2025 (2) TMI 674 - SC - Indian Laws

Non-executive director cannot be held liable for cheque dishonour without proof of active company involvement

KAMALKISHOR SHRIGOPAL TAPARIA Versus INDIA ENER-GEN PRIVATE LIMITED & ANR.

SC allowed appeal in dishonour of cheque case involving vicarious liability of non-executive director. Court held that mere designation as director ... Dishonour of Cheque - vicarious liability of non-executive director - case of appellant is that Appellant had resigned from the company well before the offence occurred - Section 141 of the NI Act - HELD THAT:- This Court has consistently held that a mere designation as a director does not conclusively establish liability under section 138 read with section 141 of the NI Act. Liability is contingent upon specific allegations demonstrating the director’s active involvement in the company’s affairs at the relevant time. In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Another, [2005 (9) TMI 304 - SUPREME COURT], this Court laid down that mere designation as a director is not sufficient; specific role and responsibility must be established in the complaint. Upon perusal of the record and submissions of the parties, it is evident that the Appellant was neither a signatory to the dishonoured cheques nor was he actively involved in the financial decision-making of the company. Moreover, he resigned from the post of independent non-executive director on 03.05.2017, duly notified through Form DIR-11 and DIR-12 to the Registrar of Companies - Petitioner’s role in the accused company was limited to that of an independent non-executive director, with no financial responsibilities or involvement in the day-to-day operations of the company. Furthermore, he was not responsible for the conduct of its business. Conclusion - The Appellant cannot be held vicariously liable under section 141 of the NI Act. The complaints do not meet the mandatory legal requirements to implicate him. The Impugned Judgment and Order dated 06.08.2019 of the High Court is set aside - Appeal allowed. The Supreme Court analyzed an appeal against the High Court's decision dismissing petitions seeking to quash criminal proceedings initiated under the Negotiable Instruments Act, 1881. The appellant, an independent non-executive director of a company, was accused of dishonoring cheques issued by the company. The key issue revolved around the appellant's liability as a director in the dishonored cheques scenario.The Court considered the appellant's role in the company, noting that he had no involvement in financial operations or key management but was accused due to the dishonored cheques issued by the company. The appellant had not signed or authorized the issuance of these cheques. The complaints under Section 138 of the NI Act were filed against the company, including specific cheques and dates, with the appellant resigning before the offenses occurred.The appellant argued that he should not be held liable post-resignation and that vicarious liability under Section 141 of the NI Act only applies to directors in charge of the company's business at the relevant time. The respondent contended that the appellant, as a director, was part of the decision-making apparatus and could not escape liability.The Court emphasized that mere designation as a director does not establish liability under Section 138 read with Section 141 of the NI Act. Liability depends on specific allegations demonstrating active involvement in the company's affairs at the relevant time. Legal precedents were cited to support this principle, emphasizing the necessity of clear and specific averments to establish vicarious liability.Upon analysis, the Court found that the appellant was not a signatory to the dishonored cheques, was not actively involved in financial decisions, and had resigned from his post. The complaints lacked specific averments detailing the appellant's responsibility for the dishonored cheques. The appellant's role was limited to that of an independent non-executive director without financial responsibilities or involvement in day-to-day operations, aligning with legal precedents that non-executive directors cannot be held liable without evidence of active involvement.Consequently, the Court set aside the High Court's decision and quashed the criminal proceedings against the appellant, as the complaints did not meet the legal requirements to implicate him under Section 141 of the NI Act. The appeals were allowed, with no order as to costs.