Introduction
In a significant judgment delivered on 4th March 2025, the Hon’ble Supreme Court in K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd. [Criminal Appeal arising from SLP (Crl.) No. 4774 of 2024 and connected matters], clarified the scope of vicarious liability of non-executive directors under Section 141 of the Negotiable Instruments Act, 1881 (NI Act). The Court quashed criminal proceedings against directors who were not involved in the financial or operational management of the company, thereby reinforcing jurisprudence requiring specific averments and active involvement for fastening criminal liability.
1. Factual Background and Procedural History
The dispute traces its genesis to an Inter-Corporate Deposit (ICD) agreement dated 09.09.2002, entered into between the accused company, M/s Blue Coast Hotels & Resorts Ltd., and the respondent, M/s Morgan Securities and Credits Pvt. Ltd., for a loan of ₹5 crores. The repayment obligation was secured through two post-dated cheques:
- ₹50 lakhs dated 28.02.2005
- ₹50 lakhs dated 30.03.2005
Both cheques were dishonoured upon presentation due to insufficient funds. Legal notices followed, and criminal complaints were filed under Section 138 read with Section 141 of the NI Act.
The appellants, K.S. Mehta and Basant Kumar Goswami, were non-executive directors at different times. Notably, they were neither signatories to the ICD agreement nor present at the board meeting that approved it. They did not sign the dishonoured cheques or participate in the financial transactions related thereto.
Despite this, they were arrayed as accused. The Delhi High Court, in a common judgment dated 28.11.2023, dismissed their petitions under Section 482 CrPC, refusing to quash the proceedings. Aggrieved, they approached the Supreme Court.
2. Identification of Legal Issues
The following issues arose for determination:
a. Whether non-executive directors can be held vicariously liable under Section 141 NI Act in the absence of specific allegations of their role in the conduct of business?
b. Whether mere designation as a director and attendance at board meetings is sufficient to attract liability under Section 138/141 NI Act?
c. Whether complaints lacking averments as to responsibility for financial affairs are maintainable against non-executive directors?
3. Arguments of the Parties
Appellants’ Submissions
- The appellants emphasized their non-executive roles, asserting that they were not involved in day-to-day operations or financial decision-making.
- They were not signatories to the dishonoured cheques, nor did they authorize their issuance.
- Their responsibilities were limited to corporate governance oversight as required under Clause 49 of SEBI’s Listing Agreement.
- They relied on ROC records and Corporate Governance Reports (CGRs), which established their non-executive status and lack of remuneration beyond meeting fees.
- Precedents relied upon included:
- S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89
- Pooja Ravinder Devidasani v. State of Maharashtra, (2014) 16 SCC 1
- Kamalkishor Shrigopal Taparia v. India Ener-Gen Pvt. Ltd., 2025 SCC Online SC 321
Respondent’s Submissions
- The respondent argued that the appellants were directors at the relevant time and thus presumed to be aware of company affairs.
- Resignation from the company did not ipso facto absolve liability under Section 141 NI Act.
- Cited Ashutosh Ashok Parasrampuriya v. Gharrkul Industries, (2023) 14 SCC 770, contending that such issues are triable questions of fact.
- Emphasized the appellants’ attendance at board meetings, asserting implied knowledge of financial transactions.
4. Court’s Analysis and Reasoning
The Supreme Court adopted a strict construction of penal provisions under the NI Act, in line with established principles on vicarious liability.
a. Role of Non-Executive Directors
The Court observed that non-executive and independent directors cannot be fastened with liability under Section 141 NI Act without specific allegations demonstrating their active participation in the company’s business.
Relying on National Small Industries Corp. Ltd. v. Harmeet Singh Paintal, (2010) 3 SCC 330, the Court reiterated that:
“For fastening vicarious liability, the complaint must specifically aver how and in what manner the director was in charge of and responsible for the conduct of the company’s business.”
The judgment clearly distinguished between executive and non-executive roles, noting that mere attendance in meetings is not sufficient to infer financial control.
b. Applicability of Section 141
The Court emphasized the dual requirement under Section 141(1):
- The person must be in charge of the conduct of business, and
- Responsible to the company for such conduct.
It relied on Hitesh Verma v. Health Care At Home India Pvt. Ltd., Crl. Appeal No. 462 of 2025, observing that in the absence of both averments, prosecution under Section 141 fails.
c. Lack of Specific Allegations
The complaints did not assert:
- That the appellants issued, signed, or authorized the cheques
- That they managed the financial affairs or operations
- That they had knowledge of the transaction
The CGRs and ROC filings corroborated their non-executive status.
d. Vicarious Liability Must Be Pleaded and Proved
The Court highlighted that vicarious liability cannot be presumed. It must be pleaded in the complaint and proved at trial, especially where the accused is neither a signatory nor a managing director.
5. Final Conclusion and Holding
The Court set aside the High Court’s order and quashed the criminal proceedings pending against the appellants under Complaint Nos. 15857 and 15858 of 2017.
Legal Principle Laid Down:
Non-executive directors cannot be held vicariously liable under Section 141 NI Act in the absence of specific averments showing their control over the conduct of the company’s business at the time of the offence.
FAQs:
1. Can a non-executive director be held liable for cheque dishonour under Section 138?
Not automatically. A non-executive director can only be held liable if there are clear allegations that they were in charge of and responsible for the conduct of the company’s business at the relevant time.
2. What is required to prosecute a director under Section 141 of the NI Act?
A complaint must include specific averments that the director was responsible for the day-to-day operations of the company and actively involved in the transaction related to the dishonoured cheque.
3. Does attending board meetings make a director liable under the NI Act?
No. Mere attendance at board meetings does not imply responsibility for financial transactions or cheque issuance unless coupled with active involvement.
4. Is there a presumption of liability for all company directors under Section 138?
No. Liability is not presumed. It must be established that the director had a role in the conduct of business and was responsible for the transaction.
5. Can a director’s resignation absolve them of criminal liability under the NI Act?
Resignation does not automatically absolve liability. However, if there are no allegations of their role in the offence or financial control, they cannot be prosecuted.
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