Liability of non-executive directors in cheque dishonour cases: 6 key points from the Supreme Court's 2025 judgment in the case of K.S. Mehta

The dishonour of a cheque can trigger significant legal repercussions, particularly under Section 138 of the Negotiable Instruments Act, 1881 (the “NI Act”). When the accused is a company, the question of who within the corporate structure can be held liable often arises. A particularly pertinent aspect of this involves the liability of directors who did not sign the cheque in question. 

The recent Supreme Court of India judgment in K.S. Mehta vs M/S Morgan Securities And Credits Pvt. on 4 March, 2025 provides crucial insights into this area of law, especially concerning non-executive directors who are not signatories to the dishonoured cheques.

This case arose from the dishonour of two post-dated cheques issued by M/s Blue Coast Hotels & Resorts Ltd. in relation to an Inter-Corporate Deposit (ICD) agreement. Criminal proceedings were initiated against all directors of the company, including the appellants, K.S. Mehta and Basant Kumar Goswami, who were non-executive directors. Importantly, neither appellant was present at the board meeting where the ICD transaction was approved, nor were they signatories to the agreement or the dishonoured cheques. The High Court of Delhi dismissed the appellants' petitions seeking to quash the criminal proceedings. However, the Supreme Court overturned this decision, highlighting the crucial distinction between directors with executive and financial responsibilities and those with a limited, non-executive role.

One of the key takeaways from the K.S. Mehta case is the reinforcement of the principle that mere designation as a director does not automatically create vicarious liability under Section 141 of the NI Act. As previously established in cases like S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr. [(2005) 8 SCC 89]9 and Pooja Ravinder Devidasani v. State of Maharashtra & Anr. [(2014) 16 SCC 1], the Supreme Court reiterated that to hold a director liable for an offence committed by the company, there must be specific allegations and evidence demonstrating their active role and responsibility in the conduct of the company’s business at the time the offence was committed.

In the context of non-signatory directors, the K.S. Mehta judgment underscores the following key points:

1. No Automatic Liability

   
   

   The court explicitly stated that non-executive and independent directors cannot be held liable under Section 138 read with Section 141 of the NI Act unless specific allegations demonstrate their direct involvement in the affairs of the company at the relevant time.

   
   

2. Burden on the Complainant

   
   

   The primary responsibility lies with the complainant to make specific averments in the complaint outlining how the accused director was in charge of and responsible for the conduct of the company's business. A bald statement is insufficient.

   
   

3. Non-Executive Role Shield 

   
   

   The fact that the appellants were designated as non-executive directors, with their role confined to governance oversight in compliance with SEBI regulations and without executive authority or financial decision-making power, was a significant factor in the court's decision.

   
   

4. Lack of Signatory Authority

   
   

   As the appellants neither issued nor signed the dishonoured cheques, and there was no evidence suggesting they were responsible for their issuance, a direct link to the offence was absent. The court in Hitesh Verma v. M/s Health Care At Home India Pvt. Ltd. & Ors. [Crl. Appeal No. 462 of 2025] had already clarified that only the signatory to the cheque is liable under Section 138, unless the case falls under Section 141.

   
   

5. Importance of Documentary Evidence

   
   

   The Registrar of Companies (“ROC”) records and Corporate Governance Reports (“CGR(s)”) confirming the appellants’ non-executive status and lack of remuneration (apart from a nominal meeting fee) further supported their claim of limited involvement in financial affairs. The fact that they never submitted Form 25(C), mandatory for executive directors drawing remuneration, also reinforced this.

   
   

6. Attendance at Board Meetings Insufficient

   
   

   The Respondent's contention that the appellants' attendance at board meetings indicated knowledge of financial dealings was dismissed by the court. Mere attendance does not automatically translate into control over financial operations or establish liability for cheque dishonour.

In conclusion, the K.S. Mehta case serves as a significant reiteration of the legal principles governing the vicarious liability of directors in cheque dishonour cases, particularly emphasising the position of non-signatory, non-executive directors. It underscores the necessity for precise and specific allegations in complaints under Section 138 read with Section 141 of the NI Act that clearly establish the role and responsibility of such directors in the company's financial affairs at the relevant time. Without such specific averments and supporting evidence demonstrating their active involvement, non-signatory, non-executive directors are unlikely to be held liable for cheque dishonour simply by virtue of their directorship. This judgment offers crucial protection to individuals holding non-executive roles, ensuring they are not unfairly implicated in criminal proceedings for financial defaults where they had no direct involvement or authority.