2025 (8) TMI 81 - HC - Indian Laws

Independent and Non-Executive Directors Not Vicariously Liable Under Section 141 NI Act Without Direct Control or Negligence

The HC held that Independent Directors and Non-Executive Directors are not vicariously liable under Section 141 NI Act unless shown to be in charge and ... Dishonour of Cheque - vicarious liability of Non-Executive, Independent, and Nominee Directors - section 141 of NI Act - who is an Independent Director and under what circumstances can a Director be liable for the acts of an Accused Company? - HELD THAT:- Section 149(6) Companies Act, 2013 thus, defines that an ‘Independent Director’ is a Director who is not a Managing Director, Whole-Time Director, or Nominee Director, and who meets specific criteria related to integrity, expertise, who has / had no pecuniary relationship, other than remuneration as such Director, and independence from the Company’s promoters and Management. An independent director does not hold any security or interest in the Company or its subsidiary or associate company - Furthermore, Section 149(12) of the Companies Act, 2013 provides a protective framework for Independent Directors and Non-Executive Directors (not being promoter or key managerial personnel), by limiting their liability. It holds them accountable only for acts of omission or commission by the Company that occurred with their knowledge gained through Board processes and with their consent, connivance, or due to their failure to act diligently. Thus, it is clear that Non-Executive Directors, including Independent Directors, are typically not involved in the day-to-day operations of the Company, which further limits the scope of their potential liability. In view of Section 141 NI Act and Section 149 of Companies Act, 2013, Petitioners could have been held vicariously liable only if it was shown that they were in charge of and were responsible for the conduct of the business of the Company at the time of commission of Offence, and not otherwise - They are therefore, entitled to be discharged. Nominee Director - HELD THAT:- The role of the Nominee Director has to be determined from the specific facts and circumstances - Further support in this regard is offered by the Classification prescribed in the Listing Agreement prescribed by the SEBI which provides that the Nominee Directors “are also treated as independent Directors.” - Thus, the Petitioner No. 6, being a nominee of LIC, cannot be summoned as he had no role in the day-to-day affairs of the Company, and is entitled to be discharged. The Summoning Order dated 09.08.2017 is set aside qua Petitioner no. 1/Mr. Amarjit Singh Dulat (Accused no. 10), Petitioner no. 2/Mr. Sanjay Mohan Labroo (Accused No. 5) & Petitioner no. 3/Mr. Amaarendra Pratap Singh (Accused no. 11) who are independent Directors, in the Company. Also, the Summoning Order dated 09.08.2017 is set aside against Petitioner No. 4/Mr. Rajeev Ranjan Vederah (Accused no. 6) & Petitioner no. 5/Mr. Gautam Thapar (Accused no. 7) who are the non-executive Directors, and Petitioner no. 6/Mr. Bhaskaran Nayar Venugopal (Accused no. 12), the LIC’s nominee director - the Summoning Order dated 09.08.2017 for Petitioner/Accused No. 8 is not liable to be quashed. Petition allowed. ISSUES: Whether Non-Executive, Independent, and Nominee Directors can be held liable under Section 141 of the Negotiable Instruments Act (NI Act) for offences committed under Section 138 NI Act.Whether mere directorship, without control or responsibility for day-to-day affairs, attracts liability under Section 141 NI Act.Whether the summons issued under Section 141 NI Act can be quashed for Directors who are not shown to be in charge of and responsible for the conduct of the company's business at the time of the offence.Whether insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) bar continuation of proceedings under Section 138 NI Act against the Corporate Debtor and/or its Directors.Whether specific averments regarding a Director's role and responsibility in the company's business are necessary in the complaint to attract liability under Section 141 NI Act.Whether a Director not signing the cheques in question can be held liable under Section 141 NI Act. RULINGS / HOLDINGS: Non-Executive, Independent, and Nominee Directors who are not in charge of and responsible for the day-to-day affairs of the company are not liable under Section 141 NI Act; the Summoning Order against such Directors is quashed.Mere directorship does not ipso facto attract liability under Section 141 NI Act; liability arises only if the person was 'in charge of and responsible for the conduct of the business of the Company at the time of commission of the offence.'Summons issued without specific averments showing that Directors were responsible for the company's business at the relevant time cannot be sustained against Independent and Non-Executive Directors.Insolvency proceedings under IBC bar continuation or initiation of proceedings under Section 138 NI Act against the Corporate Debtor but do not bar proceedings against natural persons (Directors) under Section 141 NI Act.Specific averments regarding a Director's control and responsibility over the company's affairs at the time of offence are necessary unless the Director holds a designation such as Managing Director or Joint Managing Director, where such responsibility is presumed.A Director who is a natural person in control of the company at the time of offence cannot be discharged merely because he did not sign the cheques if the complaint sufficiently indicates his active involvement in the company's business. RATIONALE: The Court applied Section 141 of the Negotiable Instruments Act, 1881, which states that when an offence under Section 138 is committed by a company, every person who was 'in charge of and responsible for the conduct of the business' at the time is deemed guilty.The Court relied on Section 149 of the Companies Act, 2013, which defines Independent Directors and limits their liability under Section 149(12) by holding them accountable only for acts with their knowledge, consent, or due to negligence.The Court referred to the Reserve Bank of India's Master Circular on 'Willful Defaulters' and the Securities and Exchange Board of India's Listing Agreement to classify Directors into categories such as Managing, Whole-time, Independent, Non-Executive, and Nominee Directors, explaining their roles and typical involvement in company affairs.Judicial precedent from the Supreme Court (including S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla, Pooja Ravinder Devidasani vs. State of Maharashtra, and others) was applied to emphasize that liability under Section 141 requires specific averments that the accused was responsible for day-to-day management at the time of offence.The Court considered the impact of insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), referencing the Supreme Court's ruling in P. Mohanraj & Ors. vs. Shah Brothers Ispat Pvt. Ltd., which bars proceedings under Section 138 NI Act against the Corporate Debtor but not against natural persons responsible under Section 141.The Court noted that the complaint's averments must show active involvement and responsibility for the company's business to attract liability under Section 141, and mere directorship or non-executive status does not suffice.The Court distinguished between Directors who are actively involved and those who are not, discharging Independent, Non-Executive, and Nominee Directors lacking specific allegations of control, while refusing discharge to a Director shown to be in control despite not signing the cheques.