Section 138 NI Act | Mere Designation as a Director Does Not Attract Criminal Liability for Cheque Bounce: Supreme Court Quashes Case Against Non-Executive Directors

No Vicarious Liability Under NI Act Without Specific Allegations of Involvement, Rules Apex Court - Supreme Court of India held that non-executive directors cannot be held criminally liable for cheque bounce cases under Section 138 of the Negotiable Instruments Act, 1881, unless there are specific allegations proving their direct involvement in the financial affairs of the company. The Court quashed criminal proceedings against two non-executive directors, ruling that a mere designation as a director is not enough to impose vicarious liability.

"It is not sufficient to make a bald and cursory statement that a director is in charge of the company’s business. The complaint must specify how and in what manner the director was responsible for the issuance and dishonour of the cheque," the Supreme Court held, reiterating that vicarious liability under Section 141 of the NI Act cannot be presumed.

The case involved K.S. Mehta and Basant Kumar Goswami, who were appointed as non-executive directors of M/s Blue Coast Hotels & Resorts Ltd. The two were designated as independent directors under Clause 49 of the SEBI Listing Agreement and had no role in the company’s financial decision-making.

The dispute arose from an Inter-Corporate Deposit (ICD) agreement dated September 9, 2002, under which the company obtained ₹5 crore in financial assistance from M/s Morgan Securities and Credits Pvt. Ltd. As part of the repayment, the company issued two post-dated cheques:

₹50,00,000 (Cheque No. 842628, dated 28.02.2005)

₹50,00,000 (Cheque No. 842629, dated 30.03.2005)

When the cheques were dishonoured due to insufficient funds, the respondent initiated criminal proceedings under Section 138 read with Section 141 of the NI Act against all directors, including the appellants.

The appellants argued that they had no role in the company’s financial transactions, did not sign or authorize the cheques, and were not even present at the board meeting when the financial arrangement was approved.

Despite these claims, the Delhi High Court dismissed their plea to quash the proceedings, leading them to approach the Supreme Court.

The Supreme Court quashed the criminal proceedings, reaffirming the legal principle that non-executive directors cannot be held liable unless specific allegations establish their involvement in the company’s financial affairs.

Vicarious Liability Under NI Act Cannot Be Presumed

The Court held that Section 141 of the NI Act is a penal provision that must be strictly interpreted.

"The law does not presume that every director of a company is responsible for its business transactions. The complaint must specify the role played by the accused director and establish their active participation in financial decision-making," the Court ruled.

Mere Holding a Director’s Position Is Not Enough to Impose Criminal Liability

Citing its previous ruling in National Small Industries Corporation Ltd. v. Harmeet Singh Paintal (2010) 3 SCC 330, the Supreme Court reaffirmed that:

"For criminal liability to be fastened, there must be specific allegations showing how and in what manner the director was responsible for the conduct of the company’s business at the relevant time. Vicarious liability cannot be inferred merely because a person is a director."

The Court dismissed the respondent’s argument that merely attending board meetings implied knowledge of financial transactions.

Non-Executive Directors Have No Role in Financial Decisions

Referring to the Companies Act, SEBI regulations, and Corporate Governance Reports, the Supreme Court noted that the appellants were classified as non-executive directors and did not draw any remuneration apart from nominal meeting fees.

"The role of non-executive directors is limited to governance oversight. They do not participate in day-to-day financial affairs or operational decision-making," the Court ruled, highlighting that the appellants had neither signed nor authorized the issuance of the dishonoured cheques.

Cheque Bounce Cases Require a Clear Nexus Between the Accused and the Offence

The Court ruled that there must be a direct connection between the dishonour of the cheque and the accused’s role in the company’s financial affairs.

"Unless there is an assertion that the accused was actively responsible for the financial affairs of the company and had knowledge of the issuance of the cheque, they cannot be prosecuted under Section 138 or 141 of the NI Act," the judgment stated.

Prior Supreme Court Rulings Support Quashing of Proceedings Against Non-Executive Directors

The Court cited its previous rulings in:

• SMS Pharmaceuticals Ltd. v. Neeta Bhalla & Anr. (2005) 8 SCC 89 – A mere designation as a director does not create liability under the NI Act. There must be specific averments of direct involvement in financial affairs.

• Pooja Ravinder Devidasani v. State of Maharashtra (2014) 16 SCC 1 – Non-executive directors are not liable unless proven to be responsible for the company’s day-to-day affairs.

• Hitesh Verma v. Health Care At Home India Pvt. Ltd. (2025) – Only the signatory of a cheque can be held liable under Section 138 unless specific allegations prove active involvement in financial transactions.

The Supreme Court set aside the Delhi High Court’s ruling and quashed the criminal proceedings against the appellants, holding that the complaints lacked specific allegations linking them to the dishonoured cheques.

"The mere fact that a person is a director does not mean they are responsible for the company’s financial affairs. A non-executive director, who has no role in the management of finances, cannot be made vicariously liable for a dishonoured cheque," the Court concluded.

With this ruling, the Supreme Court has reinforced the protection of independent and non-executive directors from unjust criminal prosecution in cheque bounce cases, ensuring that only those directly responsible for financial decisions can be held liable.

This landmark ruling clarifies the scope of vicarious liability under the NI Act, making it clear that non-executive directors cannot be dragged into criminal cases unless specific allegations prove their involvement.

By quashing the prosecution against the appellants, the Supreme Court has set a strong precedent to protect independent and non-executive directors from being wrongfully implicated in cheque bounce cases without clear and specific allegations.

Date of Decision : March 4, 2025