SUPREME COURT HOLDS NON-EXECUTIVE DIRECTORS CANNOT BE HELD LIABLE FOR DISHONOURED CHEQUES.
A two Judge Bench of The Hon’ble Supreme Court of India comprising of Justice Satish Chandra Sharma and Justice B. V. Nagarathna, passed a Judgement dated 04.03.2025, in the matter of K.S. Mehta v/s M/s Morgan Securities and Credits Pvt. Ltd. The Hon’ble Supreme Court of India, on 04.03.2025, allowed the Special Leave Petition (SLP) and set aside the Impugned Judgement and Order dated 28.11.2023 of the High Court of Delhi and quashed the criminal proceedings against the Appellant(s) in Complaint No(s). 15858 and 15857 of 2017 which was pending before the Additional Chief Metropolitan Magistrate, New Delhi, and held that Non- Executive Directors are not liable for dishonoured cheques.
Facts
The Appellant(s) K.S. Mehta and Basant Kumar Goswami, were appointed as directors of M/s Blue Coast Hotels & Resorts Ltd. at different times as non-executive directors in compliance with clause 49 of the Listing Agreement Prescribed by the Securities and Exchange Board of India (SEBI). Their role was to oversee the governance without any executive authority or financial decision-making power in the company.
The Accused Company and the Respondent entered into an Inter-Corporate Deposit (“ICD”) dated 09.09.2002 to avail a financial facility of Rs. 5,00,00,000/- (Rupees Five Crores) against certain securities for a period of 18 days only. However, the Appellant(s) were neither in attendance of the Board meeting nor they were signatories to the agreement or any related financial instruments. The Accused persons issued two post-dated cheque’s bearing cheque No. 842628 dated 28.02.2005 for Rs.50,00,000/- and cheque No. 842629 dated 30.03.2005 for 50,00,000/- respectively. Upon presentation of the cheques, both cheques were dishonoured with reasons “FUNDS INSUFFICENT”. The Respondent issued legal notices demanding payment but the company neither replied to the notices nor released any payments in favour of the Respondent. Consequently, criminal proceedings were initiated against all the directors, including the Appellant(s).
One fact that should be noted is that when the ICD Agreement was entered into, there was an arbitration clause in the Agreement which stated that in case of any dispute between the parties, the said clause shall be invoked. The Appellant(s) were not aware of any such clause. Later, a Memorandum of Settlement (MOU) was executed on 27.05.2003 where the Respondent, Accused Company, Accused No 2, Accused No. 6 and Morepen Laboratories Ltd. agreed to resolve all the financial disputes. The Appellant(s) were not a party to this settlement.
While Appellant K.S. Mehta resigned from the Company on 10.11.2012, the other Appellant, Basant Kumar Goswami continued as non-executive director in the company until 2014. The Registrar of Companies (ROC) records and Corporate Governance Reports (CGR) submitted to the stock exchange confirmed that both the Appellants were non-executive directors and also indicated that they had not drawn any remuneration from the Company other than nominal meeting fee. It is pertinent to mention here that neither Appellant ever submitted Form 25(C), which is a mandatory form to be submitted by executive and managing directors drawing remuneration from the Company. This further, substantiated their lack of involvement in the financial affairs of the Company.
Issues
Whether non-executive directors could be held vicariously liable under Section 141 of the NI Act without specific allegations of their involvement in the company’s financial affairs?
First and second round of Litigation
The Respondent initiated criminal proceedings Under Section 138 of the Negotiable Instruments Act (NI ACT) (Dishonour of Cheque) before the Court of Additional Chief Metropolitan Magistrate bearing Complaint No(s). 15857 of 2017 qua Cheque No. 842629 and Complaint No. 15858 of 2017 qua Cheque No. 842628.
The Appellant(s) having no involvement in the case in the Trial Court, approached the Hon’ble High Court of Delhi for quashing of Proceedings against them in the aforesaid cases under Section 138 of the NI Act. The Hon’ble High Court of Delhi dismissed the Appellant(s)’ Petition under Section 482 Criminal Procedure Code, 1973 (Cr.P.C) bearing Crl.M.C. No(s). 1643 and 1345 of 2019.
Aggrieved by this decision, the Appellant(s) approached the Hon’ble Supreme Court of India.
What The Hon’ble Supreme Court of India held:
The Hon’ble Supreme Court’s analysis centred on the interpretation of Section 141 of the NI Act (Offences by Companies), which deals with the liability of directors in the event of dishonoured cheques. The Hon’ble Supreme Court of India first noted that the mere designation of a person as a director does not automatically make them liable for the actions of the company. It emphasized the importance of the actual involvement of the director in the company’s affairs, particularly with regard to the issuance of cheques or financial dealings, to establish their liability.
The Hon’ble Supreme Court of India referred to earlier judgments, including National Small Industries Corporation Ltd. v. Harmeet Singh Paintal 2010 3 SCC 330 and S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla 2007 4 SCC 70, which laid down that vicarious liability under Section 141 can only be attributed to directors who are in charge of and responsible for the conduct of the business at the relevant time. It emphasized that non-executive directors, who do not have a direct role in the day-to-day management of a company, cannot be held liable for financial transactions or business decisions made by the company’s executive management unless there is clear evidence of their involvement.
The Court further clarified that the liability under Section 141 cannot be presumed based solely on the formal designation of a person as a director. Instead, there must be specific allegations of involvement or consent to the offence in question. In this case, there was no evidence to suggest that Mehta or Goswami had any knowledge of or involvement in the issuance of the dishonoured cheques. The fact that they were non-executive directors with no role in the company’s financial dealings played a crucial part in the Court’s decision.
Conclusion
The Supreme Court’s decision in K.S. Mehta vs. M/s Morgan Securities Pvt. Ltd. is a significant step towards ensuring that corporate governance is respected and that criminal liability is not imposed lightly. By distinguishing between executive and non-executive directors and setting a clear standard for vicarious liability, the Court has provided valuable guidance on the scope of director liability under the NI Act. This judgment reinforces the principle that the law must be applied fairly, with specific evidence of involvement, to hold individuals accountable for criminal conduct.
KAUSTUBH PUNJ
SENIOR LEGAL ASSOCIATE
THE INDIAN LAWYER AND ALLIED SERVICES
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