Supreme Court of India | March 4, 2025
Justices: B.V. Nagarathna & Satish Chandra Sharma
Background
The case involved criminal proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (NI Act) for dishonor of cheques. The appellants, K.S. Mehta and Basant Kumar Goswami, were non-executive directors of M/s Blue Coast Hotels & Resorts Ltd. They were accused of being responsible for dishonored cheques issued by the company in relation to an Inter-Corporate Deposit (ICD) agreement.
The appellants did not sign the cheques or participate in the financial transaction. Despite this, they were made parties to the criminal case solely based on their designation as directors.
Legal Issue
The core question before the court was whether non-executive directors can be held criminally liable for cheque dishonor when they were neither involved in company finances nor signatories to the disputed cheques.
Key Findings
- Vicarious Liability Not Automatic:
- The Supreme Court reaffirmed that non-executive and independent directors cannot be held liable under Section 141 of the NI Act unless there is clear evidence of their direct involvement in financial affairs.
- Mere attendance at board meetings or being listed as a director does not establish liability.
- Lack of Specific Allegations:
- The complaint did not contain specific details linking the appellants to the dishonored cheques or the company’s financial transactions.
- No proof was provided to show that the appellants authorized, issued, or had knowledge of the cheques.
- Supporting Judicial Precedents:
- The Court referred to multiple rulings, including:
- SMS Pharmaceuticals Ltd. v. Neeta Bhalla (2005) – which clarified that a director cannot be vicariously liable unless specific involvement is alleged.
- Pooja Ravinder Devidasani v. State of Maharashtra (2014) – which stated that non-executive directors are not liable unless they were in charge of financial decisions.
- The Court referred to multiple rulings, including:
- Evidence from Corporate Records:
- Official Registrar of Companies (ROC) records and Corporate Governance Reports confirmed that the appellants were non-executive directors with no role in financial matters.
- They did not receive remuneration apart from a nominal meeting fee.
Conclusion & Judgment
- The Supreme Court ruled that in the absence of specific allegations, non-executive directors cannot be held criminally liable for cheque dishonor under Sections 138 & 141 of the NI Act.
- The criminal proceedings initiated against the appellants were quashed, and the Delhi High Court’s order was set aside.
Significance of the Judgment
This ruling reinforces the protection of non-executive directors from unfounded criminal liability. It establishes that individuals cannot be prosecuted solely based on their designation as directors without concrete allegations proving their direct involvement in financial decision-making.
