Non-Signatory Not in Charge of Company Affairs Cannot Be Prosecuted Under Section 138 NI Act: Gujarat High Court Quashes Cheque Dishonour Case

“A mere designation is not enough; specific averments on control of company’s business are mandatory under Section 141 of the NI Act” - Gujarat High Court allowed petitions to quash cheque dishonour proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881. Justice J.C. Doshi held that the petitioner, who was neither a signatory to the cheque nor a director of the accused company, could not be made vicariously liable in the absence of any specific averments about his role in the conduct of the company’s business.

“Mere Naming as Accused Without Specific Role is Insufficient”: High Court Applies Apex Court Test on Vicarious Liability
The petitioner sought quashing of Criminal Cases Nos. 53135 and 53136 of 2016 pending before the Judicial Magistrate at Vadodara. The complaint alleged that cheques issued by a private limited company were dishonoured for “insufficient funds.” However, the petitioner argued that he was neither a director nor a signatory to the cheques and had no role in managing the day-to-day affairs of the company.

The Court, after perusing official records from the Ministry of Corporate Affairs, found merit in the submission:
“It appears that he was not the director of the accused company at any point of time. From the record, it also appears that the petitioner is not the signatory of the cheques issued in favour of the complainant.”

Accordingly, the Court held: “The allegations of commission of offence by the company is not levelled against the petitioner. Neglect, if any, has been attributed to the Managing Director who is signatory of the cheque and arraigned as accused.”
“Law on Vicarious Liability Is No Longer Res Integra”: Court Relies on Supreme Court’s Test in Harmeet Singh Paintal

Justice Doshi reinforced that vicarious liability under Section 141 must be strictly construed and cannot be presumed. Citing the landmark judgment in National Small Industries Corp. Ltd. v. Harmeet Singh Paintal [(2010) 3 SCC 330], the Court observed: “The complaint should spell out as to how and in what manner the person was in charge of or was responsible to the company for the conduct of its business.”

The High Court emphasized: “Merely being described as a director in a company is not sufficient to satisfy the requirement of Section 141. Even a non-director can be liable, but strict compliance with statutory requirements is imperative.”

“Prosecution Under Section 138 NI Act Demands Strict Pleading of Director’s Role”: No Case Made Out Against Petitioner
Following a consistent line of Supreme Court precedents—including SMS Pharmaceuticals v. Neeta Bhalla, Sabitha Ramamurthy v. RBS Channabasavaradhya, Saroj Kumar Poddar v. State (NCT of Delhi), and K.K. Ahuja v. V.K. Vora—the Court reiterated that: “For fastening vicarious liability, there is no presumption that every director knows about the transaction.”

The High Court ruled that in the absence of specific and unambiguous allegations against the petitioner regarding his role in the affairs of the company at the relevant time, continuation of criminal proceedings would amount to abuse of process.

Allowing both petitions, the Gujarat High Court firmly held that a person not shown to be managing the affairs of a company, and who neither signed the dishonoured cheque nor was a director at any material time, cannot be subjected to criminal prosecution under Sections 138 and 141 of the NI Act. The judgment reaffirms that vicarious liability in cheque bounce cases is not automatic and must be clearly established through specific factual pleadings.

Justice J.C. Doshi concluded: “In view of the provisions of Section 141 of the N.I. Act and settled legal principles, the petitioner cannot be prosecuted as he is not managing the day-to-day affairs of the company and not even signatory of the cheque.”

Date of Decision: April 17, 2025