Signing Financial Documents, Not Mere Office, Attracts Section 141 NI Act Liability, Supreme Court Holds

A Division Bench partly reverses a Madras High Court quashing order, holding that signatories to underlying loan documents face cheque-dishonour prosecution regardless of formal designation.

The Supreme Court has drawn a clear line between office bearers who signed the financial documents underlying a dishonoured cheque and those whose connection to the transaction rests only on their designation. In a judgment delivered on 26 May 2026, a Division Bench of Justice Prashant Kumar Mishra and Justice N.V. Anjaria partly allowed an appeal by M/s Mansi Finance (Chennai) Ltd., restoring a cheque-dishonour prosecution under Sections 138 and 141 of the Negotiable Instruments Act, 1881 against three respondents who had signed promissory notes, a Memorandum of Understanding, or the dishonoured cheque itself. The quashing of proceedings against a fourth respondent, an Executive Member who had signed none of those documents was upheld. The judgment refines how courts should read a complaint as a whole rather than in isolated fragments when deciding whether to quash proceedings at the threshold.

How the Dispute Reached the Court

M/s Mansi Finance (Chennai) Ltd. is a finance company operating out of Chennai. Between 2 July 2018 and 27 July 2018, M/s Ravindra Bharathi Educational Society approached the company and borrowed an aggregate sum of Rs. 4,50,00,000 (Four Crores and Fifty Lakhs Rupees) for the development of its educational institution. The amount was advanced in tranches by cheque.

Promissory notes were executed on various dates during the same period. On 31 July 2018, a Memorandum of Understanding was executed between the finance company and the Society, represented by its President and Vice-President, formalising the borrowing and fixing interest at 30% per annum, repayable on demand.

When repayment was not made despite repeated demands, the Society's President and authorised signatory, M. Subramaniam, issued cheque No. 003109 dated 18 November 2019 for Rs. 5,12,61,500 drawn on Andhra Bank, Kavuri Hills Branch, Hyderabad, towards discharge of the outstanding liability with accrued interest. The cheque was presented through IDBI Bank, Parrys Corner Branch, Chennai, and was returned dishonoured on 19 November 2019 with the endorsement “Account Blocked”.

A statutory demand notice dated 12 December 2019 was served on the Society and all its office bearers on 16 December 2019. No payment was made and no reply was sent. The finance company then filed a private complaint under Sections 138 and 141 of the NI Act before the IV FTC Metropolitan Magistrate, George Town, Chennai, which was taken on file as S.T.C. No. 1980 of 2023 by order dated 27 February 2023.

The complaint named nine accused. Accused No. 1 was the Society itself. Accused No. 2, M. Subramaniam, was the President and cheque signatory. The present respondents, M. Lalitha (Vice-President), M. Rekah (Treasurer), R. Babu Rao (Executive Member), and R. Murugan (Manager), were arrayed as accused Nos. 3, 6, 8 and 9 respectively. The complaint alleged that all accused were in charge of and responsible for the day-to-day affairs of the Society and had knowingly caused the cheque to be issued despite the account being blocked.

Upon being summoned, the four respondents filed Criminal Original Petition No. 10494 of 2024 before the Madras High Court under Section 482 of the Code of Criminal Procedure, 1973, seeking quashing of the complaint insofar as it related to them. They argued they were neither signatories to the cheque nor in charge of the day-to-day affairs of the Society, and that the complaint lacked the foundational averments required to attract vicarious liability under Section 141.

By its order dated 28 June 2024, the High Court allowed the petition and quashed the proceedings against all four respondents. It held that the averments in paragraph 7 of the complaint were omnibus and lacked the specificity required to satisfy the statutory threshold. The High Court relied on two Supreme Court decisions: S.P. Mani and Mohan Dairy v. Dr. Snehalatha Elangovan and Ashok Shewakramani and Others v. State of Andhra Pradesh and Another. Aggrieved, the finance company appealed to the Supreme Court.

The Statutory Framework and Settled Principles

The Court set out the text of Section 141 of the NI Act, which extends criminal liability for a Section 138 offence committed by a company to every person who, at the time the offence was committed, was in charge of and responsible to the company for the conduct of its business. Sub-section (2) separately covers directors, managers, secretaries or other officers where the offence is proved to have been committed with their consent, connivance, or attributable to their neglect.

The Court drew on three precedents to frame the applicable standard. In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Another, a three-Judge Bench held that it is necessary to specifically aver in a complaint that at the time the offence was committed, the person accused was in charge of and responsible for the conduct of the business of the company, and that merely being described as a director is not sufficient. In National Small Industries Corporation Limited v. Harmeet Singh Paintal and Another, the Court held that the complaint must spell out how and in what manner the accused was responsible for the conduct of the business, and that vicarious liability must be pleaded and proved, not inferred.

