Vicarious liability of Directors cannot be imputed Automatically

Commission of an offense by raising a legal fiction or by creating a vicarious liability in terms of the provisions of a statute must be expressly stated

It is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so. When the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect. Despite the fact that the Indian Penal Code does not contain any provision of vicarious liability for the offenses committed, the Directors are being arraigned and prosecuted with ulterior motive to arm-twist the Company for unlawful and illegitimate gain. The Hon'ble Supreme Court in the case of Pepsi Foods Ltd. Vs. Special Judicial Magistrate – (1998) 5 SCC 749, the Hon'ble Supreme Court held as under:

"28. Summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set into motion as a matter of course. It is not that the complainant has to bring only two witnesses to support his allegations in the complaint to have the criminal law set into motion. The order of the Magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the law applicable thereto. He has to examine the nature of allegations made in the complaint and the evidence both oral and documentary in support thereof and would that be sufficient for the complainant to succeed in bringing charge home to the accused. It is not that the Magistrate is a silent spectator at the time of recording of preliminary evidence before summoning of the accused. The Magistrate has to carefully scrutinize the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers to find out the truthfulness of the allegations or otherwise and then examine if any offense is prima facie committed by all or any of the accused."

Section 204 of Cr.P.C. provides that, if the Magistrate taking cognizance of a case upon a consideration of the materials before him thinks that there is a prima facie case for proceeding in respect of an offense, he shall issue process against the accused. The Magistrate is also empowered under Section 202 of Cr.P.C. to order an investigation with the objective of determining whether there is sufficient ground for proceedings. The primary motive is to rule out the possibility of misuse of criminal prosecution. In the case of GHCL Employees Stock Option Trust Vs. India Infoline Ltd. – (2013) 4 SCC 505, the Hon'ble Supreme Court set aside the summoning order against the Director as Magistrate has failed to record his satisfaction about the prima face against them held as under:-

"19. In the order issuing summons, the learned Magistrate has not recorded his satisfaction about the prima facie case as against Respondents 2 to 7 and the role played by them in the capacity of Managing Director, Company Secretary or Directors which is a sine qua non for initiating criminal action against them.

21. In the instant case, the High Court has correctly noted that issuance of summons against Respondents 2 to 7 is illegal and amounts to abuse of process of law. The order of the High Court, therefore, needs no interference by this Court."

The penal provision must be strictly construed and there is no vicarious liability in criminal law unless the statute takes that also within its fold. (Sham Sunder Vs. State of Haryana – (1989) 4 SCC 630, and Hira Lal Hari Lal Bhagwati Vs. CBI – (2003) 5 SCC 25) In the case of Maksud Saiyed Vs. State of Gujarat – (2008) 5 SCC 668, the Hon'ble Supreme Court held as under:-

"13. …………. The Penal Code does not contain any provision for attaching vicarious liability on the part of the Managing Director or the Directors of the Company when the accused is the Company. The learned Magistrate failed to pose unto himself the correct question viz. as to whether the complaint petition, even if given face value and taken to be correct in its entirety, would lead to the conclusion that the respondents herein were personally liable for any offense. The Bank is a body corporate. Vicarious liability of the Managing Director and Director would arise provided any provision exists on that behalf in the statute. Statutes indisputably must contain provision fixing such vicarious liabilities. Even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability."

The liability of the Directors in a corporate criminal liability is elaborately considered by the Hon'ble Supreme Court in the case of Sunil Bharti Mittal Vs. CBI – (2015) 4 SCC 609. In the aforesaid case, while considering the circumstances when Director/person in charge of the affairs of the company can also be prosecuted, when the company is an accused person, the Hon'ble Supreme Court has held, a corporate entity is an artificial person which acts through its officers, Directors, Managing Director, Chairman, etc., if such a company commits an offense involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. At the same time it is observed that it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the Statute specifically provides for. It is further held that an individual who has perpetrated the commission of an offense on behalf of the company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent. Further it is also held that an individual can be implicated in those cases where statutory regime itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision. The Hon'ble Court relied upon Iridium India Telecom Vs. Motorola Inc – (2011) 1 SCC 74 and held that the principle of attribution is applied to impute criminal intention on the Company on account of criminal intention of its alter ego and it cannot be applied in a reverse scenario to make directors liable for the offenses committed by the Company. The relevant portion of the judgment read as under:-

"44. When the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect. One such example is Section 141 of the Negotiable Instruments Act, 1881. In Aneeta Hada, the Court noted that if a group of persons that guide the business of the company have the criminal intent, that would be imputed to the body corporate and it is in this backdrop, Section 141 of the Negotiable Instruments Act has to be understood. Such a position is, therefore, because of statutory intent making it a deeming fiction. Here also, the principle of "alter ego", was applied only in one direction namely where a group of persons that guide the business had criminal intent, that is to be imputed to the body corporate and not the vice versa. Otherwise, there has to be a specific act attributed to the Director or any other person allegedly in control and management of the company, to the effect that such a person was responsible for the acts committed by or on behalf of the company.

