Specific Averments Sufficient to Attract Vicarious Liability of Directors under NI Act: Delhi HC Refuses to Quash Cheque Dishonour in FIITJEE Loan Dispute [Read Order]

The Delhi High Court has refused to quash criminal proceedings under Section 138 ofthe Negotiable Instruments Act, 1881, against the directors of International Public School Ltd. (IPS) in a long‑running loan dispute with FIITJEE Ltd.

It was held that specific averments in the complaint alleging directors’ responsibility for the company’s affairs were sufficient to attract vicarious liability under Section 141 NI Act, thereby requiring the matter to proceed to trial.

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The case began from a Joint Venture Agreement (JVA) signed in 2010 between IPS and FIITJEE Foundation to establish a “FIITJEE World School” in Bhopal. FIITJEE advanced Rs. 2.5 crore under the JVA, but the project stalled due to land conversion issues. The parties substituted the JVA with a Loan Agreement dated 20 November 2012, providing for Rs. 15 crore in two phases. The Rs. 2.5 crore already advanced was incorporated into the first phase of Rs. 10 crore.

IPS issued seven post‑dated cheques totalling Rs. 13.25 crore as security. When FIITJEE presented the first cheque for Rs. 1 crore in April 2015, it was dishonoured with the remark “payment stopped by drawer.” FIITJEE recalled the loan and initiated a criminal complaint under Section 138 NI Act. IPS sought quashing of the complaint, arguing that the cheque was only a security instrument and no legally enforceable debt existed at the time of dishonour.

IPS directors, including Alok Nanda, Jyoti Singh Masani, Jasbir Singh, and Anil Kumar Seth, contended that the dishonoured cheque was issued as security for the larger loan facility, not against a subsisting liability. Since FIITJEE failed to disburse the balance Rs. 7.5 crore, no enforceable debt existed when the cheque was presented.

It was also argued that the dishonour was due to “stop payment” instructions, not insufficiency of funds, rebutting the statutory presumption under Section 139 NI Act. It was further contended that the dispute was contractual and civil in nature, and criminal proceedings amounted to misuse of process.

It was argued that the Directors are not involved in day‑to‑day affairs and could not be held vicariously liable under Section 141 NI Act.

FIITJEE countered that the Loan Agreement expressly acknowledged receipt of Rs. 2.5 crore, making it part of the Rs. 10 crore first-phase loan. And the cheque was issued in pursuance of repayment obligations, not merely as security.

It was also contended that Clause 6 of the Loan Agreement provided that if the project failed, the loan already disbursed became immediately repayable with 18% interest. Also, the instruction to stop payment was a deliberate act to evade liability.

It was also argued that the complaint contained specific averments that all directors were responsible for the company’s conduct, thereby attracting vicarious liability under Section 141 NI Act.

The Court highlighted that under Section 141 NI Act, directors can be held vicariously liable if the complaint contains specific averments that they were in charge of and responsible for the company’s business at the time of the offence.

In this case, FIITJEE’s complaint explicitly alleged that the IPS directors were actively involved in the company’s affairs and decision‑making.

JusticeNeena Bansal Krishna noted that the Chairman and Managing Director, Ashok Nanda, had signed the agreements and issued instructions leading to dishonour of the cheque. The other directors were also impleaded with allegations of participation in the scheme.

The Court said that the essence of the allegations is more important than their form. If the Complaint sufficiently indicates that the Director was actively involved in the Company‟s day-to-day operations and played a role in the transactions in question, this is enough to meet the threshold for vicarious liability under Section 141(1) NI Act, even if the statutory expression “in charge of and responsible for the conduct of the business” is not quoted verbatim.

It was observed that in this case, the Complaint satisfies the legal requirement by naming all accused Directors/officers, with specific averments that they were all “in charge of day to day affairs and responsible for the decisions” of the Company.

It was held that the Trial Court correctly found sufficient grounds to issue the Summons to all the Directors/petitioners.

At the stage of quashing, such averments were sufficient to proceed against them. Whether they were actually responsible is a matter to be tested at trial.

On the broader issue of whether the dishonoured cheque represented a legally enforceable debt, the Court held that, prima facie, the cheque, though initially given as security, had fructified into liability under the Loan Agreement.

The defence that no debt existed or that the cheque was misused could only be examined during trial. Similarly, the contention that the dispute was purely civil was rejected, as allegations of misrepresentation and conspiracy were also raised.

The Court refused to quash the Complaints under S.138 NI Act or to set aside the Summoning Order.

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