Former Director Not Liable U/S 138 NI Act For Cheque Issued In Name Of Dissolved Company; Such Instrument Is Void Ab Initio: Karnataka High Court

The Court was hearing a petition seeking the quashing of cheque dishonour proceedings initiated based on a cheque allegedly issued by a company which, according to the petitioner, had already been struck off and declared dissolved before the instrument was issued.

A Bench of Justice M. Nagaprasanna observed that “a cheque allegedly issued in the name of the company, after dissolution of the company, would not become a legally enforceable instrument, it would be void ab initio.”

Therefore, the Bench further added, “the cheque itself is allegedly issued in the name of the Company after dissolution of the Company and the petitioner, a former Director of the said Company cannot be held liable for a cheque that is issued after dissolution of the Company.”

Advocate Nishit Kumar Shetty appeared for the petitioner, while Advocate M.R. Balakrishna appeared for the respondent.

Background

The petitioner was stated to be a director of a private company engaged in providing turnkey services. The company later applied for closure before the Registrar of Companies and was struck off from the register, following which it was declared dissolved.

The complainant alleged that the petitioner had taken a hand loan for business purposes and later issued a cheque towards repayment. When the cheque was presented, it was returned with the endorsement “account closed”. The complainant thereafter issued a demand notice and initiated proceedings under Section 138 of the Negotiable Instruments Act.

The petitioner sought quashing of the proceedings by contending that the company had been dissolved several years before the alleged issuance of the cheque. It was argued that a cheque issued in the name of a non-existent company could not create a legally enforceable liability and that a former Director could not be prosecuted on that basis.

The complainant opposed the petition by contending that the issues raised were disputed questions of fact, that he was unaware of the company’s closure, and that the petitioner could not avoid liability under the Negotiable Instruments Act merely because the company had been dissolved.

Court’s Observation

The Court first noted that the company had applied for closure and that the Registrar of Companies had accepted the closure by striking off the company and declaring it dissolved. The Court found that the cheque in question was alleged to have been issued years after the company had ceased to exist and was drawn on the company’s account.

The Court framed the issue as whether proceedings under Section 138 of the Negotiable Instruments Act could arise where the cheque itself was allegedly issued by a company after its dissolution.

Referring to Vishnoo Mittal v. Shakti Trading Company (2025), the Court noted that the Supreme Court had considered the effect of moratorium and management takeover under the Insolvency and Bankruptcy Code, 2016. The Court observed that the Supreme Court had held that proceedings against a Director would not be maintainable where the Director did not have the capacity to fulfil the demand raised under Section 138.

The Court then referred to Krishan Lal Gulati v. State of NCT of Delhi (2025), where the Delhi High Court held that once a company is struck off and dissolved, it loses its juristic personality, and acts done on its behalf become void ab initio unless the company is restored under Section 252 of the Companies Act, 2013.

The Court observed: “Once the company is struck off and stands dissolved, it loses its juristic personality, rendering any act done on behalf of the company void ab initio, unless the company is restored under Section 252 of the Companies Act, 2013.”

The Court also relied on Raj Kumar Jain v. Shree Balaji Enterprises (2026), where the Delhi High Court considered whether proceedings under Section 138 could continue after liquidation proceedings had commenced. The Court noted the reasoning that Section 138 requires a cheque to be drawn on an account “maintained” by the accused, which implies legal and practical control over the account at the relevant time.

The Court held that where control over the company’s affairs and bank accounts has passed to a liquidator, the Director cannot be said to be in a position to ensure encashment of the cheque or honour the demand notice. However, the Court clarified that the present case stood on a stronger footing because the company had already been dissolved before the cheque was allegedly issued.

On a combined reading of the Supreme Court and Delhi High Court decisions, the Court held that a cheque allegedly issued in the name of a company after its dissolution cannot become a legally enforceable instrument.

The Court distinguished this situation from cases where the cheque is validly issued while the company exists, but the company later faces liquidation, winding up or another legal impediment during pending proceedings. In such cases, the Directors or persons covered under Section 141 of the Negotiable Instruments Act may still be proceeded against.

The Bench observed: “It would be an altogether different circumstance if the cheque is issued and during the proceedings, the company would cease to exist. Then the Directors are to be held liable for fulfilling the legally enforceable instrument.”

The Court referred to Bharat Mittal v. State of Rajasthan (2025), where the Supreme Court reiterated that prosecution against persons in charge of a company ordinarily requires the company to be arraigned as an accused, except where the company cannot be prosecuted due to a legal impediment. The Court noted that this exception applies where the complaint is properly filed and the company later goes into liquidation, winding up or faces a legal snag.

Applying the principle to the facts before it, the Court held that the cheque itself was allegedly issued in the name of the company after dissolution. Therefore, the petitioner, being a former Director, could not be held liable for such a cheque.

The Court also examined the complaint and found that the cheque was drawn on the account of the company. It further found that the complaint did not contain the necessary averment that the petitioner was a Director at the relevant time and was in charge of the day-to-day affairs of the company.

The Bench observed: “There is no averment in the complaint that the petitioner was the Director at the relevant point in time and was in-charge of day-to-day affairs of the Company. The only averment is that accused No.2 is the Company and that the petitioner is the representative of the Company and is liable to honour the instrument.”

The Court rejected the complainant’s contention that the matter should be left for trial as involving disputed facts. It held that both on the factual aspect of the company having been dissolved and on the jurisdictional issue of proceedings having arisen after dissolution, continuation of the complaint could not be permitted.

The Court also distinguished Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited (2023), holding that the Supreme Court there was dealing with a circumstance where winding up or closure proceedings began after issuance of the cheque. In the present case, the company had already stood closed before the cheque was allegedly issued.

Conclusion

The High Court allowed the petition and quashed the cheque dishonour proceedings against the petitioner.

The Court held that a cheque allegedly issued in the name of a company after its dissolution would be void ab initio and could not form the basis of liability under Section 138 of the Negotiable Instruments Act against a former Director.

The Court clarified that if the complainant had any other remedy in law, he would be at liberty to avail it.

Cause Title: Rakesh Ramakanth v. Somashekara Gowda R.G.

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