The Karnataka High Court quashed criminal proceedings under Section 138 of the Negotiable Instruments Act where the cheque was dishonoured due to an 'account blocked' endorsement following the death of a partner in the drawer firm. The Court held that the essential ingredient of insufficiency of funds is missing when the account is non-operational because of a partner’s demise, and therefore no offence under Section 138 can be made out.
Background & Facts
The Dispute
The petitioner, V.B. Nagaraj, sought to quash proceedings initiated against him under Section 138 of the Negotiable Instruments Act (‘NI Act’) in C.C.No.25126/2018 pending before the XLII Additional Chief Metropolitan Magistrate at Bengaluru. The complaint alleged that a cheque issued by the petitioner’s firm was dishonoured on presentation.
Key Facts
- A partnership firm named Shree Vinayaka Traders was constituted on 20.06.2011 between accused Nos. 2 and 3.
- Accused No. 1 (the petitioner) was engaged in the fertilizers and pesticides trade; the complainant (M/s. Peregrine Phosphate Pvt. Ltd.) supplied pesticides and fertilizers to him.
- The complainant had obtained signed blank cheques of accused No. 1, represented by accused Nos. 2 and 3.
- Accused No. 2, T.M. Prabhakaraiah, who looked after the firm’s business, died on 21.05.2017.
- Upon his death, the bank account of the firm with Karnataka Bank, Hoovinahadagali Branch, was blocked; the endorsement on returned cheques read “account blocked”.
- The complainant’s representatives attended the obsequies of accused No. 2 and took back leftover stock, issuing an acknowledgment on 06.06.2017.
- Despite knowing of the death, the complainant presented a signed cheque (in its custody) on 28.03.2018, alleging that accused Nos. 2 and 3, representing accused No. 1, had issued the cheque on that date.
- The cheque was returned by the bank with the endorsement “account blocked”.
- Notices issued under Section 138 NI Act were returned with endorsements “party left” (against accused No. 1) and “party expired” (against accused No. 2); accused No. 3 replied to the notice.
- The complainant nevertheless filed a complaint under Section 138 NI Act, leading to cognizance by the trial court.
Procedural History
- 20.06.2011: Constitution of partnership firm Shree Vinayaka Traders.
- 21.05.2017: Death of accused No. 2, T.M. Prabhakaraiah.
- 06.06.2017: Acknowledgment of stock taken back by complainant.
- 28.03.2018: Presentation of the cheque alleged to have been issued on this date.
- 16.09.2026: Petition heard and reserved for orders.
- 25.09.2026: Judgment pronounced.
- Relevant prior judgments relied upon:
- Commissioner of Income Tax v. Seth Govindram Sugar Mills, AIR 1996 SC 24 (Partnership Act Sections 42(c) and 31(1)).
- Farhad Suri and Another v. Praveen Choudhary and Others, Delhi High Court, 16.12.2025 (account blocked not within Section 138 NI Act).
- Rajesh Meena v. State of Haryana, Punjab and Haryana High Court (similar holding).
- Arvinderjit Kaur v. State of Haryana and Another, Punjab and Haryana High Court, 29.10.2018 (account blocked endorsement excludes Section 138).
- Dhanasingh Prabhu v. Chandrasekar and Another, Supreme Court (SLP (Crl.) No.5706/2024), 14.07.2025 (partner liability under Section 25 Partnership Act and Section 145 NI Act).
- The petition (Crl.P No. 4428 of 2019) was filed after the trial court took cognizance; the High Court heard arguments and reserved the matter.
Relief Sought
The petitioner prayed for quashing of the proceedings under Section 138 NI Act initiated against him in C.C.No.25126/2018 and for such other orders as the Court deemed fit.
The Legal Issue
The central question was whether the initiation of proceedings under Section 138 of the Negotiable Instruments Act can be sustained when a cheque is dishonoured due to an “account blocked” endorsement resulting from the death of a partner, and whether the essential ingredient of dishonour owing to insufficiency of funds is satisfied in such circumstances.
Arguments Presented
For the Petitioner
The petitioner contended that, under the Partnership Act, a firm consisting of only two partners dissolves automatically upon the death of one partner; consequently, accused No. 1’s firm ceased to exist after the death of accused No. 2 on 21.05.2017. Therefore, no partnership persisted through accused No. 3, and the account was legitimately blocked. Relying on Commissioner of Income Tax v. Seth Govindram Sugar Mills, the petitioner argued that Section 42(c) of the Partnership Act applies only to firms with more than two partners; with two partners, the firm ends on death, leaving no scope for introducing a third party. The petitioner further submitted that the cheque presented on 28.03.2018 was invalid because the account had been non-operational for over ten months and, per RBI notifications, a cheque’s validity is limited to three months (formerly six months). Hence, the essential ingredient of insufficiency of funds was missing, and the proceedings under Section 138 NI Act could not be invoked.
