Liability of a Director when a Firm commits an Offence

Written By: Sreshta Satpathy

Who is a director?

A director [section 2(34) of the Companies Act, 2013] is a person who is appointed to a company’s board of directors. “Director” refers to a director appointed to a company’s Board of Directors, which includes a considered director, according to section 2(13) of the 1956 Act. The phrases ‘deemed director’ was removed from the 2013 Act.] A board of directors made up of persons is required for any corporation. Three directors are necessary in the case of a public company, two in the case of a private company, and one in the case of an OPC. A maximum of fifteen directors is allowed by section 149(1) of the Companies Act, 2013 [section 252 of the 1956 Act]. By special resolution, the company can increase the maximum number of directors – first proviso to section 149(1) of the Companies Act, 2013. The limitation of fifteen directors on a government firm’s board of directors does not apply – MCA A notification dated June 5, 2015, was issued under section 462 of the Companies Act, 2013. The 15-director restriction does not apply to Section 8 (licensed, i.e. non-profit) corporations – MCA A notification was issued on the 5th of June, 2015, under section 462 of the Companies Act, 2013, which was updated on the 13th of June, 2017.

Liability of a director

When a firm is designated the accused, the current ruling enhances Indian law’s doctrine on the criminal culpability of the chairman, directors, and other executive persons. Only when a law provision exists in this regard would the directors be held vicariously liable. When a business is accused of criminal offences, the IPC does not contain an express provision on the directors’ vicarious accountability. As a result, the directors can only be prosecuted under the law if there are specific allegations about their participation in the crime’s conduct. Harassment of company directors and other management staff for criminal charges filed against the firm is a common occurrence in India. The current decision will help to avoid innocent directors of a firm from being prosecuted for the corporation’s wrongdoings. In Rabindranath Bajpe v. Mangalore Special Economic Zone Ltd. and Ors. Etc (Criminal Appeal Nos. 1047 and 1048 of 2021), the Hon’ble Supreme Court held that a company’s chairman, directors, and other key managerial personnel cannot be held vicariously liable for the company’s crimes unless specific allegations and averments against them are made with respect to their individual roles. The facts and findings of the aforementioned judgment are discussed in this article.

A person cannot be prosecuted and punished only because of their status or position as a director, manager, secretary, or any other officer in a company. Justices R S Reddy and Sanjiv Khanna wrote, “Unless the offence in question was committed with their consent or connivance or is attributable to any negligence on their part.” “Every single person who, at the time the offense was committed, was in control of, and was accountable to, the company for the conduct of the company’s business as well as the company shall be held to be guilty of the offence and shall be subject to be prosecuted and punished accordingly,” says the law. The arrest of a corporation’s directors and executives without even remote participation in the claimed infraction of law by the corporation, according to Justices Reddy and Khanna, is not appropriate and must be avoided at all costs.

According to Section 22C of the Minimum Wages Act, it is said that the prosecution must define the actual involvement of the officer who is charged. According to the Supreme Court, vicarious responsibility applies only where a crime was committed with the permission, connivance, or negligence of a director, manager, secretary, or another official of the company, not just because the individual occupies a responsible position in the firm. The public official has the obligation and responsibility to proceed responsibly and establish accurate and exact facts. Unsuitable familiarity with legal laws and a thorough understanding of their application may result in the prosecution of an innocent person.

Case Study-Doyle De’souza Vs Govt of India through Deputy Chief Labour Commissioner

In this fascinating case, the Supreme Court was dealing with summonses issued to the director of a company, M/s Writer Safeguards Pvt ltd, as well as the head of the Madhya Pradesh unit, which was in charge of managing ATMs for the State Bank of India, for non-compliance with the provisions of the Minimum Wages Act, 1948.

The Court considered the provisions of Section 22C of the Act, as well as the meaning of the phrase “when a person can be in charge of, and responsible to, the company for the conduct of the business of the Company,” and concluded that “in-charge” must imply that the person is in charge of the company’s or firm’s day-to-day operations. The court also pointed out that just because someone is a director or a partner does not mean they are in command of or accountable for the firm, noting that there might be directors who only set policies and are uninterested in the day-to-day operations of the company.

As a result, the mere fact that the accused person is a partner or director of the Company does not make him criminally accountable for the Company’s conduct unless the additional components that make him criminally liable are demonstrated. The Court cited a slew of judicial decisions in this regard, including the well-known case of Hindustan Steels Vs State of Orissa, and held that the summons was liable to be quashed because there was no assertion in the summons that the person summoned was in charge of and responsible for the company’s affairs, and the offense had not been first established in the company’s name.

Case Study-Sunil Bharti Mittal v. Central Bureau of Investigation

A number of firms were granted telecommunication licenses by the federal government. A criminal inquiry was opened against many firms, including their directors after the licensing procedure was scrutinized for possible anomalies. Bharti Cellular Ltd was one of these firms (BCL). Sunil Bharti Mittal, the Chairman and Managing Director of Bharti Cellular Ltd., was named as an accused in the proceedings by the special court probing the licensing violations. The Supreme Court ruled that the special court’s decision to name the director of BCL an accused person was a legal error.

The Supreme Court ruled that without legislative support, a company’s officers and directors cannot be held criminally accountable for the company’s acts. The Supreme Court went on to say that company directors can only be held liable for the company’s wrongdoing if there is enough evidence to show that they played an active role and had criminal intent or if the relevant statute has specifically imposed liability on them, such as labour and environmental law statutes. In the absence of a legal mandate, no director can be held vicariously liable.

Conclusion

Indian law enforcement authorities have been vigorously pursuing enterprises that are accused of any misconduct or simply non-compliance with licensing requirements as required by legislation in the previous several years. The majority of the offences committed by businesses are classified as economic offences. Economic offences, Indian courts have ruled, should be treated as severe offences because they frequently have a higher degree of men’s rea and entail deep-seated conspiracies that result in massive losses of public monies and have an impact on the country’s economy and financial health. The (Indian) Companies Act, 2013 (“Companies Act”) imposes a number of responsibilities on directors, including ensuring that the firm complies with the law.

Much additional legislation holds directors liable for a company’s wrongdoings based on the assumption that they are in charge of and responsible for the company’s operations. It is also widely held that a company’s directors are its ‘will and mind,’ and that all decisions are made with their knowledge and permission. They are an easy target for getting mentioned in numerous investigations because of their exposure and perception. This is despite the fact that the courts have repeatedly stated that the notion of vicarious responsibility does not exist in Indian criminal law unless otherwise authorized by statute. As a result, we’ve seen it become routine for investigating agencies to name members of the board of directors indiscriminately, regardless of the role they played. This technique frequently runs counter to the legal standards developed by Indian courts governing directors’ criminal responsibility.

About the Author

Sreshta Satpathy

Student at Adv. Balasaheb Apte college of Law , Mumbai

I am 20 years old and I belong to Orissa. I’m currently a third-year student pursuing BLS LL.B from Mumbai University. I intend to pursue corporate law in the future.

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