Non-executive & independent directors not liable u/s 138 read with Section 141 the Negotiable Instruments Act, 1881 Act – Supreme Court
In a recent judgment the Hon’ble Supreme Court reiterated 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. Attendance in board meeting does not automatically translate into control over financial operations.
ABCAUS Case Law Citation:
4445 (2025) (03) abcaus.in SC
Important Case Laws relied upon by Parties:
National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal & Anr., (2010) 3 SCC 330
N. K. Wahi v. Shekhar Singh & Ors., (2007) 9 SCC 481
S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr., (2005) 8 SCC 89
Pooja Ravinder Devidasani v. State of Maharashtra & Anr., (2014) 16 SCC
Hitesh Verma v. M/s Health Care At Home India Pvt. Ltd. & Ors.
Ashok Shewakramani & Ors. v. State of Andhra Pradesh & Anr., (2023) 8 SCC 473
In The instant case, the appellant(s) had challenged a common Judgment and Order passed by the High Court of Delhi dismissing the petitions filed under Section 482 of the Code of Criminal Procedure, 1973 (the CrPC) seeking quashing of criminal proceedings initiated under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (the NI Act).
The Appellant(s) were appointed as directors of a company (Accused/Company) at different times. The Appellant(s) were designated as non-executive director in compliance with clause 49 of the Listing Agreement prescribed by the SEBI. Their role was confined to governance oversight without any executive authority or financial decision-making power in the company.
The accused company and the Respondent executed an agreement for Inter-Corporate Deposit (ICD) to avail a financial facility. The liability towards repayment of the ICD was secured by issuing post-dated cheques by the accused company.
The Appellant(s) were neither in attendance at the board meeting held wherein the said transaction was approved, nor were they signatories to the agreement or any related financial instruments.
The Registrar of Companies (ROC) records and Corporate Governance Reports (CGR(s)) submitted to the stock exchange confirmed that appellants status as non-executive directors and indicated that they did not draw any remuneration apart from a nominal meeting fee.
Upon presentation, cheques were dishonored due to insufficient funds. Following the dishonor, the Respondent issued legal notices demanding payment, but no remedial action was taken by the company. Consequently, criminal proceedings were initiated against all directors, including the Appellant(s) before the Additional Chief Metropolitan Magistrate (ACMM).
The Hon’ble Supreme Court observed that it had 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 Hon’ble Supreme Court observed that from the record and submissions of the parties, it was evident that the Appellant(s) neither issued nor signed the dishonoured cheques, nor had any role in their execution. 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 Hon’ble Supreme Court observed that the complaint lacked specific averments that established a direct nexus between the Appellant(s) and the financial transactions in question or demonstrate their involvement in the company’s financial affairs. Additionally, the CGR(s) and ROC records unequivocally confirm their non-executive status, underscoring their limited role in governance without any executive decision-making authority.
The Hon’ble Supreme Court held that the mere fact that Appellant(s) attended 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.
Accordingly, the Impugned Judgment and Order of the High Court was set aside, and the criminal proceedings against the Appellant(s) pending before the Court of ACCM were quashed.
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