But current can always flow from the drain to the source regardless of if the MOSFET is on or off because of the substrate diode? Ie. when the gate voltage is higher than the drain/source voltage, M2 turns off but the current still flows through the substrate diode.A MOSFET can have either terminal act as the source, depending upon the relative voltages.
So when the gate is below both source and drain voltages by greater than the Vgs(th) value (for a P-MOSFET), then the current can flow in either direction.