Concept of Vicarious Liability of directors
- A company functions through board of directors; it has not mind of its own. Provision of s.291 of erstwhile Companies Act, 1956 recognized that except where express provision is made that the powers of a company in respect of a particular matter are to be exercised by the company in general meeting, in all other cases the board of directors are entitled to exercise all its powers. Companies Act, 2013 has corresponding provision in s.179 thereof.
- This being the situation, it is natural for directors to be liable for actions of the company and in case of a criminal offence, a director of the company may be prosecuted for offence committed by the company as provided under the statute. However, the same is not automatic and things depend on the provisions of a given statute.
While the provisions relating to vicarious liability of directors may be found in many different statues e.g.
- PF Act,
- Contract Labour(Regulation and Abolition) Act, 1970,
- The Building and Other Construction Workers’ (Regulation of Employment and conditions of Service) Act, 1996,
- Negotiable Instruments Act, 1882,
- Securities and Exchange Board of India Act, 1992,
- Companies Act, 2013 and many more;
we seek to exemplify the aspect by referring to offences under only a few specific statutes. It may be noted however, that the principles will apply to offences under all different statutes.
Offence u/s.138 of Negotiable Instruments Act, 1882
- s. 141 of the NI Act, 1882 provides:- “—(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.
- Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence………..”
- Thus, in terms of s.141, all the persons in charge of and responsible for conduct of business of the company (including directors in charge of business of company) will only be liable to be punished. There are various judgments about non-executive directors, independent directors etc. not being in charge of affairs of company and hence not liable. Judgments also provide that a director is not automatically deemed to be liable for offence u/s.141 of NI Act, 1882 and It is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of business of the company.
Offences under Companies Act, 2013 (CA)
- Various provisions under the CA impute vicarious liability to “Officer who is in default” e.g. s.53 (prohibition against issuance of share at discount) provides for penalty for ‘officer who is in default’ s.8 of CA provides that if the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447 and so on.
- S. 2(60) defines ‘Officer who is in default’ as ―”officer who is in default, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—
- whole-time director;
- key managerial personnel;
- where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;
- any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;
- any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;
- every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;
- in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer;”
Thus, it can be seen that even under Companies Act, 2013, vicarious liability of a director is not automatic and further conditions need to be satisfied for him to be “officer who is in default” for a director to be vicariously liable for an offence under Companies Act, 2013.
Offences under Indian Penal Code, 1860
- A company might be alleged of having committed any offences under IPC e.g. cheating, forgery, criminal breach of trust etc., which are normally the offences more serious in nature as against the offences under specific statutes and provide for greater term of imprisonment on punishment.
- We have seen the police calling the directors of a company when offences under IPC are alleged to have been committed by a company.
- True it is that company is a legal person with no mind of its own and some human being will have to be responsible for an offence by the company; however, the vicarious liability of directors for any offence under IPC is neither automatic nor is it provided under any IPC provisions. This will mean that no director of company is liable for any offence under IPC even if he is in charge of business and day to day affairs of the company, unless any specific role is attributed to such director.
- •Those who are interested in reading further on the subject of no vicarious liability of directors for IPC offences may read judgments of the Supreme Court in the case of Sunil Bharti Mittal vs Central Bureau of Investigation and Ravindranath Bajpe vs Mangalore Special Economic Zone Ltd. & Others.
Summary
- Vicarious liability of a director for any offence by the company is not automatic.
- Vicarious liability for an offence under a specific statute can be imputed only subject to strict satisfaction of prerequisites for imputing such liability as prescribed under a given statute.
- The Indian Penal Code, 1860 does not contain any provisions for imputing vicarious liability of directors in case of commission of an offence by a Company and therefore even if a director is in charge of business of company and even if he is a whole-time director, he will not be liable for an offence committed by a company.
- A director can be investigated/ prosecuted for an IPC offence only if there is a specific allegation against the director about his specific role in connection with an offence under IPC.
What if a director is investigated / prosecuted for offence against the principles explained above
- If a director is called by the police for investigation of an offence committed by the company without the FIR attributing any specific role to him, or if the director is prosecuted for specific statute offence without satisfaction of conditions for imputing vicarious liability as enshrined in such statute, ideal remedy for a director will be to approach jurisdictional high court with a quashing petition to get the complaint quashed as against him.
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*Above information is neither intended to be nor should it be taken as any professional advice. Please contact a legal practitioner for any specific query.