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

SC allowed appeal in dishonour of cheque case involving vicarious liability of non-executive director. Court held that mere designation as director insufficient to establish liability under Section 141 NI Act without specific allegations of active involvement in company affairs. Appellant had resigned before offence occurred, was not signatory to dishonoured cheques, had no financial responsibilities, and was not involved in day-to-day operations. Court found appellant cannot be held vicariously liable as complaints failed to meet mandatory legal requirements. HC judgment set aside.

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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.

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