Supreme Court Ruling on the Liability of Non-Executive Directors in Cheque Dishonour Cases

In the landmark case of K.S. Mehta v. M/S Morgan Securities and Credits Pvt. Ltd. [2025 LiveLaw (SC) 286], decided on March 4, 2025, the Supreme Court of India reaffirmed that non-executive and independent directors cannot be held vicariously liable for cheque dishonour under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (NI Act) unless there is specific evidence proving their direct involvement in financial transactions.

Facts of the Case

The case arose from an Inter-Corporate Deposit (ICD) agreement executed on September 9, 2002, between M/s Blue Coast Hotels & Resorts Ltd. and the respondent, under which cheques were issued as repayment for the loan. Upon dishonour of two post-dated cheques due to insufficient funds, the respondent initiated criminal proceedings against all directors, including non-executive directors K.S. Mehta and Basant Kumar Goswami.

The appellants contended that they had no role in the company’s financial decisions, did not sign the cheques, and were non-executive directors tasked only with governance oversight. The High Court of Delhi refused to quash the criminal proceedings under Section 482 of the Criminal Procedure Code, 1973 (CrPC), prompting an appeal to the Supreme Court.

Key Issues Before the Court

1. Can non-executive and independent directors be held vicariously liable for cheque dishonour under Section 138 read with Section 141 of the NI Act?
2. What level of involvement must be proven to impose liability on directors in such cases?

Arguments Presented

Appellants’ Arguments:

• The appellants were not involved in the company’s financial operations and were non-executive directors, as confirmed by records from the Registrar of Companies (ROC) and Corporate Governance Reports (CGR).
• There were no specific allegations in the complaint proving their role in cheque issuance or dishonour.
• Mere attendance at board meetings does not establish liability under Section 141 of the NI Act.
• Cited precedents:
  • S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) 8 SCC 89 – Mere designation as a director does not create vicarious liability unless active participation in financial affairs is proven.
  • Pooja Ravinder Devidasani v. State of Maharashtra (2014) 16 SCC 1 – Non-executive directors have no role in financial operations unless explicitly proven.

Respondents’ Arguments:

• The appellants’ names appeared as directors at the relevant time, and they were presumed to be responsible for the company’s affairs.
• Cited Ashutosh Ashok Parasrampuriya v. Gharrkul Industries Pvt. Ltd. (2023) 14 SCC 770, which held that director liability should be examined during trial and not at the quashing stage.
• Resignation alone does not absolve a director from liability unless non-involvement is clearly established.

Supreme Court’s Reasoning

The Court relied on multiple precedents, reaffirming that liability under Section 138 NI Act extends only to those who were actively in charge of and responsible for the conduct of business. Key observations included:

1. Requirement of Specific Allegations:
   • The complaint must contain specific allegations demonstrating the director’s involvement in financial transactions. A general claim that a director was “responsible” is insufficient (National Small Industries Corp. v. Harmeet Singh Paintal, (2010) 3 SCC 330).
2. Vicarious Liability Must Be Proven, Not Presumed:
   • A director who merely holds a non-executive position cannot be presumed liable unless there is evidence of actual participation in financial decision-making.
3. Directors Who Sign Cheques vs. Those Who Do Not:
   • In Hitesh Verma v. M/s Health Care At Home India Pvt. Ltd. (2025), the Court reiterated that liability under Section 138 primarily applies to the signatory of the cheque unless vicarious liability is independently established under Section 141.

Conclusion and Judgment

The Supreme Court held that in the absence of specific allegations linking the appellants to the dishonoured cheques, their prosecution under Section 138 read with Section 141 NI Act was unjustified. Consequently, the criminal proceedings against them were quashed.

This ruling reaffirms that non-executive and independent directors are not automatically liable for company defaults and underscores the necessity for complainants to establish direct involvement in financial transactions before initiating criminal proceedings.

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