Supreme Court Clarifies Non-Executive Directors' Liability under the Negotiable Instruments Act

Introduction

In K.S. Mehta v. Morgan Securities and Credits Pvt. Ltd.[i], the Hon’ble Supreme Court has delved into the intricate legal issue of determining the vicarious liability of non-executive directors under ss. 138 and 141 of the Negotiable Instruments Act, 1881 (‘NI Act’), while adjudicating upon an appeal filed against the order passed by the Delhi High Court, dismissing the quashing petition filed by K.S Mehta and Basant Kumar Goswami, non-executive directors of M/s Blue Coast Hotels (‘Appellants’) in the present case, wherein they had sought quashing of the proceedings initiated under the NI Act qua them. Through this ruling, the Supreme Court clarified the liabilities of non-executive directors in cases involving cheque bouncing.

Brief Facts

• The Appellants were appointed directors of M/s Blue Coast Hotels & Resorts Ltd (‘Company’) in 2001 and 1998, respectively. Notably, the Appellants were non-executive directors whose duty was limited to governance oversight, and they had no authority to make any executive and/or financial decision qua the Company.

• In 2002, the Company entered into an inter-corporate debt agreement (ICD) with Morgan Securities (‘Respondent’) to avail of a financial facility of Rs. 5 crores for a period of 180 days. In furtherance of such repayment liability, the Company had issued two post-dated cheques (‘PDCs’), each amounting to Rs. 50 lakhs.

• The aforementioned PDCs were subsequently banked.  However, they were dishonoured due to insufficient funds in the Company's account. Resultantly, the Respondent was compelled to initiate proceedings under the NI Act by issuing a legal notice to the Company demanding payment. Consequently, as a result of non-payment of dues,  criminal proceedings were initiated against all directors, including the Appellants.

• Aggrieved by the initiation of criminal proceedings qua them, especially in a scenario where their non-executive status was confirmed through ROC records and corporate governance reports, they proceeded to file a petition under s. 482 of the CrPC, seeking a quashing of the complaint proceedings wherein it was alleged that the Appellants were vicariously liable.

• The High Court, however, proceeded to dismiss the aforementioned petition, compelling the Appellants to file the present appeal.

Held

• The Supreme Court proceeded to set aside the High Court’s order. It quashed the criminal proceedings initiated qua the Appellants while observing that firstly, neither of the Appellants had either issued and/or signed the dishonoured cheques, secondly,  considering that the Appellants were non-executive directors, they did not even have a role to play in its execution, thirdly, there was no material on record which could establish the direct/indirect involvement of the Appellants and lastly, the Appellant’s ‘non-executive’ involvement was categorically established through the ROC and the CGR reports. Thus, the Supreme Court proceeded to quash the complaint because the Respondent had failed to establish a direct nexus between the Appellants and the alleged financial transaction.    

• The Supreme Court reiterated that under s. 141 of the NI Act, it is not necessary that all directors are made liable for the offence. Criminal liability, if any, can only be fastened on those directors/persons who were actively involved in the business and responsible for the conduct of the company; liability in such scenarios cannot be presumed.

Our Analysis

The aforementioned decision reiterates that the penal provisions enshrined under s. 141 of the Act, which holds individuals to be vicariously liable for offences allegedly committed under s. 138 of the NI Act is to be construed in an absolute and strict manner. While alleging vicarious liability under s. 141 of the Act, it is imperative for the complainant to make specific averments regarding the role that has allegedly been played by the directors of a company that defaults in making payments and unless the same is established, liability under s. 141 ought not be fastened.  The observation is consistent with the decision given by the Supreme Court in National Small Industries Corp. Ltd. v. Harmeet Singh Paintal[ii], where the Court held that mere designation as a director does not automatically render a person liable for an offence allegedly committed by the company. Specific involvement in the wrongdoing(s) must be proven to justify vicarious liability.

The Court’s reliance on the Appellants' non-executive status and the fact that they did not have a role in the company's financial dealings reflects a careful application of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla[iii], where the Court clarified that non-executive directors could not be held liable for financial offenses without evidence of their active involvement. This principle has been reinforced in several cases, including Ashok Shewakramani v. State of Andhra Pradesh[iv], which emphasized that non-executive directors must be personally implicated in the financial operations of the company to face liability.

Furthermore, the case highlights the critical need for precise allegations in criminal complaints under Section 141 of the NI Act. The Court observed that the complaint lacked specific averments to link the Appellants directly to the issuance or dishonour of the cheques. This requirement is consistent with the judicial trend of demanding clarity and specificity in complaints, as seen in the ruling in Pooja Ravinder Devidasani v. State of Maharashtra[v], which stressed that vicarious liability could not be inferred from a mere managerial or governance role.

One significant aspect of the decision is its affirmation that mere attendance at board meetings or oversight roles in governance do not suffice to establish liability under s. 141 of the Act. The Court has consistently distinguished between the responsibilities of executive and non-executive directors. In this case, the Appellants’ governance-related role did not extend to operational or financial matters that would trigger criminal liability for dishonouring cheques.

This judgment brings clarity to the legal boundaries of director liability under the Act, particularly for non-executive directors, and underscores the importance of a clear legal framework for establishing culpability. It also reflects the judiciary’s continued insistence on upholding the principle that criminal liability should be based on clear, specific evidence rather than assumptions about an individual’s position or role within a company.

End Notes 

[i] 2025 SCC OnLine SC 492 dated 04.03.2025.

[ii] (2010) 3 SCC 330.

[iii] [2005] Supp. (3) S.C.R. 371.

[iv] 2023 INSC 692.

[v] [2014] 14 S.C.R. 1468.

Authored by Deb Zyoti Das, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.