DELHI HIGH COURT HOLDS THAT MERE DESIGNATION AS DIRECTOR IS INSUFFICIENT FOR LIABILITY UNDER NI ACT

A Single Judge Bench of the High Court of Delhi comprising of Justice Amit Mahajan in CRL.M.C. 4497/2019 & CRL.M.A. 35347/2019 passed a Judgment dated 24-02-2025 in the matter Adarsh Saran & Anr.(Petitioners) vs. Central Bank of India (Respondent) and Alok Khanna vs Central Bank of India, held that the Petitioners could not be held vicariously liable under Section 141 of the NI Act solely based on their designation as directors. It found no specific allegations proving their involvement in the Company’s business or the issuance of the dishonoured cheque.

FACTS

The Petitioners in CRL.M.C. 4497/2019, Adarsh Saran and another, and the Petitioner in CRL.M.C. 2520/2020, Alok Khanna, sought the quashing of the summoning order issued by the Metropolitan Magistrate, Patiala House Courts, New Delhi. The Respondent in both Petitions was the Central Bank of India, which had filed a Complaint under Section 138 of the Negotiable Instruments Act, 1881, against M/s West Haryana Highways and its directors following the dishonour of a cheque. The Accused Company, engaged in road construction projects, had allegedly issued a cheque for ₹1.5 crores, which was dishonoured due to insufficient funds. The Complainant contended that the Petitioners, as directors, were responsible for the Company’s financial decisions and sought their Prosecution under Section 141 of the NI Act. The Petitioners, however, argued that they had no role in the issuance of the cheque and were not involved in the day-to-day affairs of the Company during the relevant period.
The Petitioners filed the present Petitions seeking to quash the summoning Order dated 24.03.2018. The learned Metropolitan Magistrate (MM), Patiala House Courts, New Delhi, issued the order in complaint case CC No. 36097/2016.
The Complainant, Central Bank of India, initiated the complaint under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) against M/s West Haryana Highways (the Accused Company) and its directors after the Accused Company’s cheque was dishonoured.
The Accused Company, engaged in road construction and laning projects, approached the Complainant for a term loan to execute a six/four-laning project of an existing two-lane road from the Delhi-Haryana border to Rohtak.
On 25.04.2008, the Complainant sanctioned a Senior Term Debt of ₹100 crores to the Accused Company. Later, on 30.10.2013, the Accused Company, through its directors, requested the Complainant to restructure its existing debt of ₹88 crores.
The Complainant agreed to restructure the debt on terms stipulated in its letter dated 31.12.2013. The Accused Company owed Interest During Construction (IDC) dues to the Complainant.
The Accused Company, through its authorized signatories, issued Cheque No. 013805 dated 30.09.2014 for ₹1.5 crores to clear IDC dues. The Complainant credited the amount to the Accused Company’s account as consideration for the cheque.
When the Complainant presented the cheque for encashment, it was dishonoured and returned unpaid on 16.10.2014 with the remark “Funds Insufficient.” Upon assurance from the Accused Company, the Complainant presented the cheque again, but it was dishonoured once more on 05.12.2014 for the same reason.
The Complainant issued a demand notice within the statutory period, but the Accused Company failed to make the payment. Consequently, the Complainant filed a Complaint under Section 138 of the NI Act.
The learned MM issued a summons to the Accused Company as the drawer of the dishonoured cheque. The Court also summoned Mahesh Kumar Chaturvedi and Suresh Sharma as signatories of the cheque, along with the Petitioners and two other directors, for managing the Accused Company’s affairs.

TRIAL COURT

The Trial Court observed that the Accused Company, M/s West Haryana Highways, had issued a cheque for ₹1.5 crores in favor of the Complainant, Central Bank of India, towards Interest During Construction (IDC) dues. When presented for encashment, the cheque was dishonored twice due to insufficient funds. Despite the Complainant serving a legal demand notice within the statutory period, the Accused Company failed to make the payment. The Court found that these facts satisfied the essential ingredients of an offense under Section 138 of the Negotiable Instruments Act, 1881, and established a prima facie case against the Accused Company and its directors.
The Court further noted that the Petitioners were directors of the Accused Company at the time of the transaction and, therefore, could be held liable under Section 141 of the NI Act. Since they were allegedly responsible for the Company’s financial affairs, their involvement warranted further judicial scrutiny. Based on these findings, the Trial Court issued summons to the Accused Company, the signatories of the dishonored cheque, and the Petitioners, along with other directors, holding that the matter required examination during the Trial.

ISSUE
The primary issue before the Delhi High Court was whether the Petitioners, who were directors of the Accused Company, could be held vicariously liable under Section 141 of the Negotiable Instruments Act, 1881, for the dishonour of a cheque issued by the Company.

DELHI HIGH COURT

The Delhi High Court observed that while considering a Petition for quashing proceedings under Section 138 of the Negotiable Instruments Act, 1881, read with Section 141, the Court must determine whether unimpeachable material exists to exonerate the Accused at the pre-Trial stage. The Court emphasized that mere association with the Company as a director does not automatically make a person liable under the NI Act. Vicarious liability can only be established if the Accused was in charge of and responsible for the Company’s business operations at the time the offense was committed.
The Court noted that the Petitioners were neither signatories to the dishonoured cheque nor actively involved in the Accused Company’s financial decisions during the relevant period. The Petitioners presented unimpeachable evidence, including the Company’s annual returns and emails, demonstrating that they had no role in the day-to-day affairs of the Company. Furthermore, official records indicated that their offices as directors stood vacated under Section 167(1)(b) of the Companies Act, 2013, due to prolonged non-participation in board meetings. The Court found that the Complainant failed to provide specific allegations regarding their role in issuing or dishonouring the cheque.

CONCLUSION
Considering these findings, the Delhi High Court held that the continuation of proceedings against the Petitioners would amount to an abuse of process. It reiterated that merely being a non-executive director or signing financial statements does not establish liability under Section 141 unless direct involvement in the transaction is proven. As the Complainant failed to establish the Petitioners’ active participation in the alleged offense, the Court allowed the Petitions and quashed the proceedings against them.

Sakshi Raghuvanshi
Senior Legal Associate
The Indian Lawyer

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