The Supreme Court of India has reiterated that non-executive and independent directors of a company cannot be held vicariously liable for offences under the Negotiable Instruments Act, 1881 (NI Act) unless their direct involvement in the company’s financial transactions is clearly established.
The ruling came in the case of K. S. Mehta vs. M/S Morgan Securities and Credits Pvt. Ltd., where the Court examined the liability of non-executive directors under Section 138 read with Section 141 of the NI Act. The bench, comprising Justices B. V. Nagarathna and Satish Chandra Sharma, clarified that simply holding the title of a non-executive or independent director does not create automatic liability.
“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 the affairs of the company at the relevant time.”
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Case Background
The case involved an Inter-Corporate Deposit (ICD) agreement through which the accused company availed a financial facility of ₹5 crores. As part of repayment, two post-dated cheques were issued but later dishonoured due to insufficient funds. Following the dishonour, legal notices were sent, and upon non-payment, criminal proceedings were initiated against all directors, including the non-executive directors.
The Supreme Court examined key aspects, emphasizing that liability must be established through specific allegations. The appellants neither signed nor issued the dishonoured cheques, nor were they involved in financial decision-making. The Court clarified that governance oversight alone does not imply liability and rejected the argument that merely attending board meetings indicates involvement in financial transactions.
“Mere participation in board meetings does not suffice to impose financial liability on the Appellant(s), as such attendance does not automatically translate into control over financial operations.”
The Court referred to multiple legal precedents, including S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) 8 SCC 89, National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal (2010) 3 SCC 330, and Pooja Ravinder Devidasani v. State of Maharashtra (2014) 16 SCC 1. These rulings reaffirm that non-executive directors cannot be held liable unless there is clear evidence of their active participation in the company’s financial affairs.
Given the absence of direct involvement and specific allegations, the Supreme Court quashed the criminal proceedings against the appellants, ruling that they cannot be held vicariously liable under Section 141 of the NI Act.
This judgment sets an important precedent in corporate law, reinforcing that non-executive and independent directors cannot be held criminally liable for a company’s financial obligations unless there is concrete evidence of their direct participation in financial decision-making.
Case Title: K. S. MEHTA VERSUS M/S MORGAN SECURITIES AND CREDITS PVT. LTD.
