It is a well settled principle that when the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision or sufficient evidence for that act. The directors are not made in charge of each and every affairs of the company. A company assigns different roles to directors, presidents, managers or secretaries for different departments.
Now, if and when a statute contemplates creation of such a legal fiction, it specifically provides for it. So, in the absence of any such provision creating a liability for an offence on a particular office/position, Directors of a Company or key employees cannot just be made vicariously liable for any offence committed by the Company itself.
In this article, the author focuses on (i) meaning of “vicarious liability”, (ii) Cases when directors can be held liable for offences of a company, (iii) How to prove Vicarious liabilities and (iv) decided case laws.
What is vicarious liability?
A company is a separate legal entity but it does not act on its own. It acts through its Directors/Officers and when such Directors/Officers act on behalf of the company, the company is held liable for those acts on the application of “principal – agent” principle.
However, for an act of the company, such Directors/Officers are not accused unless there is a categorical provision in the statute making such persons vicariously liable or there is enough evidence to attribute the alleged acts of criminality to the said persons.
Therefore, the doctrine of vicarious liability simply means the situation where one person is held liable for the actions of another.
However, for this doctrine to be enforced, there must be a ‘principal – agent’ or ‘employer-employee’ or a similar relationship.
Cases when directors can be held liable for offences of company
Various statutes under Indian law have laid down provisions in respect of offences by companies imposing vicarious liability for the acts of the company upon its Directors and other officers occupying key managerial positions. Some of the statues which consists express provisions for penalizing the officers of the company for offences committed by company are as follows:
Companies Act, 2013
Companies Act clearly defines the term “officer in default” in Section 2(60). It includes whole time directors, key managerial personnel, directors, persons charged with specified responsibilities of the affairs of the company and a director where such contravention had taken place with his consent or connivance. The term “officer in default” has been once defined and then used in several provisions of the Companies Act violations.
The Ministry of Corporate Affairs had also issued a Circular No. 1/2020 dated 2nd March, 2020 directing the Registrar of Companies to follow the Standard Operating Procedures specified in the said circular for any proceedings against the Non-Executive Directors and Independent Directors of the Company.
Section 141 of Negotiable Instruments Act, 1881
Section 141(2) provides that where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
In the matter of K.K. Ahuja vs V.K. Vora & Anr dated 6 July, 2009, the Supreme Court identified the following allegations that can be made under this act:
(i) Managing Director/Joint Managing Director: By virtue of the office they hold, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they would fall under Section 141(1), even though there is no specific averment against them.
(ii) Person signing the cheque: The signatory of a cheque which is dishonoured, is clearly responsible for the act and will be covered under sub-section (2) of Section 141. Therefore, no special averment would be necessary to make him liable.
(iii) Director: The fact that a person is a director of a company is not by itself sufficient to make him liable under Section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business. The requirement of Section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the comp
Section 48 of the Competition Act, 2002
Section 48(2) states that where a contravention of any of the provisions of this Act has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that contravention and shall be liable to be proceeded against and punished accordingly.
CCI in the matter of Mahyco Monsanto Biotech (India) Limited dated 26/07/2016, held that when an inquiry is held under the Act, the finding of contravention has to be first recorded against the company and if the company is held liable, then the question of who was the officer in-charge of and responsible for the conduct of the business of the company at the relevant time and his liability will be gone into; however, in the same order.
Section 17 of the Prevention of Food Adulteration Act, 1954
A similar provision is there in this act with only a slight difference being there, that in case where a person has been expressly nominated under Section 17(2), he alone can be proceeded against and punished for the violations of the Act committed by the Company and only where no such person has been so nominated, any other person, who at the time the offence was committed, was in-charge of and was responsible for the conduct of business of the company may be proceeded against and punished.
How to prove Vicarious liabilities
Liability specified in law:
There is a regime of penalties which commensurate with the gravity of the offence. Almost every statute provides penalties or fines or imprisonment for contravention of the provisions of the particular statute. For example, Companies Act, 2013 defines the term ‘officer in default’ for some provisions and for the others it clearly specifies who shall be liable for default. In labour law acts, there is mostly a separate chapter or section for offences. In short, most of the acts designate persons who shall be liable for the contraventions or atleast specify that the person in charge shall be liable.
Liability NOT specified in law:
In case the statute does not specify as to who shall be responsible for the offence committed by the company, the complainant has to make specific allegations on the respective persons and furnish sufficient evidence to prove a person guilty of an offence. Supreme Court has time and again repeated that an individual who has perpetrated the commission of an offence on behalf of a company can only be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent.
Frequently Asked Questions
Q 1: Can directors and the company be simultaneously prosecuted?
CCI in the matter of Mahyco Monsanto Biotech (India) Limited dated 26/07/2016 also dealt with the issue that whether the prosecution of the company as well as of the officer be carried out simultaneously and the order of acquittal or conviction against them, as the case may be, may also pass at the same time. It was held that it is nowhere stated that in cases of commission of an offence by a company, the prosecution has to be in two stages i.e. first against the company and thereafter, in case the company is held guilty, against the officer in-charge of and responsible for conduct of business of the company.
Q 2: Can director be held liable if he was not responsible for a particular business?
K.K. Ahuja vs V.K. Vora & Anr dated 6 July, 2009: The Supreme Court held that if a director of a Company who was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable under the Negotiable Instruments Act. The liability arises from being in charge of and responsible for conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company. Conversely, a person not holding any office or designation in a Company may be liable if he satisfies the main requirement of being in charge of and responsible for conduct of business of a Company at the relevant time. Liability depends on the role one plays in the affairs of a Company and not on designation or status.
Q 3: Is there any Vicarious liability in Criminal law?
It has been time and again established and reiterated by the courts that there is no vicarious liability in criminal law unless something is imputed or there is a specific statutory provision creating criminal vicarious liability.
Courts have held that statutes indisputably must contain provisions 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.
Q 4: Can directors be held liable for a company’s debts? Here’s a detailed analysis of the case.
Supreme Court Case Laws
Sunil Bharti Mittal vs Cbi dated 9 January, 2015: No doubt, a corporate entity is an artificial person which acts through its officers, directors, managing director, chairman etc. If such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. It would be more so, when the criminal act is that of conspiracy. However, at the same time, it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so.
Pepsi Foods Ltd. v. Special Judicial Magistrate (1998) 5 SCC 749: The Magistrate has to carefully scrutinise 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 offence is prima facie committed by all or any of the accused.”
Maksud Saiyed v. State of Gujarat: 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. Vicarious liability of the Managing Director and Director would arise provided any provision exists in 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.
Kalyani v. Janak C. Mehta: Allegations contained in the FIR are for commission of offences under a general statute. 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.