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Synopsis

The Supreme Court recently held that non-executive and independent directors cannot be held liable under Section 138 read with Section 141 of the Negotiable Instruments Act unless specific allegations demonstrate their direct involvement in affairs of the company at the relevant time.

A bench of Justices B V Nagarathna and Satish Chandra Sharma also said mere attendance of board meetings would not be sufficient to impose liability on them for financial transactions as the court allowed a criminal appeal filed by K S Mehta and Basant Kumar Goswami against the Delhi High Courts judgment of November 28, 2023, declining their plea to quash the proceedings initiated against them for dishonour of cheques on a complaint filed by respondents M/s Morgan Securities and Credits Pvt Ltd.

Both Mehta and Goswami were appointed as directors of M/s Blue Coast Hotels & Resorts Ltd (Accused No. 1/Company) at different times. Mehta was appointed as an additional director on June 29, 2001, while Goswami was appointed as a director on April 16, 1998. They were designated as non-executive directors in compliance with clause 49 of the Listing Agreement prescribed by the Securities and Exchange Board of India. Their role was confined to governance oversight without any executive authority or financial decision-making power in the company.

Two cheques to the sum of Rs 50 lakh each were issued by the accused company as part of repayment of liability in terms of Inter Corporate Deposit agreement of 2002. Upon dishonour of cheques, criminal proceedings were initiated. Notably, a memorandum of settlement was also executed between the accused company and the respondent. Meanwhile, Mehta resigned in 2012 and Goswami continued until 2014. 

The appellants' counsel submitted that they had no role in the company’s financial transactions and were not vested with any responsibility in as much as its financial affairs were concerned. They were not a signatory to any of the dishonored cheques and did not authorise their issuance. Their directorship was non-executive and limited to corporate governance oversight in compliance with SEBI regulations.

The counsel also said their non-executive status negated any basis for vicarious liability under Section 141 of the NI Act. The counsel further relied upon the Corporate Governance Reports and Registrar of Companies records, which consistently reflected their non-executive roles, reinforcing their lack of involvement in operational or financial matters. In the absence of any specific allegations linking them to the issuance of cheques, or dishonor of the cheques, the proceedings initiated against them were legally untenable, their counsel said.

On the contrary, the counsel for the respondent contended that the appellants' name appeared as a director in the company at the relevant time, and were presumed to be involved in the company’s affairs. The mere resignation did not automatically absolve the directors from liability under Section 141 NI Act and that the onus lied upon them to establish their non-involvement in the company’s financial transactions. The counsel also emphasised on their attendance at board meetings, asserting that it indicated knowledge of financial dealings, including the issuance of cheques towards repayment of the ICD.

Upon perusal of the record, the bench said, there was no material on record to suggest that they were responsible for the issuance of the cheques in question. Their involvement in the company’s affairs was purely non-executive, confined to governance oversight, and did not extend to financial decision making or operational management.   

"The complaint lacks specific averments that establish a direct nexus between the appellants and the financial transactions in question or demonstrate their involvement in the company’s financial affairs. Additionally, the records unequivocally confirm their non-executive status, underscoring their limited role in governance without any executive decision-making authority. The mere fact that they attended board meetings does not suffice to impose financial liability on them as such attendance does not automatically translate into control over financial operations," the bench said.  

The court held the appellants can't be vicariously held liable under Section 141 of the NI Act, as it set aside the Delhi High Court order and quashed the proceedings pending before a court of Additional Chief Metropolitan Magistrate in New Delhi.

Case Title: K. S. MEHTA VS. M/S MORGAN SECURITIES AND CREDITS PVT. LTD