Dropping Cheque Signatory As Accused Does Not Collapse Prosecution U/S 138 NI Act Against Company Or Directors: Delhi High Court

The Court observed that statutory presumptions and corporate vicarious liability continue to operate, necessitating a full trial.

The Court was hearing petitions seeking quashing of summoning orders issued in complaints filed by a non-banking financial company alleging dishonour of cheques issued toward repayment of a credit facility and corporate guarantee.

A Bench of Justice Neena Bansal Krishna, while observing that the dropping of the signatory of cheques from the proceedings does not absolve the company, which is the principal drawer, or its continuing directors, from prosecution where statutory requirements under Section 141 are prima facie satisfied, held that “the dropping of the signatory of Cheques from these proceedings, does not result in the automatic collapse of the Complaint against the Petitioner Companies and the other Directors, …the statutory presumptions and the principles of corporate vicarious liability necessitate that the matter proceed to trial”.

Background

The complaints arose from a credit facility extended by the complainant NBFC to a borrower company, secured by a corporate guarantee from a sister concern. Cheques issued toward repayment were dishonoured, one for signature mismatch and another for insufficiency of funds. Statutory notices were served but payment was not made, resulting in complaints under Sections 138 and 141 of the NI Act.

The trial court summoned the borrower company, the guarantor company, and their directors. Proceedings against the individual who signed the cheques were later dropped on the ground that he had resigned before presentation of the instruments. The remaining accused approached the High Court seeking the quashing of the summoning orders.

The petitioners contended that the cheques were issued without authorisation by the former executive, who allegedly orchestrated internal fraud by opening a sham bank account and siphoning loan funds. They argued that the absence of the signatory in the prosecution broke the chain of liability and that the instruments were invalid for want of joint authorisation.

The complainant opposed the petitions, asserting that the companies were the drawers of the cheques and that disputes relating to internal corporate fraud were matters for trial and did not extinguish liability toward a holder in due course.

Court’s Observations

The Court first addressed a preliminary objection regarding parallel remedies, noting that quashing jurisdiction must be exercised sparingly and should not be used to short-circuit legitimate prosecutions.

On vicarious liability, the Court reiterated settled principles under Section 141 of the NI Act: directors who are in charge of and responsible for company affairs may be prosecuted where the complaint contains foundational averments. The Managing Director’s execution of facility documents and the CFO’s financial role were found sufficient at the summoning stage to warrant trial.

Rejecting the argument that dropping the signatory nullified proceedings, the Court held that the primary liability under Section 138 rests with the drawer, the company, not the individual signatory. The offence is complete upon dishonour and failure to pay after statutory notice, and resignation of the signatory does not immunise the company or continuing directors.

The Court further held that allegations of internal fraud or unauthorised issuance of cheques are defences falling within evidentiary adjudication. Such matters cannot be conclusively determined at the threshold in quashing proceedings.

Addressing the “invalid instrument” defence, the Court relied on precedent recognising that signature mismatch or violation of internal bank mandates does not remove the cheque from the ambit of Section 138. A holder in due course is entitled to statutory protection, and disputes over authority must be tried.

The Court also observed that statutory presumptions under Sections 118 and 139 operate in favour of the complainant, including a presumption of a legally enforceable debt. Rebuttal is a matter for trial and cannot form the basis of quashing.

Conclusion

The Court held that the dropping of the cheque signatory does not extinguish the prosecution against the drawer companies or their responsible directors. Allegations of internal fraud, unauthorised issuance, or absence of enforceable liability raise triable issues requiring evidence.

Finding that the complaints disclosed a prima facie case under Sections 138 and 141 of the NI Act, the High Court declined to interfere with the summoning orders. The petitions were dismissed with liberty to raise all defences during trial.

Cause Title: GBL Chemicals Limited & Ors. v. State (NCT of Delhi) & Anr. (Neutral Citation: 2026:DHC:711)

Appearances

Petitioners: Senior Advocate Mohit Mathur, along with Puneet Sharma, Ashwani Kumar, Iti Sharma, Vignesh, and Aditya Joshi, Advocates.

Respondents: Richa Dhawan, APP.

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