A) ABSTRACT / HEADNOTE

The appeals concern whether criminal proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 could be sustained against two non-executive directors who were neither signatories to the disputed post-dated cheques nor present at the board meeting that approved the underlying Inter-Corporate Deposit (ICD) agreement of ₹5,00,00,000.

The High Court had refused quashing under Section 482 CrPC; the Supreme Court examined settled principles governing vicarious liability of directors under Section 141 and the requirement for specific averments showing that a director, at the time of the offence, was “in charge of and responsible for the conduct of the business” of the company. Relying on precedents such as National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, Pooja Ravinder Devidasani, and other authorities, the Court reiterated that mere directorship or attendance at board meetings does not, without more, fasten criminal liability under Section 141.

Record materials ROC entries, Corporate Governance Reports and absence of Form 25(C) established the appellants’ non-executive status and lack of remuneration beyond meeting fees; there were no specific allegations in the complaints linking them to issuance or signing of the dishonoured cheques. In consequence, the Court held that the complaints lacked the requisite specific averments to attract vicarious liability and quashed the proceedings against the appellants.

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

B) CASE DETAILS 

i) Judgement Cause Title: K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd..
ii) Case Number: Criminal Appeal No. 1105 of 2025 (with Nos. 1106, 1107 of 2025).
iii) Judgement Date: 04 March 2025.
iv) Court: Supreme Court of India.
v) Quorum: B.V. Nagarathna & Satish Chandra Sharma, JJ.
vi) Author: Satish Chandra Sharma, J.
vii) Citation: [2025] 4 S.C.R. 1 : 2025 INSC 315.
viii) Legal Provisions Involved: Negotiable Instruments Act, 1881 — Sections 138 and 141; Code of Criminal Procedure, 1973 Section 482.
ix) Judgments overruled by the Case (if any): None.
x) Related Law Subjects: Corporate Law; Criminal Law (NI Act prosecutions); Procedural law quashing powers; Corporate governance and director-liability law.

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The dispute arose from an ICD agreement dated 09.09.2002 under which the accused company borrowed ₹5,00,00,000 from the respondent; repayment was evidenced by two post-dated cheques (Nos. 842628 and 842629) which were presented in 2005 and dishonoured for insufficiency of funds. Criminal complaints under Section 138 were filed in respect of those cheques.

The appellants, K.S. Mehta and Basant Kumar Goswami, were non-executive directors of the borrower company, appointed in 2001 and 1998 respectively, and styled as independent/non-executive pursuant to SEBI Listing Agreement requirements. They did not attend the board meeting on 09.09.2002 that approved the ICD; they were not signatories to the ICD or to the cheques; and there were no material allegations that they authorized or participated in the cheque issuance. Company records (ROC filings and Corporate Governance Reports) and the absence of Form 25(C) were relied upon to demonstrate the appellants’ lack of executive authority or managerial remuneration.

The High Court declined to quash the criminal proceedings; on appeal the Supreme Court considered whether the complaints satisfied the twin ingredients of Section 141(1) that at the time of the offence the accused director was in charge of and responsible to the company for the conduct of the business and whether mere directorship or board attendance sufficed to impose vicarious criminal liability.

D) FACTS OF THE CASE

The respondent advanced an ICD of ₹5,00,00,000 to the accused company, secured by certain securities for 180 days under an agreement of 09.09.2002. The company issued two post-dated cheques as payment instruments: Cheque No. 842628 dated 28.02.2005 (₹50,00,000) and Cheque No. 842629 dated 30.03.2005 (₹50,00,000); both were dishonoured on presentation. The respondent served statutory notices and later lodged complaints under Section 138 NI Act in 2005.

The appellants were listed as directors in ROC records and Corporate Governance Reports but designated as non-executive; they did not sign the ICD or the cheques and were not present at the board meeting approving the ICD. A memorandum of settlement dated 27.05.2003 was executed between the respondent and other parties; the appellants were not parties to that settlement. The appellants drew only nominal meeting fees and did not file Form 25(C) (used by executive/managing directors drawing remuneration), supporting the claim that they had no executive role.

Despite these facts, the trial court process included the appellants as accused; the High Court refused quashing petitions under Section 482 CrPC, which led to the present appeals. The material on record lacked specific averments that the appellants had directed, authorized or signed the instruments or were otherwise “in charge of and responsible” for company business at the relevant time.

E) LEGAL ISSUES RAISED

i. Whether mere directorship or attendance at board meetings is sufficient to fasten vicarious criminal liability on a director under Section 141 NI Act?
ii. Whether complaints under Section 138 can proceed against non-executive directors in absence of specific averments that they were in charge of and responsible for company business at the time of offence?
iii. Whether absence of signature on dishonoured cheques and absence from the board meeting that approved the ICD negate criminal liability under Section 141?
iv. Whether the High Court erred in refusing quashing under Section 482 CrPC when record materials establish non-executive status and lack of involvement in financial affairs?

F) PETITIONER / APPELLANT’S ARGUMENTS

The counsels for Petitioners submitted that the appellants were non-executive directors whose role was limited to governance oversight under SEBI clause 49 and that they had no executive or financial authority. They emphasized that the appellants did not sign the ICD or the dishonoured cheques, did not attend the approving board meeting of 09.09.2002, and were not parties to the 27.05.2003 settlement.

The appellants drew only meeting fees; ROC and CGR entries confirmed non-executive status; absence of Form 25(C) further evidenced lack of executive remuneration. Reliance was placed on precedents such as S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Pooja Ravinder Devidasani to argue that vicarious liability under Section 141 requires specific pleadings showing actual control or charge of company business, which were absent here. The counsel therefore urged setting aside the High Court order and quashing criminal proceedings.

