138 NI Act | Internal Fraud By Director No Defence To Cheque Bounce Case: Delhi High Court

“Fraud by CEO cannot absolve Company or Directors—offence under Section 138 NI Act is made out if Company fails to pay after notice”, In a significant judgment Delhi High Court refused to quash the summoning orders passed against a company and its directors under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, despite allegations of fraud by an erstwhile director.

Justice Neena Bansal Krishna, while dismissing two petitions filed under Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023 (BNSS) (equivalent to Section 482 CrPC), held:

“The contentions raised by the Petitioners, that Mr. Ramakant Pilani committed fraud, opened fake accounts, and signed cheques without authority, are factual defences… the ‘Mastermind Theory’ falls squarely within the category of a defence that is required to be tested during the trial.”

The Court underscored that such defences, however plausible, cannot be adjudicated in a quashing petition. Observing forum shopping, the Court further reprimanded the petitioners for suppressing the pendency of a criminal revision against the same summoning order.

Parallel Proceedings and Suppression of Material Facts Bar Relief Under BNSS

The Court took strong exception to the conduct of the petitioners, who filed a revision petition against the impugned summoning order before the Sessions Court, and then simultaneously invoked Section 528 BNSS before the High Court without disclosing the same.

Referring to Krishnan v. Krishnaveni (1997) 4 SCC 241 and Tejram Mahadeorao Gaikwad (1996 Cri LJ 172), the Court held:

“It is a settled principle of law that a litigant cannot pursue parallel remedies for the same relief in different forums... The Petitioners failed to disclose the pendency of the Revision Petition... which indicates a lack of bona fides.”

Thus, the petitions were dismissed as an abuse of process of law and an attempt at forum shopping.

Company as Principal Offender—Directors Can Be Tried Despite Resignation of Signatory

The Petitioners argued that since Mr. Ramakant Pilani, who had signed the dishonoured cheques, had resigned prior to their presentation, and was subsequently dropped as an accused, the Company and other Directors could not be held vicariously liable.

Rejecting the argument, the Court reaffirmed the principle laid down in Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661:

“Under Section 138 NI Act, the primary liability is that of the ‘Drawer’, i.e., the Company. The Directors are vicariously liable. The resignation of the signatory before presentation does not collapse the case against the Company or continuing Directors.”

The Court clarified that offence under Section 138 is complete only when there is failure to pay after demand notice, and not merely on signing the cheque.

Managing Director and CFO Cannot Escape Liability—Averments Sufficient at Summoning Stage

Petitioners Rishi Pilani (Managing Director) and Ramesh Pilani (Director/CFO) sought quashing on the ground that they were not signatories to the cheques and lacked knowledge of the fraudulent acts of Mr. Ramakant Pilani.

However, the Court found that the complaints contained clear averments that the two were “in charge of and responsible for the conduct of the business” of the Company. Further, their signatures on the Facility Agreement and Personal Guarantees created a direct nexus.

“At the stage of summoning, detailed role-play is not required if basic statutory foundation under Section 141 NI Act is laid. The designation of Managing Director and CFO, coupled with their signatures on key documents, is sufficient,” held the Court, relying on S.M.S. Pharmaceuticals Ltd. and HDFC Bank Ltd. v. State of Maharashtra (2025 INSC 759).

Violation of Bank Mandate Is Not a Defence at Quashing Stage—Cheques Signed by CEO Prima Facie Valid

A central defence raised was that the dishonoured cheques were void ab initio, being signed only by one director, contrary to the bank mandate requiring two signatories.

This argument was squarely rejected:

“Bank mandate is an internal arrangement between the Company and the Bank. A third-party holder in due course cannot be affected by such internal instructions.”

The Court placed reliance on Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375, where the Supreme Court held that dishonour due to signature mismatch is still actionable under Section 138:

“The drawer cannot by his own omission or commission, such as changing the signature or not matching it, escape the rigours of Section 138.”

Security Cheques and Legally Enforceable Debt—Presumption Under NI Act Operates

The Petitioners also argued that the cheques were security cheques, not issued against a legally enforceable debt, and that the loan was siphoned off by Mr. Ramakant Pilani through fraudulent accounts.

The Court ruled that:

“Existence of legally enforceable debt is presumed under Sections 118 and 139 of the NI Act. Facility Agreements and Guarantee Deeds establish prima facie liability.”

Citing Rangappa v. Sri Mohan (2010) 11 SCC 441, and I.C.D.S. Ltd. v. Beena Shabeer (2002) 2 SCC 426, the Court reiterated:

“A cheque issued as security is not outside the ambit of Section 138, provided debt or liability exists at the time of its presentation.”

Therefore, the defence that cheques were merely securities and the company did not benefit from the funds was held to be a triable issue.

Alleged Fraud by CEO Does Not Extinguish Liability of Company or Its Officers

The Petitioners claimed that Mr. Ramakant Pilani, by opening fraudulent bank accounts, siphoned off the funds, and that the Complainant NBFC had not disbursed money into an authorized account.

The Court dismissed this argument as a factual defence, observing:

“Whether Board Resolutions were forged, and whether the Company is a victim or a participant, requires evidence. These are matters for trial, not quashing.”

It was further held that internal fraud by a Director does not exonerate the Company’s liability towards a third-party lender, especially one holding dishonoured cheques drawn on the Company’s account.

Petitions Dismissed, Summoning Orders Upheld

Summing up, the Court held:

“At the stage of summoning, the Magistrate is only required to see if a prima facie case is made out. The truthfulness of a defence, however plausible, is a matter for trial.”

Accordingly, both petitions were dismissed with the Court clarifying that its observations are prima facie and shall not affect the outcome of the trial or pending revision proceedings.

Date of Decision: 29 January 2026