A) ABSTRACT / HEADNOTE

The appeals arise from orders of the High Court of Delhi refusing to quash criminal complaints under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (the NI Act), where two non-executive directors of M/s Blue Coast Hotels & Resorts Ltd. were arrayed as accused for dishonour of two post-dated cheques issued in purported repayment of an Inter-Corporate Deposit (ICD). The Supreme Court allowed the appeals, holding that mere directorship particularly a non-executive, independent directorship restricted to governance oversight under SEBI/Listing requirements is insufficient to attract vicarious penal liability under Section 141 unless the complaint contains specific, unambiguous averments showing that the director was in charge of and responsible for the conduct of the business of the company at the relevant time.

The Court applied settled precedents requiring strict construction of penal vicarious liability and found absence of material linking the appellants to issuance or signing of the cheques, board approval attendance not amounting to control over financial operations, and ROC/CGR records corroborating non-executive status. In consequence the Court quashed proceedings against the appellants.

Keywords: Section 138 NI Act; Section 141 NI Act; non-executive director; vicarious liability; quashing Section 482 CrPC.

B) CASE DETAILS 

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The appeals question the permissible scope of criminal liability under Section 141 of the NI Act when applied to directors who are non-executive and whose role is governance oversight. At the heart lies an ICD of ₹5,00,00,000 executed by the company in 2002 and two post-dated cheques issued for repayment, which were subsequently dishonoured. Criminal complaints under Section 138 were filed against the company and its directors; the appellants appointed as non-executive directors years earlier in compliance with listing norms were neither signatories to the ICD nor present at the board meeting approving it.

The High Court declined to quash the prosecutions. The Supreme Court, assessing pleadings, records filed with ROC and CGRs, and precedent, re-emphasised the strictness required to fasten vicarious penal liability on directors: the complaint must spell out how a director was in charge of and responsible for the company’s business when the offence occurred. Given absence of such specific averments and documentary evidence confirming non-executive status (including non-receipt of managerial remuneration and absence of Form 25(C)), the Court concluded that proceedings against these directors could not be sustained and therefore quashed them.

The judgment situates itself within a steady line of authority that protects non-executive directors from criminal prosecution absent clear pleading and material showing operational control.

D) FACTS OF THE CASE

The company M/s Blue Coast Hotels & Resorts Ltd. executed an ICD agreement dated 09.09.2002 with the respondent for ₹5 Crores for 180 days; appellants were non-executive directors K.S. Mehta (additional director from 29.06.2001) and Basant Kumar Goswami (director from 16.04.1998). They were designated non-executive under listing/SEBI requirements and did not sign the ICD or related instruments nor attend the board meeting on 09.09.2002 that approved the ICD.

Repayment allegedly crystallised into two post-dated cheques (Nos. 842628 dated 28.02.2005 and 842629 dated 30.03.2005), each for ₹50,00,000/-, which were dishonoured for insufficient funds. Notices were served; the company failed to satisfy the demand. Criminal complaints under Section 138 were later filed (filed dates reflected in the record), naming the company and multiple directors, including the appellants. The appellants resigned later (Mehta on 10.11.2012; Goswami in 2014), and ROC/CGR filings showed their non-executive status and only nominal meeting fees, with no Form 25(C) filed to indicate managerial remuneration.

An arbitration clause existed in the ICD and a prior memorandum of settlement (27.05.2003) involved some parties but not the appellants. The High Court refused quashing petitions and the matter reached the Supreme Court.

E) LEGAL ISSUES RAISED

i. Whether mere designation as a director, and attendance at board meetings, suffices to fasten vicarious criminal liability under Section 141 of the NI Act?

ii. Whether, at the quashing stage under Section 482 CrPC, the complaint must contain specific averments demonstrating that a director was in charge of and responsible for the conduct of the company’s business at the time of the alleged offence?

iii. Whether documentary material such as ROC records and CGRs can be relied upon to demonstrate non-involvement and negate the averments required for Section 141 liability?

F) PETITIONER / APPELLANT’S ARGUMENTS

The counsels for the appellants submitted that they were non-executive directors with a governance role only and no executive authority to direct financial affairs. They did not sign or issue the dishonoured cheques nor participate in the board meeting that approved the ICD. ROC and CGR records, and non-receipt of managerial remuneration (absence of Form 25(C)), corroborated non-involvement. The appellants relied on precedent to argue that vicarious liability under Section 141 cannot be inferred from mere directorship; there must be specific allegations of control or responsibility over the company’s business. They sought exercise of Section 482 CrPC power to quash the proceedings as legally untenable against them.

G) RESPONDENT’S ARGUMENTS

The counsels for the respondent argued that the appellants were directors during the relevant period and that directorship carries a presumption of involvement in company affairs. Resignation does not absolve prior responsibility. Attendance at board meetings and being part of the company’s governance structure indicated knowledge and tacit approval of financial transactions, and such matters should be tested at trial, not in a quashing petition. Reliance was placed on decisions suggesting that factual disputes as to a director’s role ought to be adjudicated after evidence is led.

