Non‑Executive Directors Are Not Vicariously Liable Under NI Act Without Specific Allegations

A Bench of Justices B. V. Nagarathna and Satish Chandra Sharma heard appeals arising from the dismissal by the High Court of Delhi of petitions under Section 482 CrPC seeking quashing of criminal proceedings framed under Section 138 read with Section 141 of the Negotiable Instruments Act. The appeals challenged the continuation of complaints based on dishonour of post‑dated cheques issued by a company, against which the appellants were non‑executive directors.

The Court allowed the appeals, set aside the High Court order dated 28.11.2023 and quashed the criminal proceedings against the appellants in Complaint Nos. 15857 and 15858 of 2017. The judges held that non‑executive directors could not be made vicariously liable under Section 141 of the NI Act in the absence of specific averments demonstrating their control of or responsibility for the conduct of the company’s business at the relevant time. The Court, in its reasoning, observed: “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 also reiterated that “Section 141 is a penal provision creating vicarious liability, and which, as per settled law, must be strictly construed.”

Background: The dispute arose from an Inter‑Corporate Deposit agreement dated 09.09.2002 under which the accused company availed a financial facility of Rs 5 crore from the respondent. Liability for repayment culminated in two post‑dated cheques for Rs 50 lakh each (Cheque Nos. 842628 and 842629 dated 28.02.2005 and 30.03.2005) which were dishonoured for insufficient funds. Legal notices followed and complaints under Section 138 NI Act were filed against all directors, including the appellants K. S. Mehta and Basant Kumar Goswami.

The appellants had been appointed as non‑executive directors and were neither signatories to the ICD agreement nor to the dishonoured cheques; they did not participate in the relevant board meeting approving the transaction. Records including ROC filings and Corporate Governance Reports indicated that they drew only nominal meeting fees and had no executive authority or involvement in financial decision‑making. The appellants resigned at different times (Mehta in 2012; Goswami in 2014). They sought quashing of the criminal complaints under Section 482 CrPC.

The respondent maintained that the appellants’ names on company records and attendance at board meetings justified prosecution and that resignation alone did not absolve liability. The High Court had dismissed the quashing petitions.

The Supreme Court examined the settled principles governing vicarious liability under Section 141 and relied on a line of precedents including National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, Pooja Ravinder Devidasani v. State of Maharashtra and subsequent decisions which required specific, unambiguous averments showing that a director was “in charge of and responsible” for the conduct of the company’s business at the time of the alleged offence. Finding no material to show that the appellants had been responsible for or in charge of the business when the offences occurred, and noting that they did not sign the cheques, the Court concluded that the complaints lacked the necessary averments and quashed the proceedings. The appeals were allowed and there was no order as to costs. The judgment was pronounced on March 4, 2025.

Case Details: Case No.: 2025 INSC 315 (Arising out of SLP (Crl.) No. 4774 of 2024) Case Title: K. S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd. Appearances: For the Petitioner(s): [Not indicated in the judgment] For the Respondent(s): [Not indicated in the judgment]