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Synopsis

The Supreme Court on February 13, 2025, said that the mere designation of a man as a director of a company does not conclusively establish his liability under Section 138 read with Section 141 of the Negotiable Instruments Act.

It stressed that liability is contingent upon specific allegations demonstrating the director’s active involvement in the company’s affairs at the relevant time.

A bench of Justices B V Nagarathna and N Kotiswar Singh set aside Bombay High Court's order of August 6, 2019, which declined to quash proceedings against Kamal Kishore Shrigopal Taparia. The high court had declined to quash criminal proceedings with regard to dishonour of cheques against Singh.

The appellant, being an independent non-executive director of M/s D S Kulkarni Developers Ltd, had been arrayed as an accused in the complaints. He had no role in the financial operations or key-management of the company.

The company availed two loans to the tune of Rs 70 lakh and 50 lakh. However, in repayment, four cheques were dishonoured. The cheques were not signed by the appellant, and in two out of the four criminal cases, the demand notices were initially not addressed to the appellant. It was only in the second set of demand notices that the appellant.

The appellant resigned from the position of independent non-executive director on May 03, 2017.

The appellant's counsel argued that he was a non-executive director and had no involvement in the financial affairs of the company. The complaints do not provide any specific averments detailing his role in the dishonoured cheques.

He said Section 141 of the NI Act establishes vicarious liability only upon directors who are in-charge of and responsible for the conduct of the business of the company at the relevant time.

The respondents, on the opposite, submitted that the high court had rightly observed that the role of the appellant was a matter to be examined during the trial. Their counsel argued that the vicarious liability under Section 141 of the NI Act could extend to directors, regardless of their executive or non-executive status.

The respondent further submitted that the appellant, by virtue of his directorship, was part of the decision-making apparatus of the company, therefore, could not escape liability at the pre-trial stage.

Making its analysis, the bench, on its part, pointed out in S M S Pharmaceuticals Ltd Vs Neeta Bhalla and another, (2005), the top court laid down that mere designation as a director is not sufficient; specific role and responsibility must be established in the complaint.

In Pooja Ravinder Devidasani Vs State of Maharashtra, (2014), the apex court while taking into consideration that a non-executive director plays a governance role, and are not involved in the daily operations or financial management of the company, had held that to attract liability under section 141 of the NI Act, the accused must have been actively in-charge of the company’s business at the relevant time.

"Mere directorship does not create automatic liability under the Negotiable Instruments Act. The law has consistently held that only those who are responsible for the day-to-day conduct of business can be held accountable," the bench said.

Upon perusal of the record and submissions of the parties, the court said, it was evident that the appellant was neither a signatory to the dishonoured cheques nor was he actively involved in the financial decision-making of the company. Moreover, he resigned from the post of independent non-executive director on May 03, 2017, which was duly notified to the Registrar of Companies.

Court also pointed out the complaints did not contain any specific averments detailing how the appellant was responsible for the dishonoured cheques.

"The petitioner’s role in the accused company was limited to that of an independent non-executive director, with no financial responsibilities or involvement in the day-to-day operations of the company. Furthermore, he was not responsible for the conduct of its business," the court said.

The bench stressed that the legal precedents clearly hold that non-executive directors cannot be held liable under section 138 NI Act unless specific evidence proves their active involvement.

Court thus concluded, "The appellant cannot be held vicariously liable under section 141 of the NI Act. The complaints do not meet the mandatory legal requirements to implicate him."

Consequently, court quashed the proceedings pending before a court in Mumbai.

Case Title: Kamalkishore Shrigopal Taparia Vs India Ever Gen Private Ltd & Anr