2026 (2) TMI 661 - HC - Indian Laws

Vicarious criminal liability requires material evidence of active involvement or connivance; independent directors quashed, CFO preserved for trial.

Vicarious criminal liability under Section 138 NI Act requires material evidence of a director's active role, knowledge, consent, connivance or failure of ... Dishonour of Cheque - Vicarious liability of directors under the Negotiable Instruments Act - liability of independent/non-executive directors - liability of key managerial personnel and Chief Financial Officer (CFO) - protective limitation of liability for independent directors under the Companies Act, 2013 - quashing of summons in proceedings u/s 138 of the Negotiable Instruments Act - 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. Apex Court in the case of K.S. Mehta vs. M/s Morgan Securities and Credits Pvt. Ltd. [2025 (3) TMI 255 - SUPREME COURT], wherein the Complaint lacked specific averments that would have established a direct nexus between the Appellants and the financial transactions in question or demonstrate their involvement in the Company’s financial affairs and the documents on record confirmed the non-executive status of the Appellants/Directors, underscoring their limited role in governance without any Executive decision-making authority. It was held that merely because the Appellants/Directors attended Board Meetings, does not automatically translate into control over financial operations. Hence, unless direct involvement of the Directors is established, they cannot be held vicariously liable under the Act, 1881. In the present case, the Complaints themselves admit that payments were made to the Accused No. 1 Company, and not to any of the individual Petitioners. In view of aforesaid law and also considering that Petitioner Nos. 1, 3 and 4, namely, Mr. Ashwini Kumar Singh, Ms. Sunita Palta and Mr. Bhagwan Singh Duggal are Non-Executive Directors of the Company, they cannot be held in-charge / responsible for the day of day affairs of the Company. Therefore, Summoning Order dated 03.04.2018 passed Ld. MM in CC No. 9804/2017 is set aside and CC No. 9804/2017 under Section 138 NI Act is quashed against Petitioner Nos. 1, 3 and 4, namely, Mr. Ashwini Kumar Singh, Ms. Sunita Palta and Mr. Bhagwan Singh Duggal. In so far as Petitioner No. 2, Mr. Darshan Singh Negi is concerned, the position is materially different. It is not disputed that he was the Chief Financial Officer (CFO) of the Accused Company, at the relevant time. The role of a CFO, by its very nature, is intrinsically connected with the financial administration, accounting, and management of monetary transactions of the Company. Unlike Independent or Non-Executive Directors, a CFO forms part of the Key Managerial Personnel and is actively involved in the day-to-day financial affairs of the Company. Petition is allowed partially and Summoning Order dated 03.04.2018 passed Ld. MM in CC No. 9804/2017 is set aside, and the proceedings under Section 138 NI Act against Petitioner Nos. 1, 3 and 4, namely, Mr. Ashwini Kumar Singh, Ms. Sunita Palta and Mr. Bhagwan Singh Duggal, is quashed. However, there is no ground to quash the summoning Order against Petitioner No. 2, Mr. Darshan Singh Negi, which is upheld and the Petition viz-a-viz him, is hereby, dismissed. Issues: (i) Whether Non-Executive and Independent Directors can be criminally proceeded against vicariously for offences under Section 138 of the Negotiable Instruments Act, 1881; (ii) Whether the Chief Financial Officer (CFO) as Key Managerial Personnel can be summoned and proceeded against under Section 138 of the Negotiable Instruments Act, 1881.Issue (i): Whether Non-Executive and Independent Directors of the accused company can be held liable and summoned in proceedings under Section 138 NI Act.Analysis: The Court examined the statutory definition and protection accorded to independent directors under Section 2(47) and Section 149 (including sub-section (6) and (12)) of the Companies Act, 2013, and the established criminal jurisprudence that individual directors are not automatically accused when the company is charged. The petitioners produced FORM-32/DIR-12 establishing their non-executive and independent status. The Court applied the principle that vicarious or derivative criminal liability requires material showing active role, knowledge, consent, connivance or failure of due diligence linking the director to the impugned financial transaction; mere attendance at board meetings or formal directorship is insufficient.Conclusion: Summoning Order dated 03.04.2018 is set aside and the complaint under Section 138 NI Act (CC No. 9804/2017) is quashed qua Petitioner Nos. 1, 3 and 4 (the Non-Executive and Independent Directors).Issue (ii): Whether the Chief Financial Officer (CFO), as Key Managerial Personnel, can be summarily quashed from proceedings under Section 138 NI Act in exercise of Section 482 Cr.P.C.Analysis: The Court noted that the CFO falls within the statutory definition of key managerial personnel under Section 2(51) of the Companies Act, 2013 and that the role of a CFO is intrinsically connected with financial administration and transactions of the company. The Court observed that whether the CFO actually exercised control or had knowledge of the specific transaction is a matter of trial and not amenable to summary quashing under Section 482 Cr.P.C.Conclusion: There is no ground to quash the Summoning Order dated 03.04.2018 qua Petitioner No. 2 (the CFO); the petition is dismissed insofar as it relates to him.Final Conclusion: The petition under Section 482 Cr.P.C. is allowed in part: proceedings under Section 138 NI Act are quashed against the Non-Executive/Independent Directors but are maintained against the CFO; the Summoning Order dated 03.04.2018 is set aside in respect of the Independent Directors and upheld in respect of the CFO.Ratio Decidendi: Independent and non-executive directors cannot be held vicariously liable under Section 138 of the Negotiable Instruments Act, 1881 absent material showing their active involvement, knowledge, consent, connivance or failure of due diligence; by contrast, key managerial personnel such as the CFO, whose role is materially connected to company finances, cannot be summarily relieved of trial where their involvement is disputed.