Hello, @Adebowale Ademosu,
Welcome to the Microsoft Q&A platform!
Based on your description, I understand that You have deactivated the Exchange server and are using it as an SMTP relay, and you are receiving an undelivered report with code 420 4.2.0 when sending mails.
As for the reason for this problem, if you introduce On-Premises Exchange in your infrastructure it can see your Active Directory users, but it doesn't see their mailboxes (because they were created and used only in Cloud). For cloud only users, it can't find those users in Active Directory, so it forwards emails for non-existing accounts using Internal Relay setting.
To fix it, run the following command in your PowerShell.
Enable-RemoteMailbox "Test User" -RemoteRoutingAddress "test.user@mydomain.mail.onmicrosoft.com"
Above command, while simple is required to fix your problem, now you only need to set this for all remaining users so that this issue is no more.
Please feel free to contact me if you have any queries. If my reply is helpful to you, please mark it as the answer so that other users can refer to it. Thank you for your support and understanding.
Best Wishes,
Alex Zhang