CFO Signing Cheques Prima Facie Responsible for Company’s Actions, Must Prove Lack of Knowledge as Defense: Delhi High Court Dismisses Petition to Quash Complaint

In a significant ruling, the Delhi High Court dismissed a petition seeking to quash a complaint filed under Section 138 of the Negotiable Instruments Act (NI Act) against George Ninan, the Chief Financial Officer (CFO) of Uniply Décor Ltd. The court, led by Justice Navin Chawla, underscored the CFO’s responsibility and accountability in corporate financial misconduct, emphasizing the adequacy of the allegations made in the complaint.

Background: The case originated from a complaint filed by Shubham Chemicals and Solvents against Uniply Décor Ltd. And its officers, including CFO George Ninan. The complaint alleged that Uniply Décor Ltd. Had issued a cheque for Rs. 11,50,000 to settle dues for industrial chemical supplies. However, the cheque was dishonored due to insufficient funds, leading to the filing of the complaint under Section 138 of the NI Act. George Ninan, as the signatory of the cheque, sought to quash the complaint on the grounds that his liability was solely based on his role as a signatory.

Responsibility and Accountability of CFO: The court highlighted the key managerial role of the CFO within the company, stating, “The petitioner is the Chief Financial Officer and a key managerial personnel as defined under Section 2(51)(iv) of the Companies Act, 2013. The complaint asserts that he was in charge of and responsible for the conduct of the business at the relevant time.” The bench stressed that the role of CFO inherently involves oversight of financial transactions, including the issuance of cheques.

Legal Framework and Precedents: Justice Chawla drew upon the Supreme Court precedent in S.P. Mani and Mohan Dairy v. Dr. Snehalatha Elangovan, which clarifies the liability of individuals who sign cheques on behalf of a company. The judgment stated, “A person who signs the cheque or has the authority to sign can be assumed to be responsible for the company’s business.” This principle was central to rejecting the petitioner’s argument that his liability was solely as a signatory without managerial responsibility.

Section 28 NI Act Argument Dismissed: Addressing the petitioner’s reliance on Section 28 of the NI Act, which pertains to an agent signing without indicating their role, the court found it inapplicable. Justice Chawla observed, “The complaint does not lay its foundation under Section 28 of the NI Act but instead makes the petitioner liable under Section 141, focusing on his responsibility and charge over the company’s business.”

Detailed Examination of Section 141 NI Act: The judgment meticulously analyzed Section 141 of the NI Act, which deems every person responsible for the company’s conduct of business liable for offences under Section 138. Justice Chawla reiterated, “The first part of Section 141 states that every person in charge of and responsible to the company for its business at the time of the offence is deemed guilty, shifting the burden to the accused to prove ignorance or due diligence.”

Justice Chawla noted, “A person in a managerial role, especially one who signs the cheque, can be prima facie assumed to be responsible for the company’s business. It is for the accused to prove lack of knowledge or due diligence as a defense.”

The dismissal of George Ninan’s petition by the Delhi High Court reinforces the judiciary’s stance on holding key managerial personnel accountable for financial misconduct within a company. This ruling underscores the importance of managerial roles in ensuring compliance with financial regulations and maintaining corporate integrity. By affirming the complaint’s validity under Section 141 of the NI Act, the judgment sets a precedent for similar cases, emphasizing the legal responsibilities of company officers in financial transactions.

Date of Decision: 27^th May 2024

George Ninan v. State NCT of Delhi & Anr.