The Delhi High Court has ruled that a party cannot be sued under Section 138 of the Negotiable Instruments (NI) Act, 1881 for dishonour of cheques issued by a dissolved company.
The court explained, “Once a company is struck off and dissolved, it loses its legal personality. Any act done on its behalf becomes void unless the company is restored under Section 252 of the Companies Act. Therefore, a cheque issued in the name of such a dissolved company cannot be treated as legally valid, as there is no lawful drawer or account-holder. Proceedings under Section 138 of the NI Act, which require a valid cheque, cannot be maintained in such cases.”
This observation came while hearing two petitions filed by directors of a company. The directors had been booked for dishonour of cheques issued by their company to the complainant company. The petitioners argued that the complainant company had been struck off by the Registrar of Companies (ROC) in 2018 and no longer existed when the complaints were filed in 2020. They said that the complainant was not a legal entity at that time, so the complaints under Section 138 NI Act were invalid.
The petitioners cited Section 2(20) of the Companies Act, stating that only a registered company is a legal entity. Since the complainant company had ceased to exist in 2018, it had no legal capacity to file complaints. They also argued that after dissolution, all the company’s assets, bank accounts, and property automatically passed to the government, leaving its ex-directors without the right to file any complaints.
The High Court agreed. It noted that the cheques, legal notices, and complaints were all issued after the company was dissolved. “This shows that the company did not exist in law at the time, and therefore could not have legally participated in transactions or maintained bank accounts,” the court said.
Where a company stands dissolved under section 248, it shall on and from the date mentioned in the notice under sub-section (5) of that section cease to operate as a company and the Certificate of Incorporation issued to it shall be deemed to have been cancelled from such date except for the purpose of realising the amount due to the company and for the payment or discharge of the liabilities or obligations of the company.”
The court also referred to a Government Notification dated 05.09.2017 by the Department of Financial Services. It states that companies struck off under Section 248(5) cease to exist, their directors become ex-directors, and their bank accounts remain frozen until the company is restored under Section 252. “This notification, issued during a large-scale corporate clean-up, confirms that any transactions by a struck-off company are legally invalid until restoration,” the court added.
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