The Supreme Court, in K.S. Mehta vs. Morgan Securities & Credits Pvt. Ltd dated 04.03.2025, reaffirmed that non-executive directors cannot be held liable under Section 138 read with Section 141 of the Negotiable Instruments Act unless specific allegations prove their active role in financial transactions.
๐๐๐๐ค๐ ๐ซ๐จ๐ฎ๐ง๐
M/s Blue Coast Hotels & Resorts Ltd. entered into an Inter-Corporate Deposit (ICD) agreement with Morgan Securities for โน5 crores. When post-dated cheques issued as repayment were dishonored, criminal proceedings were initiated under Section 138 NI Act against all directors, including K.S. Mehta and Basant Kumar Goswami, despite them not being signatories or involved in financial decision-making.
๐๐ซ๐ ๐ฎ๐ฆ๐๐ง๐ญ๐ฌ ๐๐ฒ ๐ญ๐ก๐ ๐๐ฉ๐ฉ๐๐ฅ๐ฅ๐๐ง๐ญ๐ฌ:
(a) They were non-executive directors with no role in financial decision-making.
(b) They did not sign or authorize the issuance of the dishonored cheques.
(c) They were not involved in the companyโs day-to-day operationsโtheir role was limited to corporate governance as per SEBI regulations.
(d) ROC records and CGRs confirmed their non-executive status and lack of remuneration beyond meeting fees.
๐๐ซ๐ ๐ฎ๐ฆ๐๐ง๐ญ๐ฌ ๐๐ฒ ๐ญ๐ก๐ ๐๐๐ฌ๐ฉ๐จ๐ง๐๐๐ง๐ญ:
(a) Since the Appellants were listed as directors at the time of default, they were presumed to be responsible for the companyโs affairs.
(b) Their attendance at board meetings indicated knowledge of financial transactions, including the issuance of cheques.
(c) The burden was on them to prove their non-involvement in the companyโs financial dealings.
๐๐๐ฒ ๐๐ข๐ง๐๐ข๐ง๐ ๐ฌ & ๐ญ๐๐ค๐๐๐ฐ๐๐ฒ:
(a) non-executive and independent director(s) cannot be held liable under Section 138 read with Section 141 of the NI Act unless specific allegations demonstrate their direct involvement in affairs of the company at the relevant time.
(b) Mere directorship does not create automatic liability
(c) Attendance at board meetings alone is insufficient to establish liability.
(d) Specific allegations and evidence are required to invoke vicarious liability under Section 141.
This judgment reinforces that corporate governance roles must be clearly distinguished from operational and financial responsibilities and that they should not be casually proceeded with, protecting non-executive directors from unjust prosecution.
Despite Supreme Court holding repeatedly, SEBI and IRDAI resists to follow ๐๐ฎ๐ช๐ต ๐๐ช๐ด๐ณ๐ข ๐ญ๐ช๐ฏ๐ฆ ๐ฐ๐ง ๐ซ๐ถ๐ฅ๐จ๐ฎ๐ฆ๐ฏ๐ต๐ด. (Link: https://lnkd.in/dqXkFpeE) in securities and insurance laws.