The Court also noted a more recent clarification in HDFC Bank Limited v. State of Maharashtra and Another, where it was held that a complaint need not mechanically reproduce the exact phraseology of Section 141 if the substance of the allegations, read as a whole, discloses the factual basis for liability. The emphasis, the Court said, is on substance rather than form, and the role attributable to each accused must be independently discernible from the complaint.

The Court accepted the proposition from Ashok Shewakramani that mere reiteration of the statutory formula without any factual nexus between the accused and the transaction will not suffice. It equally accepted the caution from S.P. Mani and Mohan Dairy that a hyper-technical approach ought not to be adopted and that where the factual foundation for the offence has been laid when the complaint is read as a whole, the power of quashing should be exercised sparingly.

Why the Court Treated the Four Respondents Differently

The Court held that the answer to whether the complaint disclosed sufficient foundational facts “cannot be uniform for all the respondents and must necessarily depend upon the role attributable to each of them.”

For respondent Nos. 1, 2 and 4, M. Lalitha (Vice-President), M. Rekah (Treasurer) and R. Murugan (Manager) the Court found that the material placed on record prima facie indicated their personal participation in the underlying financial documents. The MoU bore the signature of respondent No. 1. The dishonoured cheque itself bore the signature of respondent No. 2. The promissory notes and allied payment documents disclosed the participation of respondent Nos. 1, 2 and 4. The Court was clear that these were not matters of mere designation but constituted prima facie material linking them to the underlying transaction.

The Court held that such participation in the transaction giving rise to the debt was a relevant and proximate circumstance when considering whether these respondents were in charge of and responsible for the affairs of the Society within the meaning of Section 141. The documentary material forming part of the complaint furnished the factual foundation necessary for continuation of the prosecution at this stage.

The position was different for respondent No. 3, R. Babu Rao, the Executive Member. No promissory note, cheque, MoU or allied financial document bore his signature or otherwise indicated his participation. The complaint did not travel beyond a general assertion founded upon his official status. The Court held that in the absence of any specific factual foundation connecting him with the transaction giving rise to the dishonoured cheque, the principles in Ashok Shewakramani and National Small Industries Corporation Limited applied squarely.

The appellant's argument that R. Babu Rao, as an Executive Member and part of the Managing Committee, was entrusted with the affairs of the Society and therefore liable under Section 141 was rejected. The Court reiterated that there is no deemed liability merely by virtue of holding an office or position in a company or society, and that his designation alone would not be sufficient to attract liability under Section 141.

The High Court's Error and the Quashing Power

The Court found that the High Court was justified in quashing the proceedings against respondent No. 3 but had failed to notice the material distinction in the position of respondent Nos. 1, 2 and 4. By extending the same relief to all four respondents without examining the documentary material linking three of them to the underlying transaction, the High Court erred.

The Court reiterated the limits of the quashing jurisdiction at this stage. At the stage of quashing, the Court does not adjudicate upon the truthfulness of the allegations or embark upon appreciation of evidence. Whether respondent Nos. 1, 2 and 4 were in fact in charge of and responsible for the conduct of the affairs of the Society is a matter of evidence to be established at trial. The inquiry at the quashing stage is confined to whether foundational material exists, not whether that material is sufficient to secure a conviction.

The Court also noted that the cheque was returned with the endorsement “Account Blocked” and that the complaint specifically alleged the cheque was issued towards discharge of the liability arising out of the transactions between the parties despite the existence of such circumstances. The surrounding circumstances, coupled with the documentary material disclosing participation of respondent Nos. 1, 2 and 4 in the underlying financial transactions, constituted sufficient foundational material to justify continuation of the prosecution against them.

Order

The appeal was partly allowed. The impugned order dated 28 June 2024 passed by the Madras High Court in Criminal Original Petition No. 10494 of 2024 was set aside insofar as it related to respondent Nos. 1, 2 and 4. The quashing of proceedings against respondent No. 3, R. Babu Rao, was upheld.

The complaint in S.T.C. No. 1980 of 2023, pending before the IV FTC Metropolitan Magistrate, George Town, Chennai, was restored insofar as respondent Nos. 1, 2 and 4 are concerned. All contentions of the parties were left open to be urged before the Trial Court. The Court clarified that its observations were confined to the adjudication of the issue arising in the appeal and shall not be construed as an expression on the merits of the allegations in the complaint.