K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd.

The Supreme Court of India, in Criminal Appeal No. of 2025 [Arising out of SLP (Criminal) No. 4774 of 2024], adjudicated upon the matter of K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd. The judgment was delivered on March 4, 2025, by a bench comprising Hon’ble Justice B.V. Nagarathna and Hon’ble Justice Satish Chandra Sharma under Criminal Appellate Jurisdiction.

This case pertained to the vicarious liability of non-executive directors under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (NI Act), and the quashing of criminal proceedings initiated against the appellants.

The appeals arose out of the impugned judgment and order dated November 28, 2023, passed by the High Court of Delhi, wherein the petitions filed under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) for quashing criminal proceedings were dismissed.

This matter, at its core, revolved around whether non-executive directors could be held criminally liable for dishonour of cheques when there was no demonstrable involvement in the company’s financial affairs. The Supreme Court examined the role, responsibilities, and liability of non-executive and independent directors in the context of cheque dishonour proceedings.

Factual Background

1. Role of the Appellants in the Company

    • The Appellants, 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 June 29, 2001, while Basant Kumar Goswami was appointed as a Director on April 16, 1998.
    • The Appellants were designated as non-executive directors, ensuring compliance with Clause 49 of the Listing Agreement prescribed by the Securities and Exchange Board of India (SEBI).
    • Their role was limited to governance oversight without executive authority or financial decision-making power within the company.

2. Inter-Corporate Deposit (ICD) Agreement and Issuance of Cheques

    • The dispute arose from an Inter-Corporate Deposit (“ICD”) Agreement dated September 9, 2002, executed between the accused company and the Respondent to avail a financial facility of ₹5,00,00,000 (Rupees Five Crores) against securities for a period of 180 days.
    • The Appellants did not attend the board meeting held on September 9, 2002, during which this financial transaction was approved.
    • The Appellants were not signatories to the ICD agreement or any related financial instruments.
    • The liability for the repayment of the ICD led to the issuance of two post-dated cheques, namely:
      • Cheque No. 842628 dated February 28, 2005, for ₹50,00,000/-
      • Cheque No. 842629 dated March 30, 2005, for ₹50,00,000/-
    • Upon presentation, both cheques were dishonoured due to insufficient funds.

3. Legal Notices and Initiation of Criminal Proceedings

    • Following the dishonour of the cheques, the Respondent issued legal notices demanding payment.
    • No remedial action was taken by the company, leading to criminal proceedings under Section 138 read with Section 141 of the NI Act against all directors, including the Appellants.
    • The Appellant(s) were not signatories to the cheques, nor did they authorize their issuance.

4. Settlement and Resignation of the Appellants

    • The executed ICD agreement contained an arbitration clause for resolving disputes, which the Appellants were unaware of at the time of execution.
    • A Memorandum of Settlement was executed on May 27, 2003, between the Respondent and the accused company, involving Accused No. 2, Accused No. 6, and Morepen Laboratories Ltd. to resolve financial disputes.
    • The Appellants were not parties to this settlement agreement.
    • K.S. Mehta resigned from the company on November 10, 2012, while Basant Kumar Goswami remained a non-executive director until 2014.

5. Corporate Governance Reports and Financial Liability

    • The Registrar of Companies (ROC) records and Corporate Governance Reports (CGRs) submitted to the stock exchange confirmed that the Appellants were non-executive directors.
    • The Appellants did not receive any remuneration apart from a nominal meeting fee, further substantiating their non-involvement in the company’s financial affairs.
    • They never submitted Form 25(C), which is mandatory for executive and managing directors drawing remuneration, confirming their lack of financial decision-making authority.

6. Complaints Filed Under Section 138 NI Act

    • The following complaints under Section 138 NI Act were filed against the Appellants before the Court of Additional Chief Metropolitan Magistrate, New Delhi:
      • Complaint No. 15857 of 2017, filed on November 10, 2005, regarding Cheque No. 842629.
      • Complaint No. 15858 of 2017, filed on October 25, 2005, regarding Cheque No. 842628.
    • The Appellants sought quashing of these proceedings before the Delhi High Court, which was dismissed on November 28, 2023.


Submissions By The Parties

Arguments Advanced by the Appellants

1. No Involvement in Financial Transactions

    • The learned counsel for the Appellants contended that they had no role in the financial transactions of the company and were not responsible for its financial affairs.
    • The Appellants were not signatories to the dishonoured cheques and did not authorize their issuance.
    • Their directorship was purely non-executive, and limited to corporate governance oversight in compliance with SEBI regulations.

2. Lack of Vicarious Liability Under Section 141 of the NI Act

    • It was argued that the Appellants’ non-executive status negated any basis for vicarious liability under Section 141 of the NI Act.
    • The Corporate Governance Reports (CGRs) and Registrar of Companies (ROC) records consistently reflected their non-executive roles, reinforcing that they had no involvement in the operational or financial matters of the company.
    • In the absence of specific allegations linking them to the issuance or dishonour of the cheques, the learned counsel contended that the proceedings initiated against them were legally untenable.

