When There Are Only Three Directors, It Cannot Be Said That One Director Is Not Responsible For The Company’s Day-To-Day Affairs: Delhi High Court Dismisses Petition To Quash Summons In Cheque Bounce Case

On October 29, 2024, the Delhi High Court rejected a petition filed by Shelly Narang to quash a summons in a cheque bounce case involving a ₹10 lakh loan. The summons had been issued by the Metropolitan Magistrate in 2019 after Narang, as one of three directors, was implicated in a complaint under Section 138 of the Negotiable Instruments Act (NI Act). The Court ruled that Narang, as a director, could not avoid vicarious liability at the pre-trial stage given her role in the company and lack of any conclusive evidence absolving her of responsibility.

The case originated from a complaint by the second respondent, who claimed that the company had failed to honor a loan agreement and issued a cheque, later dishonored, in repayment. The respondent alleged that Narang and another director were responsible for managing the company’s financial affairs after the death of a third director who was the original signatory on the cheque. Following two unsuccessful attempts to cash the cheque due to a “blocked account,” a demand notice was sent under Section 138, which remained unsatisfied.

In 2019, the Metropolitan Magistrate summoned Narang, prompting her to petition for dismissal of the summons. Narang argued that she was a housewife with no role in the company’s financial decisions and claimed she was merely a director on paper without signing authority or involvement in the business.

Vicarious Liability and Director’s Role: Narang argued that, as a non-signatory, she should not be liable under Section 138. She referenced Pooja Ravinder Devidasani v. State of Maharashtra and other cases asserting that a director must have a proven role in the company’s daily business to be liable for cheque-related offenses. She claimed there were no specific allegations or evidence showing her active involvement in company operations.

High Court’s Evaluation of Summons and Quashing Principles: The Court held that quashing of criminal proceedings at the initial stage is exceptional, only to be used if complaints are patently absurd or mala fide. Justice Subramonium Prasad emphasized that the Court must be cautious and allow such cases to proceed to trial unless the accused presents “unimpeachable and incontrovertible evidence” of non-involvement in company affairs.

Sufficient Averments of Responsibility in Complaint: The Court observed that the complaint made specific claims that Narang, along with the other director, managed financial transactions and represented the company in repayment discussions. Citing SP Mani & Mohan Dairy v. Snehalatha Elangovan, the Court held that a director’s presence as a signatory is not essential for establishing responsibility under the NI Act, as long as the complaint includes specific averments about the director’s involvement.

Vicarious Liability Standards under the NI Act: Referencing precedents, the Court reiterated that directors in charge of business operations at the time of offense are vicariously liable. In the absence of evidence to the contrary, it held that Narang’s status as a director implied her involvement in managing the company’s business, especially since she did not qualify as an independent or non-executive director.

The Court dismissed Narang’s petition, ruling that her arguments regarding her lack of involvement should be tested at trial. The decision emphasizes that directors cannot readily escape vicarious liability in cheque bounce cases by claiming non-involvement without clear evidence and underscores the responsibility placed on directors, particularly when only a few individuals are managing the company.

Date of Decision: October 29, 2024