Supreme Court clarifies liability of non-executive directors under Section 138 NI Act in cheque dishonor cases: K.S. Mehta vs. M/S Morgan Securities (2025) INSC 315 (March 4, 2025)

Date of the Judgment: March 4, 2025

Citation: 2025 INSC 315

Judges: B. V. Nagarathna, J., Satish Chandra Sharma, J.

Can a non-executive director of a company be held liable for cheque dishonor under Section 138 of the Negotiable Instruments Act, 1881? The Supreme Court addressed this critical question in the case of K.S. Mehta vs. M/S Morgan Securities and Credits Pvt. Ltd. The court clarified the extent of vicarious liability of non-executive directors in cheque bouncing cases, providing much-needed clarity on the issue. The judgment was delivered by a two-judge bench comprising Justice B. V. Nagarathna and Justice Satish Chandra Sharma.

Case Background:

The case revolves around an Inter-Corporate Deposit (ICD) agreement between M/s Blue Coast Hotels & Resorts Ltd. and M/S Morgan Securities and Credits Pvt. Ltd. Here’s a breakdown of the key events:

✓ 09.09.2002: An ICD agreement was executed between the accused company, M/s Blue Coast Hotels & Resorts Ltd., and the Respondent, M/S Morgan Securities and Credits Pvt. Ltd., for a financial facility of ₹5,00,00,000 (Rupees Five Crores) against certain securities for a period of 180 days.

✓ K.S. Mehta and Basant Kumar Goswami were appointed as directors of M/s Blue Coast Hotels & Resorts Ltd. at different times. K.S. Mehta was appointed as an additional director on 29.06.2001, while Basant Kumar Goswami was appointed as a director on 16.04.1998. They were designated as non-executive directors in compliance with clause 49 of the Listing Agreement prescribed by the Securities and Exchange Board of India (SEBI).

✓ The Appellant(s) were neither in attendance at the board meeting held on 09.09.2002, wherein the said transaction was approved, nor were they signatories to the agreement or any related financial instruments.

✓ In repayment of the ICD, two post-dated cheques were issued:

• Cheque No. 842628 dated 28.02.2005 for ₹50,00,000/-.
• Cheque No. 842629 dated 30.03.2005 for ₹50,00,000/-.

✓ Both cheques were dishonored due to insufficient funds. The Respondent issued legal notices demanding payment, but no action was taken by the company, leading to criminal proceedings against all directors, including the Appellants.

✓ A memorandum of settlement was executed on 27.05.2003 between the Respondent and the accused company, Accused No. 2, Accused No. 6, and Morepen Laboratories Ltd., to resolve financial disputes. The Appellant(s) were not a party to this settlement.

✓ K.S. Mehta resigned from the company on 10.11.2012, whereas Basant Kumar Goswami continued as non-executive director until 2014.

✓ The Registrar of Companies (ROC) records and Corporate Governance Reports (CGR(s)) submitted to the stock exchange confirmed their non-executive status and indicated that they did not draw any remuneration apart from a nominal meeting fee.

✓ The following complaints under Section 138 NI Act were filed against the Appellant(s) before the Court of Additional Chief Metropolitan Magistrate, New Delhi:

1. Complaint No. 15857 of 2017, filed on 10.11.2005, qua Cheque No. 842629.
2. Complaint No. 15858 of 2017, filed on 25.10.2005, qua Cheque No. 842628.

Timeline:

Course of Proceedings:

The Appellants approached the High Court of Delhi under Section 482 of the Code of Criminal Procedure, 1973 (CrPC), seeking to quash the criminal proceedings initiated against them. The High Court dismissed their petitions, leading to the present appeals before the Supreme Court.

✓ The High Court dismissed the Appellant (s)’ petition under Section 482 CrPC bearing Crl.M.C. No(s). 1643, 1645 and 1345 of 2019 seeking quashing of the proceedings pending before the Court of Additional Chief Metropolitan Magistrate, New Delhi.

Legal Framework:

The case primarily involves Section 138 and Section 141 of the Negotiable Instruments Act, 1881.