H) JUDGEMENT

The Supreme Court allowed the appeals and quashed criminal proceedings against the appellants. The Court reaffirmed the twin requirements under sub-section (1) of Section 141 that the person sought to be fastened with vicarious liability must, at the time of the offence, be in charge of and responsible to the company for the conduct of its business. Penal vicarious liability is to be strictly construed; the complaint must contain clear, specific averments spelling out the role and manner of control or responsibility. Reliance was placed on a consistent line of authorities, notably National Small

Industries Corpn. Ltd. v. Harmeet Singh Paintal (2010) 3 SCC 330, N. K. Wahi v. Shekhar Singh (2007) 9 SCC 481, S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) 8 SCC 89, and Pooja Ravinder Devidasani (2014) 16 SCC 1, to stress that mere directorship or attendance at meetings cannot be a substitute for pleading and proof of operational control. The Court examined the record: appellants were non-executive directors, not signatories to the cheques, not present at the approving board meeting, drew only nominal meeting fees, and did not file forms indicative of managerial remuneration.

There was no pleading or material connecting them to issuance of cheques. The arbitration clause and earlier settlement-memo did not implicate the appellants. Given the lack of specific allegations and documentary corroboration of their non-executive status, the Court concluded that continuation of prosecution would be unwarranted and set aside the High Court order. Proceedings in Complaint Nos. 15858 and 15857 of 2017 were quashed. No costs were imposed.

a. RATIO DECIDENDI

The decisive legal principle is that Section 141 creates a penal vicarious liability which must be strictly construed: a director can be prosecuted only if the complaint contains specific averments that, at the time of the offence, the director was in charge of and responsible to the company for the conduct of its business. Mere designation as director, attendance at board meetings, or presence on ROC records without particularised allegations does not satisfy the statutory requirements. Where a director is not a managing or whole-time director and has not signed the cheque, vicarious liability cannot be inferred absent pleaded facts and supporting material showing effective control over the company’s finances. This formulation follows settled precedents and is the controlling ratio of the judgment.

b. OBITER DICTA 

The Court reiterated observations on prosecutorial burden at the complaints stage: complainants must plead facts that clearly attribute operational control to specific directors. The Court observed that documentary filings such as CGRs and ROC records are relevant and may be relied upon at the quashing stage to test the veracity of allegations, particularly where they corroborate non-executive status. It also noted that where signature on cheques is by others (e.g., managing director), absence of signature by the director sought to be prosecuted weakens the case for Section 141 invocation. These observations, while ancillary to the ratio, provide guidance on evidentiary treatment at the quashing stage.

c. GUIDELINES 

1. Complaints seeking to fasten Section 141 liability must specifically aver the manner in which each director was in charge of and responsible for the company’s business at the time of the offence; bald or generic statements will not suffice.

2. Where a director is not a managing or whole-time director and has not signed the cheque, prosecution should not proceed unless the complaint contains material facts showing de facto control over finances.

3. ROC filings, Corporate Governance Reports and statutory forms (e.g., Form 25(C)) are admissible indicia and may be considered at the quashing stage to test allegations of executive control.

4. Attendance at board meetings or mere listing in company records cannot be treated as conclusive proof of authority to sign company cheques or manage day-to-day finances. The causal nexus between the director and the impugned financial act must be pleaded.

5. When cheques are signed by managing directors or designated officers, the prosecutorial focus must be on persons who were directly responsible for issuance; peripheral directors should not be roped in by assumption.

I) CONCLUSION & COMMENTS

The judgment is a reaffirmation of judicial caution in extending penal vicarious liability to non-executive directors. It protects the principle that penal statutes creating vicarious liability must be strictly interpreted, and that criminal process should not be used as a substitute for civil remedies where specific culpability of non-executive directors is not pleaded. Practically, the decision directs complainants to draft complaints with particularised averments about each director’s role and to support such allegations with documentary material where possible.

For corporate governance, the judgment reinforces the protective boundary around independent/non-executive directors performing oversight functions they cannot be treated as guarantors of corporate payments merely by virtue of title. For practitioners, the case underscores the utility of ROC and CGR documents at the quashing stage and the importance of differentiating between whole-time, managing directors and non-executive directors when framing criminal liability under the NI Act. The ruling aligns with earlier precedents and will deter fishing prosecutions against non-executive directors absent clear factual foundation.

J) REFERENCES

a. Important Cases Referred

1. K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd., [2025] 4 S.C.R. 1 : 2025 INSC 315.

2. National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, (2010) 3 SCC 330.

3. S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr., (2005) 8 SCC 89.

4. Pooja Ravinder Devidasani v. State of Maharashtra & Anr., (2014) 16 SCC 1.

5. N. K. Wahi v. Shekhar Singh & Ors., (2007) 9 SCC 481.

6. Ashok Shewakramani & Ors. v. State of Andhra Pradesh & Anr., (2023) 8 SCC 473.

7. Hitesh Verma v. M/s Health Care At Home India Pvt. Ltd. & Ors., Crl. Appeal No. 462 of 2025 (as cited in judgment).

b. Important Statutes Referred

1. Negotiable Instruments Act, 1881 — Section 138, Section 141.

2. Code of Criminal Procedure, 1973 — Section 482.