Case Note & Summary
The Supreme Court allowed the appeals filed by K.S. Mehta and Basant Kumar Goswami, non-executive directors of M/s Blue Coast Hotels & Resorts Ltd., against the judgment of the Delhi High Court which had dismissed their petitions under Section 482 CrPC seeking quashing of criminal proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881. The dispute arose from an Inter-Corporate Deposit agreement dated 09.09.2002, under which the company issued two cheques of ₹50 lakh each that were dishonoured due to insufficient funds. The appellants were appointed as directors at different times but were designated as non-executive directors under SEBI's Listing Agreement, with no executive authority or financial decision-making power. They were not present at the board meeting that approved the ICD, were not signatories to the agreement or the cheques, and did not draw any remuneration apart from nominal meeting fees. The complaints filed by the respondent did not contain specific allegations linking the appellants to the conduct of the company's business. The Supreme Court, relying on its earlier decisions in National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, and Pooja Ravinder Devidasani v. State of Maharashtra, held that vicarious liability under Section 141 NI Act requires strict construction and specific averments of active participation. The Court found that the complaints merely stated that the appellants were directors without specifying their role, and the material on record, including ROC records and CGRs, showed they were non-executive directors. Consequently, the Court quashed the criminal proceedings against the appellants.
Headnote
A) Criminal Law - Vicarious Liability - Section 141 Negotiable Instruments Act, 1881 - Non-Executive Directors - The issue was whether non-executive directors can be prosecuted under Section 138 read with Section 141 NI Act without specific allegations of their involvement in the company's financial transactions. The Supreme Court held that mere designation as a director does not attract vicarious liability; there must be specific averments that the director was in charge of and responsible for the conduct of the business at the relevant time. (Paras 16-18) B) Criminal Procedure - Quashing of Criminal Proceedings - Section 482 Code of Criminal Procedure, 1973 - Lack of Specific Averments - The High Court had dismissed the quashing petitions, but the Supreme Court allowed the appeals, holding that the complaints lacked specific allegations against the appellants. The Court emphasized that the power under Section 482 CrPC can be exercised to prevent abuse of process when the complaint does not make out a prima facie case. (Paras 9, 18) C) Company Law - Non-Executive Directors - Role and Liability - Clause 49 of SEBI Listing Agreement - The appellants were non-executive directors with roles limited to governance oversight. The Court noted that they did not attend the board meeting approving the ICD, were not signatories to the agreement or cheques, and did not draw remuneration. Their non-executive status was confirmed by ROC records and CGRs. (Paras 3-7)
Issue of Consideration
Whether non-executive directors who were not involved in the financial affairs of the company can be held vicariously liable under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 for dishonour of cheques issued by the company.
Final Decision
The Supreme Court allowed the appeals, set aside the impugned judgment of the High Court, and quashed the criminal proceedings against the appellants.