G) RESPONDENT’S ARGUMENTS

The counsels for Respondent contended that the appellants’ names appeared as directors at the relevant time and that a director is presumed to have knowledge of company affairs; attendance at board meetings indicated awareness of financial dealings and the ICD. It was argued that resignation does not automatically absolve a director and that the appellants had the onus to demonstrate non-involvement.

Reliance was placed on Ashutosh Ashok Parasrampuriya & Anr. v. Gharrkul Industries Pvt. Ltd. (2023) to submit that determination of a director’s executive character is a matter for trial and not for quashing stage. The respondent urged that the complaints were maintainable and that quashing at the threshold would be premature.

H) JUDGEMENT 

The Court granted leave, considered the record and relevant precedents and concluded that the appellants could not be proceeded against under Section 141 on the present pleadings and material. The Court reiterated the settled principle that Section 141 imposes vicarious criminal liability only where the complaint contains specific averments that the accused director, at the time of the offence, was in charge of and responsible to the company for the conduct of the business.

The Court examined National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal (2010) and N. K. Wahi v. Shekhar Singh (2007), which require clear and unambiguous allegations identifying the director’s role. Applying those benchmarks, the Court found no material to show that the appellants had any charge of or responsibility for the company’s financial affairs: they did not sign the cheques, did not attend the approval meeting, were not party to the settlement, and the ROC/CGR entries corroborated a purely non-executive role.

The Court rejected the respondent’s submission that board attendance gives rise to an inferential presumption of control. It held that criminal statutes creating vicarious liability must be strictly construed and that the complaint lacked the twin ingredients of Section 141(1). The Court also relied on more recent pronouncements including Ashok Shewakramani and Hitesh Verma that underscore the necessity of specific pleading where directors are non-executive and not signatories.

Given these findings, the Court set aside the High Court order and quashed the complaints against the appellants (Nos. 15857 and 15858 of 2017). No costs were ordered.

a. RATIO DECIDENDI

The decisive legal principle is that vicarious liability under Section 141 NI Act requires two specific averments in the complaint:

(i) that the accused, at the time of commission of the offence, was in charge of the company’s business and

(ii) that the accused was responsible to the company for conduct of its business. Mere directorship or board attendance is insufficient.

Where the complaint does not specifically plead how a non-executive director exercised control or took part in financial decision-making, such director cannot be fastened with liability under Section 141. Penal provisions creating vicarious liability must be strictly construed and inference of responsibility cannot replace pleaded facts.

The Court applied this ratio to quash proceedings where the record (ROC, CGR, absence of Form 25(C), lack of signatures) supported non-executive status and absence of involvement in cheque issuance.

b. OBITER DICTA 

The Court observed obiter that where a director actually signs negotiable instruments or is a managing/whole-time director, specific pleading may not be necessary; such scenarios are distinguishable.

The Court also noted that arbitration clauses in commercial contracts (the ICD agreement contained one) may bear on the broader commercial resolution of disputes but do not negate statutory remedies under the NI Act; however, arbitration-related arguments cannot substitute for the specific requirements of Section 141.

The Court emphasized that resignation from directorship does not automatically absolve liability but in the present factual matrix resignation timing and records reinforced appellants’ non-executive status.

c. GUIDELINES 

i. Complaints under Section 138 that array directors must specifically plead how each director was in charge of and responsible for company business at the time of the offence.
ii. Mere listing of a person as director or pleading attendance at board meetings is insufficient to attract Section 141 liability.
iii. Where directors are non-executive or independent, complainants should plead contemporaneous material (minutes, signing authorities, delegation of financial powers, Form 25(C), remuneration records) to demonstrate active control.
iv. If a director signs negotiable instruments, that fact should be pleaded and will materially affect maintainability.
v. Quashing under Section 482 CrPC is appropriate when the complaint lacks the specific averments required by Section 141 and documentary record supports non-executive status.

I) CONCLUSION & COMMENTS

The judgment is a reaffirmation of long-standing safeguards that protect non-executive and independent directors from summary criminal persecution under the NI Act absent clear pleading and supporting material showing active charge and responsibility for company affairs. The Court’s approach balances protection of creditor remedies under Section 138 with constitutional and statutory protections for persons who are not part of day-to-day management.

Practically, the decision signals to litigants the evidentiary and pleading standard required at the threshold: plaintiffs must identify and plead director-specific acts, signatures, delegations or contemporaneous records that link a director to the transaction complained of. For corporate governance, the ruling underscores the evidentiary value of clear ROC filings, CGRs and remuneration records; for creditors it cautions against relying upon mere directorship as ground for criminal proceedings.

The judgment preserves the remedy for cases where directors actively control or sign instruments while preventing expansion of criminal liability to passive governance participants. Law practitioners should ensure that complaints under Section 138 carefully map allegations to the twin limbs of Section 141(1) or risk summary quashing.

J) REFERENCES

a. Important Cases Referred

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

2. S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.

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

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

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

6. Ashutosh Ashok Parasrampuriya & Anr. v. Gharrkul Industries Pvt. Ltd. & Ors., (2023) 14 SCC 770.

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

8. Kamalkishor Shrigopal Taparia v. India Ener-Gen Private Limited & Anr., 2025 SCC Online SC 321.

9. Present case: K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd., Criminal Appeal No. 1105 of 2025, [2025] 4 S.C.R. 1.

b. Important Statutes Referred

1. Negotiable Instruments Act, 1881 — Sections 138 and 141.

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