Non-executive, independent directors not liable in company’s NI Act cases: Supreme Court

The Supreme Court on Tuesday quashed criminal proceedings against two non-executive directors of a company named Blue Coast Hotels & Resorts Ltd., thereby re-affirming the position that such directors cannot be held vicariously liable for the dishonour of cheques issued by the company [KS Mehta v. Morgan Securities and Credits Pvt. Ltd.]..A Bench of Justices BV Nagarathna and Satish Chandra Sharma reiterated that non-executive directors and independent directors cannot be held vicariously liable in such cases unless there is something to indicate their direct involvement in the alleged offence. "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 Negotiable Instruments Act, 1881 unless specific allegations demonstrate their direct involvement in affairs of the company at the relevant time," the Court's March 4 ruling said. .The case stemmed from a financial dispute involving an Inter-Corporate Deposit (ICD) agreement dated September 9, 2002, between Blue Coast Hotels & Resorts Ltd. and Morgan Securities and Credits Pvt. Ltd. The agreement involved a financial facility of ₹5 crores, secured against certain securities. The company issued two post-dated cheques in 2005 for ₹50 lakhs each, which were dishonored due to insufficient funds. Consequently, criminal proceedings were initiated under Section 138 of the NI Act against the company and its directors, including the appellants, KS Mehta and Basant Kumar Goswami.The appellants, who served as non-executive directors, contended that they had no involvement in the financial affairs of the company and were not signatories to the dishonored cheques or the ICD agreement. They argued that their roles were limited to corporate governance oversight, as mandated by SEBI regulations, and that they did not participate in the financial decision-making process.The Delhi High Court however dismissed their plea to quash the criminal proceedings, prompting the appellants to approach the Supreme Court for relief..The Supreme Court reiterated the legal principle that non-executive and independent directors cannot be held liable under Section 138 read with Section 141 of the NI Act unless specific allegations demonstrate their direct involvement in the company's financial affairs. The Court cited several precedents which established that mere designation as a director does not create automatic liability.The Court noted that the appellants were neither present at the board meeting where the ICD agreement was approved nor were they signatories to the agreement or the dishonored cheques. Furthermore, the Corporate Governance Reports and ROC records consistently reflected their non-executive roles, and they did not draw any remuneration apart from nominal meeting fees."It is evident that the Appellant(s) neither issued nor signed the dishonoured cheques, nor had any role in their execution. There is 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 Court found..The Supreme Court further noted that the complaints lacked specific averments linking the appellants to the financial transactions in question. It emphasised that attendance at board meetings does not equate to control over financial operations..The Court, thus, quashed the criminal complaint and allowed the appeal."Given the lack of specific allegations and in view of the aforesaid observations, the Appellant(s) cannot be held vicariously liable under Section 141 (if a company commits an offense under section 138, the company and anyone in charge of the company will also be held liable) of the NI Act," it held. .Senior Advocate Vishwajit Singh and advocates Veera Kaul Singh, Ridhima Singh, Suman Jyoti Khaitan, Vikas Kumar, Ayush Kapur, and Vihaan Kumar appeared for the appellants.Additional Solicitor General Vikramjeet Banerjee and advocates Mukesh Kumar Maroria, Annirudh Sharma, BK Satija, Diksha Rai, Sakshi Kakkar, Satvika Thakur, and Aruna Gupta represented the respondent (Morgan Securities)..[Read Judgment]