Non-Executive Directors Cannot Be Held Liable Under Section 138 Read with Section 141 of the Negotiable Instruments Act, 1881 Without Specific Allegations of Direct Involvement in Financial Transactions – Supreme Court Reiterated Established Precedents

Mere designation as a director does not create vicarious liability. Non-executive directors with no financial decision-making authority cannot be presumed responsible for dishonored cheques. Absence of specific allegations or evidence of active participation in financial transactions precludes liability under Section 141 NI Act.

The Supreme Court quashed the criminal proceedings, holding that non-executive directors cannot be held liable under Section 138 read with Section 141 of the NI Act without specific allegations of their direct involvement in the company’s financial affairs.

The Supreme Court set aside the High Court’s judgment dated 28.11.2023 and quashed the criminal proceedings against the Appellant(s). The appeals were allowed with no order as to costs.

Acts and Sections Discussed:

1. Constitution of India (COI) – Article 136 – Special Leave Petition

2. Code of Criminal Procedure, 1973 (CrPC) – Section 482 – Inherent Powers of High Court

3. Negotiable Instruments Act, 1881 (NI Act) – Section 138 – Dishonor of Cheque – Section 141 – Offenses by Companies

Subjects:

Non-Executive Directors – Vicarious Liability – Cheque Dishonor – Corporate Governance Oversight – Financial Decision-Making

Nature of the Litigation: Criminal appeals arising from dismissal of petitions filed under Section 482 CrPC for quashing of criminal proceedings initiated under Section 138 read with Section 141 of the NI Act.

Parties and Remedy Sought: Appellant(s): K.S. Mehta and Basant Kumar Goswami – Sought quashing of criminal complaints filed for dishonor of post-dated cheques. Respondent: M/s Morgan Securities and Credits Pvt. Ltd. – Initiated criminal proceedings alleging liability of the directors for the dishonored cheques.

Reason for Filing the Case: The Appellant(s) contended that they were non-executive directors with no financial decision-making powers and were not involved in the issuance of the dishonored cheques.

Previous Decisions: The High Court of Delhi dismissed the Appellant(s)’ petitions under Section 482 CrPC, refusing to quash the criminal proceedings.

Issues:

(a) Whether non-executive directors can be held vicariously liable for offenses under Section 138 read with Section 141 of the NI Act without specific allegations of their involvement in financial transactions. (b) Whether the mere designation as a director suffices to impose criminal liability.

Submissions/Arguments:

Appellant(s):

• Argued lack of involvement in financial affairs and absence of authority in cheque issuance.

• Emphasized non-executive status with governance oversight only, in compliance with SEBI regulations.

• Cited judicial precedents affirming the requirement of specific allegations for vicarious liability.

Respondent:

• Contended that the Appellant(s) being directors were presumed involved in company affairs.

• Argued that resignation did not absolve directors from liability without proving non-involvement.