Supreme Court 2025: Clear Limits on Director Liability Under Section 138 NI Act

az

A Landmark Clarification in Cheque-Bounce Jurisprudence

Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) plays a pivotal role in commercial disputes involving dishonoured cheques. Over the years, judicial interpretation has evolved to balance strict enforcement with fairness and precision in liability, especially when company directors are involved. In a series of significant 2025 judgments, the Supreme Court of India has now provided much-needed clarity on the scope of liability for directors in cheque-bounce cases. 

1. Director Liability Is Not Automatic

One of the most important takeaways from the Supreme Court’s rulings is this: mere designation as a company director does not automatically attract criminal liability under Section 141 read with Section 138 of the NI Act. 

In Hitesh Verma v. M/s Health Care At Home India Pvt. Ltd. (January 2025), the Court reiterated that the prosecution must explicitly plead and prove two conditions before a director can be held liable:
• The director was in charge of the company’s business at the relevant time, and
• The director was responsible for conducting the business of the company when the cheque was issued. 

Absent these clear allegations, proceedings against a director cannot be sustained.

2. Non-Executive and Independent Directors Are Protected

In K.S. Mehta v. Morgan Securities & Credits Pvt. Ltd. (2025), the Supreme Court quashed proceedings against non-executive and independent directors where there was no evidence showing their involvement in the transaction that led to the bounced cheque. Attendance at board meetings or being listed as a director on paper was not enough to fasten liability. 

This approach aligns with the statutory intent of Section 141 which imposes vicarious liability only in narrow circumstances where both control and responsibility clearly exist.

3. Resigned Directors Cannot Be Prosecuted

The Court has also clarified that a director who resigned before the cheque was issued cannot be prosecuted under Section 138/141. In Adhiraj Singh v. Yograj Singh & Others, the Supreme Court underscored that liability must be determined in light of the individual’s status on the date of issuance of the cheque. 

This ruling protects directors who have formally disengaged from company affairs before the relevant transaction took place.

4. Impact on Litigation and Compliance

These Supreme Court judgments have several practical implications for litigators and corporate entities alike:
• ➤ Strict Construction of Section 141: Courts will not extend liability to directors by assumption; only clear pleadings and evidence will suffice. 
• ➤ Focus on Role and Responsibility: Corporate records, board resolutions, and transaction documents will play a crucial role in establishing liability. 
• ➤ Quashing Under Section 482 CrPC: Where complaints lack specific allegations against directors, High Courts can quash proceedings in the interest of justice. 

Conclusion

The Supreme Court’s 2025 jurisprudence on Section 138 NI Act is a welcome clarification in the evolving cheque-bounce landscape. It underscores that criminal liability especially for company directors cannot be fastened merely on designation. Liability must be anchored to actual control, involvement, and responsibility.

For businesses, practitioners, and corporate leaders, this clarity encourages sound corporate governance while preserving the integrity of cheque transactions under the NI act.