The Supreme Court has reaffirmed that non-executive and independent directors of a company cannot be held liable for a dishonored cheque under the Negotiable Instruments Act, 1881, unless their direct involvement in the company’s financial transactions is explicitly demonstrated.
The ruling makes it clear that merely holding a directorial position does not equate to accountability for the company’s financial obligations. The Court emphasized that only those actively managing the company’s business operations and daily affairs can be held responsible for such defaults.
A bench comprising Justices BV Nagarathna and SC Sharma quashed criminal proceedings against the appellants—non-executive directors accused under Sections 138 and 141 of the NI Act. The Court noted that they neither signed nor issued the dishonored cheques and played no role in their execution. Their involvement in the company was strictly limited to governance oversight rather than financial decision-making.
The Court dismissed the argument that mere attendance at board meetings could establish vicarious liability. It ruled that participation in such meetings does not automatically translate to control over financial operations.
Referencing key precedents, including Pooja Ravinder Devidasani v. State of Maharashtra, National Small Industries Corporation v. Harmeet Singh Paintal, and SMS Pharmaceuticals v. Neeta Bhalla, the judgment reiterated that vicarious liability must be strictly interpreted, and specific allegations are required to link directors to the company’s financial affairs.
With this decision, the Supreme Court reinforced the principle that independent and non-executive directors cannot be made scapegoats for a company’s financial missteps unless there is clear evidence of their direct involvement.