Section 138 of the Negotiable Instruments Act, 1881 deals with the dishonor of cheques for insufficiency of funds. It states that if a cheque is returned by the bank unpaid because there are insufficient funds in the account, the drawer of the cheque shall be deemed to have committed an offence and shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both.

Section 141 of the Negotiable Instruments Act, 1881 addresses offences by companies. It stipulates that if a company commits an offence under Section 138, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

The section further clarifies that if an offence under the Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Arguments:

Arguments by the Appellants:

✓ The Appellants had no role in the company’s financial transactions and were not vested with any responsibility concerning its financial affairs.

✓ The Appellants were not signatories to any of the dishonored cheque(s) and did not authorize their issuance.

✓ The Appellants’ directorship was non-executive and limited to corporate governance oversight in compliance with SEBI regulations.

✓ Their non-executive status negates any basis for vicarious liability under Section 141 of the NI Act.

✓ The Corporate Governance Reports (CGR(s)) and Registrar of Companies (ROC) record(s) consistently reflected the Appellants’ non-executive roles, reinforcing their lack of involvement in operational or financial matters.

✓ In the absence of any specific allegations linking them to the issuance or dishonor of the cheques, the proceedings initiated against them were legally untenable.

✓ Relied on judicial precedents including Kamal kishor Shrigopal Taparia v. India Ener-Gen Private Limited & Anr., 2025 SCC Online SC 321; S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr., (2005) 8 SCC 89; and Pooja Ravinder Devidasani v. State of Maharashtra & Anr., (2014) 16 SCC 1 to substantiate that mere designation as a director does not create vicarious liability under Section 141 NI Act. There must be specific allegations of active participation in the conduct of business at the relevant time.

Arguments by the Respondent:

✓ The Appellants’ names appeared as directors in the company at the relevant time, and they were presumed to be involved in the company’s affairs.

✓ The mere resignation of the Appellant(s) does not automatically absolve a director from liability under Section 141 NI Act, and the onus lies upon them to establish their non-involvement in the company’s financial transactions.

✓ Relied on Ashutosh Ashok Parasrampuriya & Anr. v. Gharrkul Industries Pvt. Ltd. & Ors., (2023) 14 SCC 770, to contend that the question of the Appellant(s)’ status as an independent and non-executive director is a matter that should be determined during trial rather than at the quashing stage.

✓ Emphasized on the Appellant (s)’ attendance at board meetings, asserting that it indicated knowledge of financial dealings, including the issuance of cheques towards repayment of the ICD.

Submissions by Parties:

Issues Framed by the Supreme Court:

The Supreme Court did not explicitly frame specific issues in the provided text. However, the primary issue before the court was:

1. Whether non-executive directors can be held vicariously liable under Section 141 of the Negotiable Instruments Act, 1881, for the dishonor of cheques issued by the company.

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities:

The court relied on several precedents to arrive at its decision. Here’s a summary of the key authorities cited:

✓ National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal & Anr., (2010) 3 SCC 330 (Supreme Court of India): The court observed that Section 141 is a penal provision creating vicarious liability and must be strictly construed. It emphasized that the complaint should specify how the director was in charge of or responsible for the conduct of the company’s business.

✓ N. K. Wahi v. Shekhar Singh & Ors., (2007) 9 SCC 481 (Supreme Court of India): The court stated that to launch a prosecution against alleged directors, there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegations as to how the directors are in-charge and responsible for the conduct of the business of the company.

✓ S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr., (2005) 8 SCC 89 (Supreme Court of India): The court laid down that mere designation as a director is not sufficient; specific role and responsibility must be established in the complaint.

✓ Pooja Ravinder Devidasani v. State of Maharashtra & Anr., (2014) 16 SCC 1 (Supreme Court of India): The court held that to attract liability under Section 141 of the NI Act, the accused must have been actively in charge of the company’s business at the relevant time. Mere directorship does not create automatic liability under the Act.

✓ Ashok Shewakramani & Ors. v. State of Andhra Pradesh & Anr., (2023) 8 SCC 473 (Supreme Court of India): The court reiterated the importance of compliance with the requirements of Sub-section (1) of Section 141 of the NI Act and distinguished between directors and managing directors or whole-time directors.