Arguments Advanced by the Respondents

1. Presumption of Involvement in the Company’s Affairs

    • The learned counsel for the Respondents argued that the Appellants were listed as directors of the company at the relevant time and were presumed to be involved in its affairs.
    • It was contended that the mere resignation of a director does not automatically absolve them from liability under Section 141 of the NI Act.

2. Onus on Directors to Prove Non-Involvement

    • The Respondents argued that the burden lay on the Appellants to establish that they were not involved in the company’s financial transactions.
    • Reliance was placed on Ashutosh Ashok Parasrampuriya & Anr. v. Gharrkul Industries Pvt. Ltd. & Ors., (2023) 14 SCC 770, wherein it was held that whether a director was non-executive or independent should be determined during trial rather than at the quashing stage.

3. Appellants’ Attendance at Board Meetings

    • The Respondents highlighted the Appellants’ attendance at board meetings, asserting that their presence indicated knowledge of the company’s financial dealings, including the issuance of cheques for repayment of the ICD.


Analysis And Findings

The Supreme Court reaffirmed that non-executive and independent directors cannot be held vicariously liable under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, unless specific allegations demonstrate their direct involvement in the company’s financial affairs at the relevant time. The Court emphasized that a mere designation as a director or attendance at board meetings does not automatically create liability. For criminal prosecution under the NI Act, there must be clear, unambiguous allegations detailing the accused’s role in the issuance or dishonor of the cheques.

Judicial Precedents Considered by the Court

The Supreme Court relied on several landmark judgments to reinforce the principle that only those who were actively responsible for the conduct of business at the relevant time can be held liable under Section 141 of the NI Act.

In National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal & Anr., (2010) 3 SCC 330 [1], the Court held that bald and cursory allegations without specific averments as to how a director was responsible for financial transactions are insufficient to impose vicarious liability. The judgment also clarified that there is no deemed liability on a director unless specific facts are pleaded to show their involvement in the company’s financial management.

Further, in N. K. Wahi v. Shekhar Singh & Ors., (2007) 9 SCC 481 [2], the Court observed that to launch a prosecution against a director, there must be a specific allegation regarding their role in the transaction, and general assertions about their designation are not sufficient. Similarly, in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr., (2005) 8 SCC 89, it was held that mere directorship does not create liability under Section 141; specific acts of active participation must be alleged.

The Court also referred to Pooja Ravinder Devidasani v. State of Maharashtra & Anr., (2014) 16 SCC 1 [3], wherein it was established that non-executive directors play a governance role and are not responsible for the company’s day-to-day operations or financial management. The ruling reiterated that vicarious liability cannot be imposed unless there is a demonstrated connection between the accused and the financial transactions in question.

Upon a thorough examination of the record and submissions of the parties, the Supreme Court found that the Appellants neither issued nor signed the dishonored cheques, nor had any role in their execution. There was no material evidence on record to suggest that they were responsible for the issuance or dishonor of the cheques. The Court further noted that the Corporate Governance Reports (CGRs) and Registrar of Companies (ROC) records unequivocally confirmed that the Appellants were non-executive directors, with no executive or financial decision-making authority.

The Court rejected the Respondents’ argument that the Appellants’ attendance at board meetings indicated their knowledge of financial transactions. It was held that mere attendance at board meetings does not suffice to impose financial liability, as it does not automatically translate into control over financial operations.


Conclusion And Final Order

After a detailed examination of the facts, legal provisions, and judicial precedents, the Supreme Court concluded that the Appellants, being non-executive directors, could not be held vicariously liable under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881. The Court observed that the complaints against the Appellants lacked specific allegations linking them to the dishonored cheques or the company’s financial affairs. Their non-executive status, as confirmed by Corporate Governance Reports (CGRs) and Registrar of Companies (ROC) records, reinforced their lack of financial decision-making authority.

Accordingly, the impugned judgment and order dated November 28, 2023, passed by the High Court of Delhi, was set aside. The Supreme Court ruled that the criminal proceedings initiated against the Appellants in Complaint No. 15857 of 2017 and Complaint No. 15858 of 2017, pending before the Court of Additional Chief Metropolitan Magistrate, New Delhi, were legally unsustainable and, therefore, quashed.


Final Order of the Supreme Court

1. The appeals are allowed.
2. The impugned judgment and order of the Delhi High Court is set aside.
3. Criminal proceedings against the Appellants in Complaint No. 15857 of 2017 and Complaint No. 15858 of 2017 are quashed.
4. No order as to costs.

The judgment reinforces the legal principle that non-executive directors cannot be held vicariously liable under Section 141 of the NI Act without specific allegations establishing their active involvement in the company’s financial affairs. It further upholds the protection available to independent and non-executive directors from unwarranted criminal prosecution in cases where they have no role in the financial decision-making of a company.

This ruling sets a significant precedent in corporate criminal liability, particularly in matters involving dishonor of cheques and the responsibilities of non-executive and independent directors.

[1]  https://jajharkhand.in/wp/wp-content/judicial_updates_files/16_Negotiable_Instruments_Act/11_Person_in_Charge/National_Small_Industries_…_vs_Harmeet_Singh_Paintal_&_Anr_on_15_February,_2010.PDF

[2] https://indiankanoon.org/doc/1140927/

[3] https://indiankanoon.org/doc/52020558/