Supreme Court On Director's Vicarious Liability in Cheque Dishonor

Supreme Court in the case of KAMALKISHOR SHRIGOPAL TAPARIA VERSUS INDIA ENER-GEN PRIVATE LIMITED & ANR., heard appeals against a judgment and order of the High Court of Judicature at Bombay, which had rejected the appellant's petitions requesting the quashing of criminal proceedings filed under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (the "NI Act"). The appellant, a free non-executive director of M/s D.S. Kulkarni Developers Ltd., was made an accused in complaints relating to the dishonor of cheques drawn by the company.

Background: The KAMALKISHOR SHRIGOPAL TAPARIA's Company company was reportedly having taken loans from the INDIA ENER-GEN PRIVATE LIMITED & ANR respondent, and in repayment, various cheques were drawn which were later dishonored because of lack of funds. The appellant was appointed as an independent non-executive director in 2008 and had no involvement in the financial workings or material management of the company.

Significantly, the dishonoured cheques were neither signed nor endorsed by the appellant. Moreover, in a few of the early demand notices, the appellant's name had not been included. The appellant had also resigned on May 3, 2017, and the same had been rightly intimated to the Registrar of Companies. Notwithstanding this, criminal proceedings under Section 138 of the NI Act were initiated against the company, including the appellant, resulting in his failed application before the High Court for quashing these proceedings.

The Apex Court meticulously examined the principles governing vicarious liability of directors under Section 141 of the NI Act. It reiterated the settled legal position that mere designation as a director does not automatically lead to liability.

The Apex Court underscored that the complainant is required to make specific allegations proving the active role of the director in the company's affairs during the material time. Referring to the precedents like National Small Industries Corporation Limited vs Harmeet Singh Paintal and Another (Click to Download) The Apex Court reaffirmed that the complainant must make some allegations setting out the active role of the director in the affairs of the company at the relevant time. Relying on precedents like National Small Industries Corporation Limited (supra) and Another, N.K. Wahi vs. Shekhar Singh (Click to Download), S.M.S. Pharmaceuticals Ltd. vs Neeta Bhalla and Another (Click to Download) , and Pooja Ravinder Devidasani vs State of Maharashtra (Click to Download) , the Apex Court noted that Section 141 is a criminal section which has to be construed strictly and vicarious liability has to be alleged and proved, and not inferred.

The Apex Court has specifically emphasized that non-executive directors, having the job solely of governance and not of working on a daily basis or finance management, cannot be made liable under Section 138 of the NI Act unless there is categorical evidence of their active involvement in the running of the business during the said time.,In citing its earlier judgments the Apex Court also emphasized that Section 141 is a penal section which has to be interpreted strictly, and vicarious liability should be pleaded and established, and not inferred.

The Court specifically pointed out that non-executive directors, whose role is mostly that of governance and not on a day-to-day basis or even in the management of finances, cannot be held liable under Section 138 of the NI Act unless there is clear evidence of their active participation in the running of the business at the material time.

Thus, the Apex Court observed that the appellant was merely an independent non-executive director with no financial responsibilities, did not sign the cheques, and had resigned prior to the filing of some complaints, and crucially, the complaints lacked any specific averments detailing his role in the dishonored cheques.

Based on these observations, the Apex Court concluded that the appellant could not be held vicariously liable under Section 141 of the NI Act. The Court found that the complaints did not meet the mandatory legal requirements to implicate him in the offence. Consequently, the Apex Court allowed the appeals, set aside the Impugned Judgment and Order of the High Court, and quashed the criminal proceedings pending against the appellant.

Coram: Justice B. V. Nagarathna and Justice Satish Chandra Sharma
Between: KAMALKISHOR SHRIGOPAL TAPARIA INDIA ENER-GEN PRIVATE LIMITED & ANR 2025 INSC 223
Date of Judgment: 13-02-2025