SC: Non-Executive Director Not Liable Under Section 138 of NI Act Without Evidence
April 02, 2025
The Supreme Court of India (“Court”) in Kamalkishor Shrigopal Taparia v. India Ener-gen Private Limited & Anr. has quashed the criminal proceedings initiated against a non-executive director under Section 138 of the Negotiable Instruments Act, 1881 ("NI Act"), on the grounds that there was no specific evidence to demonstrate his active involvement in the dishonour of the cheques.
Background of the Case:
Kamalkishor Shrigopal Taparia (“Appellant”), served as an independent non-executive director in D.S. Kulkarni Developers Ltd (“Company”), without any involvement in the Company's financial operations or key management of the Company. The Company availed loans from India Ener-gen Private Limited & Anr (“Respondent”). For the purpose of repayments, the Company issued several cheques. However, these cheques were dishonoured due to insufficient funds.
The Respondent initiated criminal proceedings under Section 138 of the NI Act, accusing the Company of dishonouring the cheques and the Appellant was made a respondent in that case.
The Appellant was aggrieved by the order passed by the Division Bench of the High Court and subsequently, filed the present appeal before the Court under Section 482 of the Code of Criminal Procedure, 1973 (“CrPC”) seeking to quash the proceedings against the Appellant under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (the “NI Act”), asserting that the complaints lacked any specific allegations linking him to the dishonoured cheques.
Issues Before the Supreme Court:
Whether a non-executive director, who had no financial responsibilities or involvement in the day-to-day operations of the Company, can be held liable under Section 138 of the NI Act in the absence of specific evidence of involvement.
Judgment:
The Court held that mere designation of a director cannot per se hold a person liable under Section 138 of the NI Act. The Court emphasized that criminal liability would only arise if there is a specific case of allegations coupled with evidence indicating the active role played by the director in the company's finance when the cheques were returned dishonoured.
In the present case, the Court held that the Appellant was neither a signatory of the dishonoured cheques nor had he participated in the company's financial decision-making process. Further, the Appellant had resigned and given notice to the Registrar of Companies. The Court noted that the complaints had no definite averments to bring him to question.
The Court also observed that according to Section 141 of the NI Act, a director can be held vicariously liable only if it is established that they were in charge of the company's business at the time in question. Since the Appellant was not in charge of such things, the Court quashed the criminal proceedings against him.