For the Respondent
The respondent countered that Section 25 of the Partnership Act renders every partner jointly and severally liable for all acts of the firm done while he is a partner; thus, even after the death of accused No. 2, the firm’s acts could attract liability. It relied on the Supreme Court judgment in Dhanasingh Prabhu v. Chandrasekar and Another (paragraph 7.21), which held that once an illegal act is established by the firm or its partners, all partners are jointly liable for it, and the act constituting an offence must be determined with reference to the statute creating the offence - here, the NI Act. The respondent urged that the question of liability is a matter for trial and that the court should not refuse to take cognizance merely because the cheque was returned with an “account blocked” endorsement.
The Court's Analysis
The Court began by noting that Section 138 NI Act requires three ingredients: (i) drawing of a cheque, (ii) presentation for payment, and (iii) dishonour owing to insufficiency of funds or that the amount exceeds arrangements with the bank. The endorsement “account blocked” does not fall within the scope of insufficiency of funds.
“When the cheque was returned with an endorsement “account blocked” (situation covered in Sl.No.21-25), the proceedings under Section 138 of the NI Act, could not be invoked.”
The Court observed that the death of accused No. 2 on 21.05.2017 led to the immediate blocking of the firm’s bank account, a fact not disputed by either party. The cheque presented on 28.03.2018 was therefore drawn on an account that had been non-operational for nearly ten months.
Relying on the partnership law principles elucidated in Commissioner of Income Tax v. Seth Govindram Sugar Mills, the Court held that a partnership consisting of only two partners dissolves automatically on the death of one partner; there is then no partnership for a third party to be introduced, and consequently no scope for applying clause (c) of Section 42 of the Partnership Act. The Court further noted that an agreement between two partners to nominate a legal heir does not automatically make that heir a partner; any new partnership would be distinct.
The Court also considered the Delhi High Court judgment in Farhad Suri and Another v. Praveen Choudhary and Others (16.12.2025), which held that an “account blocked” return memo does not attract Section 138 NI Act, as the dishonour is not due to insufficiency of funds. This view was echoed in Rajesh Meena v. State of Haryana (Punjab and Haryana High Court) and Arvinderjit Kaur v. State of Haryana and Another (29.10.2018).
Although the respondent invoked Dhanasingh Prabhu v. Chandrasekar and Another to argue for joint liability, the Court clarified that such liability presupposes the existence of a continuing partnership and a valid cheque. Since the partnership had dissolved and the account was blocked, the foundational ingredients of Section 138 NI Act were absent. The Court emphasized that the RBI notification limiting cheque validity to three months rendered the cheque presented on 28.03.2018 invalid, further negating any claim of insufficiency of funds.
Thus, the Court concluded that the essential ingredient required to bring home an offence under Section 138 NI Act - dishonour owing to insufficiency of funds - was not established, and the proceedings must be quashed.
The Verdict
The petition was allowed. The initiation of proceedings under Section 138 of the Negotiable Instruments Act against the petitioner is hereby quashed. No monetary relief, costs, or further directions were granted in the order.
What This Means For Similar Cases
Account Blocked Excludes NI Act Liability
A cheque dishonoured merely because the drawer’s account is blocked - whether due to death of an account holder, statutory prohibition, or winding-up proceedings - does not satisfy the “insufficiency of funds” requirement of Section 138 NI Act. Practitioners should examine the endorsement on the return memo; if it reads “account blocked” or similar, the offence under Section 138 cannot be made out.
Partnership Dissolution on Death of One Partner
Where a partnership consists of exactly two partners, the death of one partner results in automatic dissolution of the firm. The surviving partner cannot continue the original partnership; any subsequent business constitutes a new partnership. Consequently, cheques issued after such death purporting to be on behalf of the original firm are not valid, and any NI Act complaint based thereon is untenable.
Cheque Validity and RBI Norms
Even if a partnership were to continue, a cheque presented beyond its validity period (three months as per current RBI notification, earlier six months) is legally ineffective. Courts will treat such cheques as invalid, and the absence of a subsisting debt or liability negates the ingredient of insufficiency of funds required for prosecution under Section 138 NI Act.