✓ Hitesh Verma v. M/s Health Care At Home India Pvt. Ltd. & Ors., Crl. Appeal No. 462 of 2025 (Supreme Court of India): The court emphasized that as the appellant is not a signatory to the cheque, he is not liable under Section 138 of the 1881 Act and that there are twin requirements under sub-Section (1) of Section 141 of the 1881 Act.

✓ Kamal kishor Shrigopal Taparia v. India Ener-Gen Private Limited & Anr., 2025 SCC Online SC 321 (Supreme Court of India)

Authorities Considered by the Court:

Judgment:

The Supreme Court allowed the appeals, setting aside the High Court’s order and quashing the criminal proceedings against the Appellants. The court held that non-executive directors cannot be held vicariously liable under Section 141 of the NI Act unless specific allegations demonstrate their direct involvement in the affairs of the company at the relevant time.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal & Anr., (2010) 3 SCC 330: The court cited this authority to emphasize the need for specific averments in the complaint to make the accused vicariously liable.

✓ N. K. Wahi v. Shekhar Singh & Ors., (2007) 9 SCC 481: The court cited this authority to highlight the necessity of specific allegations regarding the part played by the directors in the transaction.

✓ S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr., (2005) 8 SCC 89: The court cited this authority to assert that mere designation as a director is not sufficient for establishing liability.

✓ Pooja Ravinder Devidasani v. State of Maharashtra & Anr., (2014) 16 SCC 1: The court cited this authority to emphasize that non-executive directors playing a governance role are not involved in daily operations or financial management.

✓ Ashok Shewakramani & Ors. v. State of Andhra Pradesh & Anr., (2023) 8 SCC 473: The court cited this authority to highlight non-compliance with the requirements of Sub-section (1) of Section 141 of the NI Act.

✓ Hitesh Verma v. M/s Health Care At Home India Pvt. Ltd. & Ors., Crl. Appeal No. 462 of 2025: The court cited this authority to emphasize that there are twin requirements under sub-Section (1) of Section 141 of the 1881 Act.

What weighed in the mind of the Court?:

The court’s decision was primarily influenced by the lack of specific allegations demonstrating the Appellants’ direct involvement in the company’s financial affairs and the evidence supporting their non-executive status. The court emphasized that vicarious liability under Section 141 of the NI Act cannot be automatically imposed on non-executive directors without clear evidence of their active role in the conduct of the business.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning:

For the issue of whether non-executive directors can be held vicariously liable, the court’s logical reasoning can be summarized as follows:

The court’s reasoning was based on the interpretation of Section 141 of the NI Act, which requires specific allegations and evidence of direct involvement for imposing vicarious liability on non-executive directors. The court rejected the argument that mere designation as a director or attendance at board meetings is sufficient to establish liability.

Key Takeaways:

• ✓ Non-executive directors cannot be held liable for cheque dishonor under Section 138 read with Section 141 of the NI Act unless there are specific allegations demonstrating their direct involvement in the company’s affairs at the relevant time.
• ✓ Mere designation as a director or attendance at board meetings is not sufficient to establish vicarious liability.
• ✓ The complaint must contain clear and unambiguous allegations as to how the directors were in-charge and responsible for the conduct of the business of the company.
• ✓ Corporate Governance Reports (CGR(s)) and Registrar of Companies (ROC) records can be used as evidence to support the non-executive status of directors.

Development of Law:

The ratio decidendi of the case is that non-executive directors cannot be held vicariously liable under Section 141 of the NI Act unless specific allegations demonstrate their direct involvement in the affairs of the company at the relevant time. This judgment reinforces the existing legal position and clarifies the scope of vicarious liability for non-executive directors in cheque dishonor cases.

Conclusion:

In K.S. Mehta vs. M/S Morgan Securities and Credits Pvt. Ltd., the Supreme Court reiterated that non-executive directors cannot be held vicariously liable under Section 141 of the Negotiable Instruments Act, 1881, for the dishonor of cheques unless specific allegations demonstrate their direct involvement in the company’s affairs. This judgment provides clarity and reinforces the importance of specific evidence in establishing liability in cheque bouncing cases.