The Hon'ble Supreme Court ruled in favor of the appellants, reaffirming that non-executive directors cannot be held vicariously liable under the NI Act without specific allegations and evidence of their involvement in the financial affairs of the company: K.S. Mehta vs. M/S Morgan Securities and Credits Pvt. Ltd.

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Case Title: K.S. Mehta vs. M/S Morgan Securities and Credits Pvt. Ltd.
Court: Supreme Court of India
Judgment Date: 4th March 2025
Case Number: Criminal Appeal arising out of SLP (Criminal) No. 4774 of 2024

Background of the Case:

  • Parties Involved:

    • Appellant(s): K.S. Mehta and Basant Kumar Goswami
    • Respondent: M/S Morgan Securities and Credits Pvt. Ltd.

  • Company Involved: M/s Blue Coast Hotels & Resorts Ltd.

  • Nature of Dispute:
    The case arises from an Inter-Corporate Deposit (ICD) agreement dated 9th September 2002 for ₹5 crore between the accused company and the respondent. To repay this deposit, two post-dated cheques were issued:

    • Cheque No. 842628 (₹50 lakh) dated 28th February 2005
    • Cheque No. 842629 (₹50 lakh) dated 30th March 2005
      Both cheques were dishonored due to insufficient funds.

  • Criminal Proceedings:
    The respondent issued legal notices, but no action was taken by the company, leading to criminal proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (NI Act).

Key Facts:

  • The appellants were non-executive directors of the company, only involved in governance and not in financial decision-making.
  • They were not signatories to the dishonored cheques and did not attend the board meeting that approved the ICD agreement.
  • The appellants did not draw any remuneration apart from nominal meeting fees and did not submit Form 25(C), required for executive directors receiving remuneration.
  • Complaint Numbers: 15857 and 15858 of 2017 were filed against the appellants for the dishonored cheques.
  • The High Court of Delhi dismissed their petitions seeking quashing of criminal proceedings under Section 482 of the Code of Criminal Procedure (CrPC).

Arguments Presented:

  • Appellant’s Arguments:

    • They had no role in financial transactions of the company.
    • They did not sign or authorize the issuance of the dishonored cheques.
    • Their non-executive status negates vicarious liability under Section 141 of the NI Act.
    • Judicial precedents establish that non-executive directors cannot be held liable without specific allegations of involvement in financial affairs.

  • Respondent’s Arguments:

    • The appellants were directors at the relevant time and were presumed to be involved in company affairs.
    • Resignation does not automatically absolve liability.
    • The appellants attended board meetings, suggesting knowledge of financial transactions.

Court’s Analysis and Findings:

  • The Supreme Court reiterated that non-executive directors cannot be held liable under Section 138 read with Section 141 of the NI Act unless specific allegations establish direct involvement in company affairs.
  • No evidence was found of the appellants' role in issuing or dishonoring the cheques.
  • Their governance oversight role did not extend to financial decisions.
  • ROC records and Corporate Governance Reports confirmed their non-executive status.
  • Attendance at board meetings does not equate to financial control.

Judgment:

  • The appeals were allowed.
  • The criminal proceedings were quashed against the appellants.
  • The High Court’s judgment dated 28th November 2023 was set aside.
  • No order as to costs.

Conclusion:
The Supreme Court ruled in favor of the appellants, reaffirming that non-executive directors cannot be held vicariously liable under the NI Act without specific allegations and evidence of their involvement in the financial affairs of the company.

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