A vicarious liability can be fastened only by reason of a provision of a statute and not otherwise. For the said purpose, a legal fiction has to be created. Even under a special statute when the vicarious criminal liability is fastened on a person on the premise that he was in charge of the affairs of the company and responsible to it, all the ingredients laid down under the statute must be fulfilled. A legal fiction must be confined to the object and purport for which it has been created. (R. Kalyani Vs. Janak C. Mehta – (2009) 1 SCC 516) In the case of Sharon Michael Vs. State of Tamil Nadu – (2009) 3 SCC 516, the Hon'ble Supreme Court held that in the absence of any specific allegations against the employee, they cannot be made vicariously liable only because they are employees of the Company."

In the case of Keki Hormusji Gharda Vs. Mehervan Rustom Irani – (2009) 6 SCC 475, the Hon'ble Supreme Court held that the Penal Code, 1860 save and except in some matters does not contemplate any vicarious liability on the part of a person. Commission of an offense by raising a legal fiction or by creating a vicarious liability in terms of the provisions of a statute must be expressly stated. The Managing Director or the Directors of the Company, thus, cannot be said to have committed an offense only because they are holders of offices. The learned Additional Chief Metropolitan Magistrate, therefore, in our opinion, was not correct in issuing summons without taking into consideration this aspect of the matter. The Managing Director and the Directors of the Company should not have been summoned only because some allegations were made against the Company.

In the case of Shiv Kumar Jatia Vs. State of NCT of Delhi – (2019) 17 SCC 193, the Supreme Court held that reiterated the law of the Sunil Bharti Mittal Vs. CBI and held that a Director of the Company can be made accused along with the Company only, if there is sufficient material to indicate his active role with criminal intent. The relevant portion of the judgment reads as under:-

"20. Though there are allegations of negligence on the part of hotel and its officers who are in charge of day-to-day affairs of the hotel, so far as appellant– Accused 2 Shiv Kumar Jatia is concerned, no allegation is made directly attributing negligence with the criminal intent attracting provisions under Sections 336, 338 read with Section 32 IPC. Taking the contents of the final report as it is we are of the view that, there is no reason and justification to proceed against him only on grounds that he was the Managing Director of M/s Asian Hotels (North) Ltd., which runs Hotel Hyatt Regency. The mere fact that he was chairing the meetings of the company and taking decisions, by itself cannot directly link the allegation of negligence with the criminal intent, so far as appellant – Accused 2. Applying the judgment in the case of Sunil Bharti Mittal we are of the view that the said view expressed by this Court, supports the case of appellant - Accused 2.

21. By applying the ratio laid down by this Court in the case of Sunil Bharti Mittal, it is clear that an individual either as a Director or a Managing Director or Chairman of the company can be made an accused, along with the company, only if there is sufficient material to prove his active role coupled with the criminal intent. Further the criminal intent alleged must have direct nexus with the accused. Further in the case of Maksud Saiyed vs. State of Gujarat & Ors, this Court has examined the vicarious liability of Directors for the charges leveled against the Company. In the aforesaid judgment this Court has held that, the Penal Code does not contain any provision for attaching vicarious liability on the part of the Managing Director or the Directors of the Company, when the accused is a Company. It is held that vicarious liability of the Managing Director and Director would arise provided any provision exists in that behalf in the Statute. It is further held that Statutes indisputably must provide fixing such vicarious liability. It is also held that, even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability.

The provisions of the Companies Act, 2013 provide that Managing Director, whole time Director, certain managerial person, Company Secretary liable for almost all the violation. There are certain statute, such as Negotiable Instrument Act, Foreign Exchange Management Act, etc. which hold directors liable who at the time of contravention, were in charge of the conduct or affairs of the Company. In the case of Shailendra Swarup Vs. Enforcement Directorate – (2020) SCC OnLine SC 600, while dealing the Section 191 of the Companies Act and Section 68 of FERA, 1973, the Hon'ble Supreme Court held as under:-

"36. In the above case, this Court held that Directors can be prosecuted only if they were in-charge and responsible for the conduct of the business of the company. …………

37. Section 68 of FERA, 1973 deals with "Offences by companies". Section 68(1) provides that "…………… every person who, at the time of the contravention was committed, was in charge of, and was responsible to, the company for the conduct of business of the company as well as the company, shall be deemed to be guilty of the contravention ………….." Section 68(1) creates a legal fiction, i.e., "shall be deemed to be guilty". The legal fiction triggers on fulfillment of conditions as contained in the section. The words "every person who, at the time of the contravention was committed, was in charge of, and was responsible to, the company for the conduct of business" has to be given some meaning and purpose. The provision cannot be read to mean that whosoever was a Director of a company at the relevant time when the contravention took place, shall be deemed to be guilty of the contravention. Had the legislature intended that all the Directors irrespective of their role and responsibilities shall be deemed to be guilty of contravention, the section could have been worded in different manner. When a person is proceeded with for committing an offense and is to be punished, necessary ingredients of the offense as required by Section 68 should be present."

However, despite well settled principle of law, the Director are prosecuted simply on account of the fact that they are holding top position in the Company causing trauma, harassment and hardship of criminal trial which are of serious and grave concern and, also defeating the real intent of law. The law requires to ensure that the innocent individuals are not getting harassed merely because they are Chairmen/Directors of the Company.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.