Kiran Raj

The Supreme Court has quashed criminal proceedings against two non-executive directors who were accused in a cheque dishonour case under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881. The bench comprising Justice B. V. Nagarathna and Justice Satish Chandra Sharma set aside the judgment of the Delhi High Court, which had dismissed their petition seeking to quash the proceedings. The Court held that in the absence of specific allegations linking the directors to the issuance or dishonour of the cheques, they could not be held vicariously liable under the Act.

The dispute arose from an Inter-Corporate Deposit (ICD) agreement dated September 9, 2002, executed between M/s Blue Coast Hotels & Resorts Ltd. and the respondent, M/s Morgan Securities and Credits Pvt. Ltd. The agreement facilitated a financial facility of ₹5,00,00,000 for a period of 180 days. The appellants, K.S. Mehta and Basant Kumar Goswami, were directors of the company at different points in time but were designated as non-executive directors in compliance with the Listing Agreement prescribed by the Securities and Exchange Board of India (SEBI). Their roles were limited to governance oversight, and they had no executive authority or involvement in financial decision-making.

To discharge its liability under the ICD, the company issued two post-dated cheques:

Cheque No. 842628 dated February 28, 2005, for ₹50,00,000
Cheque No. 842629 dated March 30, 2005, for ₹50,00,000

Both cheques were dishonoured upon presentation due to insufficient funds. The respondent issued legal notices demanding payment, but no remedial action was taken. Subsequently, the respondent initiated criminal proceedings against all directors, including the appellants, under Section 138 of the Negotiable Instruments Act, 1881.

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The appellants contended that they were neither present at the board meeting when the ICD transaction was approved nor were they signatories to the agreement or the cheques. They further submitted that they had no knowledge of an arbitration clause within the agreement and were not parties to a subsequent memorandum of settlement executed between the respondent and other accused persons.

The appellants also submitted that their non-executive status was consistently reflected in the Registrar of Companies (ROC) records and Corporate Governance Reports (CGRs) submitted to the stock exchange. They did not receive any remuneration apart from a nominal meeting fee, and they never submitted Form 25(C), which is mandatory for executive and managing directors drawing remuneration.

Despite these factors, complaints under Section 138 of the Negotiable Instruments Act were filed against them before the Additional Chief Metropolitan Magistrate, New Delhi. The appellants approached the Delhi High Court under Section 482 of the Code of Criminal Procedure, 1973, seeking to quash the proceedings. The High Court dismissed their petitions, leading to the present appeal before the Supreme Court.

The Supreme Court examined the issue of vicarious liability of non-executive directors under Section 141 of the Negotiable Instruments Act. The Court referred to multiple precedents to clarify that mere designation as a director does not automatically result in liability under the Act.

The Court recorded:

"This Court has consistently held that non-executive and independent director(s) cannot be held liable under Section 138 read with Section 141 of the NI Act unless specific allegations demonstrate their direct involvement in affairs of the company at the relevant time."

Referring to National Small Industries Corporation Ltd. v. Harmeet Singh Paintal & Anr., the Court observed:

"It is not sufficient to make a bald cursory statement in a complaint that the Director (arrayed as an accused) is in charge of and responsible to the company for the conduct of its business without anything more as to the role of the Director. The complaint should spell out as to how and in what manner the Director was in charge of or was responsible for the accused company’s business."

The Court held that vicarious liability under Section 141 can only be imposed if the director was actively responsible for the company’s financial affairs. It observed:

"The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company. Mere directorship does not create automatic liability under the Act."

The Court further referred to S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr., stating that mere designation as a director is insufficient and that specific allegations must establish a director’s role in financial transactions.

The Court also relied on Pooja Ravinder Devidasani v. State of Maharashtra & Anr., where it was held that non-executive directors, whose roles are confined to governance, cannot be held liable unless it is demonstrated that they were in charge of and responsible for the company’s affairs at the relevant time.

The Court recorded that the complaints against the appellants lacked specific allegations linking them to the issuance or dishonour of the cheques. It further noted:

"Upon perusal of the record and submissions of the parties, it is evident that the Appellant(s) neither issued nor signed the dishonoured cheques, nor had any role in their execution. There is no material on record to suggest that they were responsible for the issuance of the cheques in question. Their involvement in the company’s affairs was purely non-executive, confined to governance oversight, and did not extend to financial decision-making or operational management."

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The Court also stated that mere attendance at board meetings does not automatically translate into liability under Section 138 of the Negotiable Instruments Act. It noted:

"The mere fact that Appellant(s) attended board meetings does not suffice to impose financial liability on them, as such attendance does not automatically indicate control over financial operations."

Based on the lack of specific allegations against the appellants, the Supreme Court quashed the criminal proceedings pending before the Additional Chief Metropolitan Magistrate, New Delhi. It recorded:

"Given the lack of specific allegations and in view of the aforesaid observations, the Appellant(s) cannot be held vicariously liable under Section 141 of the NI Act."

The Court set aside the High Court’s order and directed that:

"The Impugned Judgment and Order dated 28.11.2023 of the High Court is set aside, and the criminal proceedings against the Appellant(s) in Complaint No(s). 15858 and 15857 of 2017 pending before the Court of Additional Chief Metropolitan Magistrate, New Delhi, are hereby quashed."

The appeals were accordingly allowed, with no order as to costs.

Case Title: K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd.
Neutral Citation: 2025 INSC 315
Case Number: SLP (Criminal) No. 4774 of 2024
Bench: Justice B. V. Nagarathna, Justice Satish Chandra Sharma

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