Supreme Court Quashes Cheque Bounce Case Against Independent Directors

The Supreme Court has quashed a cheque bounce case under Sections 138 and 141 of the Negotiable Instruments Act (NI Act), 1881, against three independent directors of MBL Infrastructure Limited. The judgment clarifies that independent directors who are not involved in a company’s daily management cannot be held vicariously liable under Section 141 of the NI Act unless specific allegations prove their direct involvement in the issuance of a dishonored cheque.

Background of the Case

The case originated when M/s Panchami Stone Quarry (PSQ) filed a complaint against MBL Infrastructure Limited and its directors after a cheque for ₹1.71 crore issued by the company was dishonored with the remark “account closed.” The complainant alleged that the directors, including the appellants, were responsible for the day-to-day management of the company and, therefore, should be held liable under Sections 138 and 141 of the NI Act.

PSQ had supplied construction materials to MBL Infrastructure Limited based on multiple purchase orders. The company had issued a post-dated cheque to settle outstanding dues, but the cheque was dishonored upon presentation. Following legal notice and non-payment within the statutory period, PSQ initiated criminal proceedings against the company and its directors.

Arguments Before the Supreme Court

Petitioners’ Arguments (Independent Directors of MBL Infrastructure Limited)

The petitioners argued that they were independent, non-executive directors and had no role in the day-to-day operations of the company.
They contended that there were no specific allegations in the complaint showing their direct involvement in issuing or handling the dishonored cheque.
They emphasized that under Section 141 of the NI Act, vicarious liability could not be presumed, and mere designation as a director was insufficient to establish criminal liability.
The petitioners relied on corporate filings (DIR-12 and DRI-32 forms) to prove that they were independent directors with no executive authority.

Respondents’ Arguments (M/s Panchami Stone Quarry)

The complainant maintained that all directors of MBL Infrastructure Limited were responsible for the conduct of the company’s business.
They argued that the directors had signed financial statements and other documents, indicating their active participation in decision-making.
The complainant asserted that the directors should face trial, and their role in the dishonored cheque should be determined based on evidence.

Supreme Court’s Observations

The Supreme Court examined the provisions of the NI Act, the Companies Act, and previous judicial precedents. The Court emphasized that vicarious liability under Section 141 of the NI Act requires specific allegations demonstrating a director’s active role in a company’s financial transactions.

“Mere designation as a director is not enough to make a person liable under Section 141 of the NI Act. There must be specific allegations showing how the director was in charge of and responsible for the company’s affairs at the time of the offense.”

The Court referred to its previous rulings in SMS Pharmaceuticals Ltd. v. Neeta Bhalla and National Small Industries Corporation Ltd. v. Harmeet Singh Paintal, where it held that a director is liable only if he is directly involved in the conduct of business and decision-making related to the dishonored cheque.

The Court further noted:

“Independent directors are appointed for their expertise and governance oversight. Holding them criminally liable for operational decisions without evidence of their participation in the transaction in question would be contrary to the principles of natural justice.”

Supreme Court’s Verdict

The Supreme Court ruled in favor of the petitioners and passed the following orders:

The criminal proceedings under Sections 138 and 141 of the NI Act against the three independent directors are quashed.
The complaint against MBL Infrastructure Limited, its Managing Director, and the signatory of the dishonored cheque may proceed.
The trial court is directed to ensure that the liability is determined based on the role of each accused person.

Impact of the Judgment

This ruling has significant implications for corporate governance and criminal liability in financial transactions:

It protects independent directors from being held vicariously liable for corporate actions unless direct involvement is established.
It reinforces the principle that criminal liability cannot be presumed solely based on designation.
It provides clarity on the legal responsibilities of directors under the NI Act and the Companies Act.
It prevents the misuse of cheque bounce provisions to harass individuals who are not involved in a company’s financial transactions.

The judgment reaffirms the Supreme Court’s commitment to ensuring that legal liability in corporate cases is assigned based on actual involvement rather than mere official positions.

Petitioner Name: Sunita Palita & Others.
Respondent Name: M/s Panchami Stone Quarry.
Judgment By: Justice Indira Banerjee, Justice J.K. Maheshwari.
Place Of Incident: Birbhum, West Bengal.
Judgment Date: 01-08-2022.

Don’t miss out on the full details! Download the complete judgment in PDF format below and gain valuable insights instantly!

Download Judgment: sunita-palita-&-othe-vs-ms-panchami-stone-q-supreme-court-of-india-judgment-dated-01-08-2022.pdf

Directly Download Judgment: Directly download this Judgment

See all petitions in Fraud and Forgery
See all petitions in Banking Regulations
See all petitions in Judgment by Indira Banerjee
See all petitions in Judgment by J.K. Maheshwari
See all petitions in allowed
See all petitions in Quashed
See all petitions in supreme court of India judgments August 2022
See all petitions in 2022 judgments

See all posts in Criminal Cases Category
See all allowed petitions in Criminal Cases Category
See all Dismissed petitions in Criminal Cases Category
See all partially allowed petitions in Criminal Cases Category