In a significant ruling, the Supreme Court of India quashed criminal proceedings against two non-executive directors of M/s Blue Coast Hotels & Resorts Ltd., K.S. Mehta and Basant Kumar Goswami, in a case involving dishonored cheques under the Negotiable Instruments Act, 1881 (NI Act). The judgment, delivered by Justice B.V. Nagarathna and Justice Satish Chandra Sharma overturned a Delhi High Court order dated November 28, 2023, emphasizing that “mere directorship does not create automatic liability” under Section 141 of the NI Act unless specific allegations of active involvement are proven. The case, registered as Criminal Appeal No. of 2025 [Arising out of SLP (Criminal) No. 4774 of 2024], along with connected appeals, marks a significant clarification on the scope of vicarious liability for company directors.
Background of the Case
The legal battle originated from a financial dispute between M/s Morgan Securities and Credits Pvt. Ltd., the respondent, and M/s Blue Coast Hotels & Resorts Ltd., the accused company. On September 9, 2002, the company entered into an Inter-Corporate Deposit (ICD) agreement with the respondent for a loan of ₹5 crore, repayable within 180 days. The agreement led to the issuance of two post-dated cheques—Cheque No. 842628 dated February 28, 2005, and Cheque No. 842629 dated March 30, 2005—each for ₹50 lakh. When presented, both cheques were dishonored due to insufficient funds, triggering legal notices and subsequent criminal complaints under Section 138 of the NI Act.
The appellants, K.S. Mehta and Basant Kumar Goswami, were named as accused alongside the company and other directors. Mehta had joined as an additional director on June 29, 2001, and resigned on November 10, 2012, while Goswami was appointed on April 16, 1998, and continued until 2014. Both were non-executive directors, tasked with governance oversight under SEBI regulations, and had no role in the company’s financial operations. Notably, they were neither present at the board meeting approving the ICD nor signatories to the cheques or the agreement.
The respondent filed complaints (No. 15857 and 15858 of 2017) before the Additional Chief Metropolitan Magistrate, New Delhi, alleging liability of all directors under Section 141 of the NI Act, which imposes vicarious liability on persons in charge of a company’s business. The appellants’ plea to quash these proceedings under Section 482 of the CrPC was dismissed by the Delhi High Court, prompting their appeal to the Supreme Court.
Legal Issues Involved
The central issue before the Supreme Court was whether non-executive directors, without direct involvement in a company’s financial transactions, could be held vicariously liable under Section 138 read with Section 141 of the NI Act. Key questions included:
1. Scope of Vicarious Liability: Does mere designation as a director suffice to impose criminal liability, or must there be specific evidence of active participation in the company’s business?
2. Burden of Proof: Is the complainant required to make specific allegations linking the accused directors to the offense, or can liability be presumed based on their position?
3. Role of Non-Executive Directors: Can non-executive directors, confined to governance roles, be held accountable for financial decisions they did not authorize or execute?
The appellants, represented by their counsel (names not specified in the document), argued that their non-executive status, substantiated by Corporate Governance Reports (CGRs) and Registrar of Companies (ROC) records, precluded liability. They cited precedents like S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) and Pooja Ravinder Devidasani v. State of Maharashtra (2014), asserting that liability under Section 141 requires clear allegations of responsibility for the company’s day-to-day affairs.
The respondent’s counsel countered that the appellants’ presence as directors at the relevant time implied involvement, relying on Ashutosh Ashok Parasrampuriya v. Gharrkul Industries Pvt. Ltd. (2023) to argue that such questions should be resolved at trial, not the quashing stage.
Supreme Court’s Decision and Observations
The Supreme Court allowed the appeals, quashing the criminal proceedings against Mehta and Goswami. Justice Satish Chandra Sharma, delivering the judgment, emphasized the need for specific allegations to establish vicarious liability under Section 141. The Court held:
– No Automatic Liability for Directors: Quoting National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal (2010), the Court reiterated, “Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.” The absence of specific averments in the complaints against the appellants rendered the proceedings untenable.
– Non-Executive Role Confirmed: The Court noted, “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.” Evidence from CGRs and ROC records corroborated their limited role, and their non-signatory status to the cheques further absolved them.
– Attendance at Meetings Insufficient: Rejecting the respondent’s contention, the Court observed, “The mere fact that Appellant(s) attended board meetings does not suffice to impose financial liability… as such attendance does not automatically translate into control over financial operations.”
– Precedents Upheld: Citing S.M.S. Pharmaceuticals and Pooja Ravinder Devidasani, the Court reaffirmed that “mere directorship does not create automatic liability under the Act,” and liability hinges on active involvement in the company’s business at the relevant time.
The Court concluded that the complaints lacked a “direct nexus” between the appellants and the dishonored cheques, setting aside the High Court’s order and quashing Complaint Nos. 15857 and 15858 of 2017.
