Source: Supreme Court 

Why in News? 

A bench of Justice BV Nagarathna and Justice Satish Chandra Sharma held that mere directorship does not create automatic liability under Section 141 of Negotiable Instruments Act, 1881 (NI Act). 

• The Supreme Court held this in the case of K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd. (2025). 

What was the Background of K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd. (2025) Case?   

• Appeals were filed against the Delhi High Court’s order dated 28th November 2023, which dismissed petitions under Section 482 Code of Criminal procedure,1973 (CrPC), rejecting the request to quash criminal proceedings. 
• The Appellants, K.S. Mehta and Basant Kumar Goswami, were Non-Executive Directors of Blue Coast Hotels & Resorts Ltd. They faced criminal charges under Section 138 & 141 of NI Act related to cheque dishonor. 
• They were non-executive directors with no financial decision-making power and were appointed as per the SEBI Listing Agreement (Clause 49). They had no involvement in daily operations or financial transactions. 
• The dispute originated from an Inter-Corporate Deposit (ICD) Agreement executed on 09th September 2002, where the company took a loan of ₹5 Crores from the Respondent. The Appellants were not present at the board meeting when the loan was approved and did not sign any financial documents. 
• Two post-dated cheques were issued as repayment: Cheque No. 842628 (₹50,00,000) dated 28th February 2005 and Cheque No. 842629 (₹50,00,000) dated 30th March 2005. Both cheques bounced due to insufficient funds. Legal notices were sent, but no payment was made. 
• The loan agreement included an arbitration clause, which the Appellants were unaware of. On 27th May 2003, a settlement was signed between some accused parties, but the Appellants were not part of this settlement. 
• K.S. Mehta resigned on 10th November 2012, while Basant Kumar Goswami remained a Non-Executive Director until 2014. Official records, including ROC & CGR reports, confirmed their non-executive status, and they did not receive any salary apart from a nominal meeting fee. 
• Criminal complaints were filed against the Appellants: Complaint No. 15857/2017 (Filed on 10th November 2005) for Cheque No. 842629 and Complaint No. 15858/2017 (Filed on 25th October 2005) for Cheque No. 842628. 
• The Appellants filed petitions under Section 482 CrPC to quash the case, but the High Court rejected their plea, allowing proceedings to continue. 

What were the Court’s Observations? 

• The Court held that it has been 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 held that in the present facts the appellant (s) neither signed nor had a role in the execution of the cheques. 
• The Court observed that their involvement in the company’s affairs was purely non-executive and confined to governance oversight and did not extend to financial decision making or operational management.   
• The complaint however fails to make specific averments that establish a direct nexus between the Appellant (s) and the financial transactions in question or demonstrate their involvement in the financial affairs of the company. 
• The mere fact that the appellants attended the board meetings would not suffice to impose financial liability on the appellants and does not automatically translate into control over financial operations. 
• Thus, the Court held that the appellant (s) cannot be held vicariously liable under Section 141 of NI Act.  
• Given the lack of specific allegations and in view of the aforesaid observations, the Appellant(s) cannot be held vicariously liable under Section 141 of the NI Act.

What is the Liability of a Company under Section 141 NI Act?

• Section 141 (1) of NI Act provides for the following: 
  • If a company commits an offence under Section 138 of the NI Act (cheque dishonor), every person in charge of and responsible for the company’s business at that time will also be deemed guilty and can be punished. 
  • A person will not be held liable if they can prove that: 
    • The offence was committed without their knowledge. 
    • They exercised due diligence to prevent the offence. 
  • A government-nominated director (appointed due to their role in the Central/State Government or a government-owned financial corporation) cannot be prosecuted under this section. 
• Section 141 (2) of NI Act lays down the following: 
  • If a company commits an offence under this Act, certain individuals within the company can also be held guilty if it is proven that the offence was committed: 
    • With their consent. 
    • With their connivance (active involvement or approval). 
    • Due to their neglect. 
  • This applies to directors, managers, secretaries, or other officers of the company. 
  • Definition for clarity: 
    • "Company" includes any corporate body, firm, or association of individuals. 
    • "Director" (in case of a firm) refers to a partner in the firm

What are the Landmark Cases on Liability of Director?

• S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr. (2005) 
  • The Court in this case laid down that mere designation as a director is not sufficient; specific role and responsibility must be established in the complaint. 
• Pooja Ravinder Devidasani v. State of Maharashtra & Anr. (2014) 
  • A non-executive director primarily has a governance role and does not handle daily operations or financial matters of the company. 
  • To be held liable under Section 141 of the NI Act, the accused must have been actively in charge of the company’s business at the time of the offence. 
  • Mere directorship does not automatically make a person liable under the Act. 
  • The law consistently holds that only those responsible for the day-to-day business operations can be prosecuted.
• Hitesh Verma v. M/s Health Care at Home India Pvt. Ltd. & Or, (2025) 
  • Only the signatory of the cheque is liable under Section 138, unless liability is established under Section 141. 
  • Under Section 141(1), two conditions must be met for vicarious liability: 
    • The accused must have been in charge of the company’s business at the time of the offence. 
    • The accused must have been responsible for the conduct of the company’s business. 
  • Being in charge of the company and being responsible for its business operations are two different things. 
  • Both conditions must be explicitly mentioned in the complaint to establish liability. 
  • Since the complaints do not allege that the appellant was in charge of the company’s business at the time of the offence, they cannot be prosecuted under Section 141(1).