Trading Company, contending that directors cannot be made liable for cheques issued after a company’s dissolution.
Respondent’s side: The respondent contended that the petitioner’s submissions involved disputed factual issues that should be tested at trial. The respondent also claimed that the complainant was not aware that the company had been closed. Additionally, the respondent submitted that since the petitioner did not deny his signature on the cheque, he could still be prosecuted in his personal capacity under Section 141 of the Negotiable Instruments Act, relying on Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited.
Court’s Analysis
The High Court noted that Giga Networks Private Limited was dissolved on March 16, 2011, while the impugned cheque was issued in July 2017, i.e., six years later.
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To assess whether proceedings under Section 138 can survive when a company is already closed or dissolved, the Court referred to multiple authorities. It discussed the Delhi High Court decision in Krishan Lal Gulati v. State of NCT of Delhi, which states:
“Once a company is struck off and stands dissolved, it loses its juristic personality, rendering any act done on its behalf void ab initio unless the company is restored under Section 252 of the Companies Act. Consequently, a cheque issued in the name of or by such a dissolved company cannot be treated as a legally enforceable instrument, since no valid drawer or account-holder exists in law.”
The Court also cited Raj Kumar Jain v. Shree Balaji Enterprises, observing that for an offence under Section 138 to be made out, the bank account must be “maintained” by the accused at the time of the offence, meaning the accused must have continuous authority and control over it.
The Court distinguished the respondent’s reliance on Ajay Kumar Radheyshyam Goenka, explaining that in that case, winding up or liquidation proceedings had commenced after the issuance of the cheque. Here, however, the company was already dissolved long before the cheque was even drawn. The Court further referred to the Supreme Court ruling in Bharat Mittal v. State of Rajasthan, clarifying that directors can be prosecuted if the company goes into liquidation during the pendency of the proceedings a “legal snag” that blocks prosecution of the company while preserving director liability.
Applying these principles, the Court held:
“Therefore, the cheque itself is allegedly issued in the name of the Company after dissolution of the Company. Therefore, the petitioner, a former Director of the said Company cannot be held liable for a cheque that is issued after dissolution of the Company.”
The Court also noted that the complaint merely described the petitioner as a “representative” of the company. It found no specific averments that he was a director in charge of the day-to-day affairs at the relevant time. On both factual and jurisdictional grounds, the Court concluded the proceedings could not continue.
Decision of the Court
The High Court allowed the criminal petition and quashed the entire proceedings in C.C. No. 263 of 2018 pending before the IV Additional Senior Civil Judge & Additional Chief Metropolitan Magistrate, Bengaluru. It also disposed of the pending interlocutory application (I.A. No. 2 of 2024), while leaving it open for the complainant to pursue any other available legal remedy.
Case Title: Rakesh Ramakanth v. Somashekara Gowda R.G. Criminal Petition No. 3024 of 2024
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