Supreme Court: Merely Attending Board Meetings Doesn’t Impose Financial Liability On Director; Does Not Attract Vicarious Liability U/s. 141 NI Act
The Supreme Court quashed criminal proceedings against a non-executive Director of a company in a cheque bounce case.
The Supreme Court held that merely attending board meetings does not impose financial liability on a director and thereby, does not attract vicarious liability under Section 141 of the NI Act.
The Court quashed criminal proceedings against a non-executive Additional Director (Appellant) of M/s Blue Coast Hotels & Resorts Ltd. (Company) in a cheque bounce case. The Bench allowed the Appeal against the decision of the Delhi High Court which dismissed the Appellant’s Petitions under Section 482 of the CrPC for quashing of proceedings under Sections 138 and 141 of the Negotiable Instruments Act, 1881 (NI Act).
A Bench of Justice BV Nagarathna and Justice Satish Chandra Sharma held that “the Appellant(s) neither issued nor signed the dishonoured cheques, nor had any role in their execution. There is no material on record to suggest that they were responsible for the issuance of the cheques in question. Their involvement in the company’s affairs was purely non-executive, confined to governance oversight, and did not extend to financial decisionmaking or operational management.”
Senior Advocate Vishwajit Singh appeared for the Appellants, while ASG Vikramjeet Banerjee represented the Respondent.
Brief Facts
The dispute stemmed from an Inter-Corporate Deposit (ICD) agreement between the Company and the Respondent. The Company issued two post-dated cheques, which were dishonored upon presentation due to insufficient funds. Following this, the Respondent initiated criminal proceedings under Section 138 read with Section 141 of the NI Act.
The Appellant sought quashing of the proceedings before the Delhi High Court under Section 482 of the CrPC, arguing that they had no role in the company's financial transactions, were not signatories to the dishonored cheques, and were only involved in governance oversight. The High Court dismissed their Petition.
Court’s Reasoning
The Supreme Court remarked, “This Court has consistently held that non-executive and independent director(s) cannot be held liable under Section 138 read with Section 141 of the NI Act unless specific allegations demonstrate their direct involvement in affairs of the company at the relevant time.”
The Court referred to S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) reiterating that a person cannot be held liable merely by virtue of being a director.
The Bench explained, “The complaint lacks specific averments that establish a direct nexus between the Appellant(s) and the financial transactions in question or demonstrate their involvement in the company’s financial affairs…The mere fact that Appellant(s) attended board meetings does not suffice to impose financial liability on the Appellant(s), as such attendance does not automatically translate into control over financial operations.”
Consequently, the Court held, “Given the lack of specific allegations and in view of the aforesaid observations, the Appellant(s) cannot be held vicariously liable under Section 141 of the NI Act…Accordingly, the Impugned Judgment and Order of the High Court is set aside, and the criminal proceedings against the Appellant(s)...pending before the Court of Additional Chief Metropolitan Magistrate, New Delhi are hereby quashed.”
Accordingly, the Supreme Court allowed the Appeal.
Cause Title: K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd. (Neutral Citation: 2025 INSC 315)
Appearance:
Appellant: Senior Advocate Vishwajit Singh; Advocates Veera Kaul Singh, Vikas Kumar, Ayush Kapur and Vihaan Kumar; AOR Ridhima Singh and Suman Jyoti Khaitan
Respondent: ASG Vikramjeet Banerjee; AOR Mukesh Kumar Maroria and Aruna Gupta; Advocates Annirudh Sharma Ii, B K Satija, Diksha Rai, Sakshi Kakkar and Satvika Thakur
