SC: Non-Executive Directors Not Liable for Cheque Dishonour (Section 141 NI Act) Without Direct Involvement

Case Overview: K. S. Mehta vs. M/s Morgan Securities and Credits Pvt. Ltd. (2025)

The Supreme Court of India has reiterated that non-executive and independent directors of a company cannot be held responsible for dishonored cheques under the Negotiable Instruments Act, 1881 (NI Act) unless their direct involvement in financial transactions is established. This ruling came in the case of K.S. Mehta vs. M/s Morgan Securities and Credits Pvt. Ltd., where criminal proceedings against two non-executive directors were quashed.

The verdict, delivered by Justices B.V. Nagarathna and Satish Chandra Sharma, overturned a Delhi High Court decision dated November 28, 2023. The Supreme Court emphasized that mere designation as a director does not automatically impose liability under Section 141 NI Act without clear evidence of active participation.

Legal Framework of Section 141 NI Act – Understanding Corporate Liability in Negotiable Instruments.

Background of the Case

The case stemmed from a financial dispute between M/s Morgan Securities and Credits Pvt. Ltd. and M/s Blue Coast Hotels & Resorts Ltd. The accused company had entered into an Inter-Corporate Deposit (ICD) agreement on September 9, 2002, securing a loan of ₹5 crore, repayable within 180 days. As part of this agreement, two post-dated cheques (each for ₹50 lakh) were issued but were dishonored due to insufficient funds. This led to legal notices and subsequent criminal complaints under Section 138 of the NI Act.

Among the accused were K.S. Mehta and Basant Kumar Goswami, both serving as non-executive directors. Mehta was appointed as an additional director in 2001 and resigned in 2012, while Goswami held his position from 1998 to 2014. Neither of them participated in the financial operations of the company, nor were they signatories to the cheques or the ICD agreement.

Despite their non-executive roles, complaints were filed against them in 2017 under Section 141 of the NI Act, holding them vicariously liable. The Delhi High Court dismissed their plea to quash these proceedings, prompting an appeal to the Supreme Court.

Legal Issues Examined Under Section 141 NI Act

The Supreme Court considered three primary legal questions:

1. Extent of Vicarious Liability: Can directors be held criminally liable solely based on their designation, or is evidence of active participation required?

2. Burden of Proof: Must the complainant present specific allegations linking the directors to the offense?

3. Role of Non-Executive Directors: Can non-executive directors, whose roles are limited to governance, be held accountable for financial decisions they neither authorized nor executed?

The appellants argued that they had no involvement in the company’s financial affairs, citing Corporate Governance Reports (CGRs) and Registrar of Companies (ROC) records as evidence. They relied on precedents such as S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla (2005) and Pooja Ravinder Devidasani vs. State of Maharashtra (2014), which establish that liability under Section 141 requires clear allegations of responsibility.

On the other hand, the respondent contended that the directors' presence at the relevant time suggested involvement and referenced Ashutosh Ashok Parasrampuriya vs. Gharrkul Industries Pvt. Ltd. (2023) to argue that such matters should be decided at trial.

Supreme Court’s Ruling and Key Observations

The Supreme Court allowed the appeal, quashing the criminal proceedings against Mehta and Goswami. The key observations from the ruling include:

• No Automatic Liability for Directors: Citing National Small Industries Corp. Ltd. vs. Harmeet Singh Paintal (2010), the Court reiterated that all directors cannot be held liable for dishonored cheques unless they were responsible for the company's business operations at the relevant time.

• Non-Executive Role Confirmed: The Court emphasized that the appellants' involvement was strictly limited to governance and not financial decision-making. Supporting documents from CGRs and ROC confirmed their non-executive roles.

• Board Meeting Attendance Not Sufficient: The Court rejected the argument that merely attending board meetings implied financial responsibility. It stated that participation in governance does not equate to control over financial transactions.

• Precedents Upheld: The Court reaffirmed that directorship alone does not establish liability under the NI Act. There must be specific allegations demonstrating active involvement in the company’s affairs.

Ultimately, the Supreme Court concluded that the allegations lacked a direct link between the appellants and the dishonored cheques. Accordingly, it set aside the Delhi High Court’s order and quashed the complaints (No. 15857 and 15858 of 2017).

Conclusion

This landmark judgment reaffirms the legal principle that non-executive directors cannot be held liable for dishonored cheques unless they had a direct role in financial decisions. The ruling provides much-needed clarity on vicarious liability under the NI Act, ensuring that individuals in governance roles are not wrongfully implicated in financial disputes they had no control over.

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