Office-Bearers Can Face NI Act Prosecution If Complaint Shows Their Role In Transaction: Supreme Court

The Supreme Court on Tuesday held that criminal liability for cheque dishonour cannot be fastened on a person merely because they hold an office in a society, while making it clear that proceedings cannot be quashed at the threshold where the complaint discloses sufficient factual material linking them to the underlying transaction.

A Bench of Justice Prashant Kumar Mishra and Justice N.V. Anjaria partly allowed an appeal filed by Mansi Finance (Chennai) Ltd against a Madras High Court order that had quashed proceedings against four office-bearers of Ravindra Bharathi Educational Society.

Explaining the legal position, the Court said that while cheque dishonour constitutes the offence, liability can extend to those who were responsible for the affairs of the entity at the time of the offence.

"While Section 138 of the NI Act creates the offence of dishonour of cheque, Section 141 of the NI Act extends criminal liability to every person who, at the time the offence was committed, was in-charge of and responsible to the company or association for the conduct of its business.”

The Bench, however, emphasised that such liability is not automatic merely because a person holds an office.

“The emphasis, therefore, is not on form but on substance in the sense that the criminal liability under Section 141 of the NI Act is person specific and cannot be imposed merely by association. The complaint must, therefore, disclose sufficient factual foundation qua each accused and the role attributable to each must be independently discernible.

The dispute arose from a series of financial transactions between the finance company and the educational society in July 2018. According to the company, the society borrowed ₹4.5 crore for the development of its educational institution and business needs. The borrowings were backed by promissory notes and a memorandum of understanding setting out repayment terms with interest.

When the dues remained unpaid, a cheque for ₹5.12 crore was issued towards discharge of the liability, but it was returned unpaid with the endorsement “Account Blocked.” After a legal notice drew neither payment nor any response, the company initiated cheque dishonour proceedings against the society, its president and several office-bearers.

The vice-president, treasurer, executive member and manager later moved the Madras High Court seeking quashing of the case, arguing that the complaint contained only broad allegations without specifically establishing their individual roles or responsibility for the society's affairs. Mansi Finance countered that documents forming part of the complaint showed active participation by some of them in the borrowing transaction and financial management of the society.

Accepting that distinction, the Supreme Court found prima facie material against three of them.

“The material placed on record prima facie indicates that respondent Nos. 1, 2 and 4 were themselves signatories to some of the antecedent financial documents forming part of the transaction. The MoU bears the signature of respondent no. 1. The dishonoured cheque itself bears the signature of respondent No. 2. The promissory notes and allied payment documents disclose participation of respondent Nos. 1, 2 and 4. These are not matters of mere designation but constitute prima facie material linking them to the underlying transaction.”

The Court added,“The documentary material forming part of the complaint furnishes the factual foundation necessary for continuation of the prosecution at this stage.”

As for the executive member, the Court found no comparable material linking him to the transaction and upheld the quashing of proceedings against him. Proceedings against the vice-president, treasurer and manager were restored.

For Appellant: Advocate N Sai Vinod

For Respondents: Advocate Balaji Srinivasan