Business Laws

Courtroom: No sadism

Vasanth Rajasekaran / Harshvardhan Korada October 18 | Updated on October 18, 2021

In a recent case, the Supreme Court held that a director of a company could not be “vicariously” held liable for criminal offences of a company

In a recent case, Ravindranatha Bajpe Vs Mangalore Special Economic Zone Ltd, the Supreme Court of India held that a director of a company could not be “vicariously” held liable for criminal offences of a company.

The court held that the chairman, directors, and other key managerial personnel of a company cannot be automatically held vicariously liable for the offences committed by a company unless specific allegations and averments against them are made with respect to their individual role.

The appellant in the case stated that he is the absolute owner and in possession and enjoyment of certain immovable properties which were adjoining the Mangalore-Bajpe Old Airport Road. The properties had valuable trees on them and was surrounded by a stone wall as a boundary.

The appellant’s case is that Mangalore Special Economic Zone Ltd and its contracts, sub contractors and labourers had conspired with common intention to lay the pipeline beneath the appellant’s properties without any lawful authority and right, trespassed over the properties and demolished the compound wall, when he (the appellant was not in town). Some 100 trees, worth ₹27 lakh, were destroyed, he said.

The Supreme Court noted that there were no specific allegations made against the directors and managerial personnel amongst the accused. The Apex Court clarified that nowhere had the appellant made the allegation that at the command and directions of directors.

The Apex Court referred to the decision in Sunil Bharti Mittal Vs Central Bureau of Investigation for circumstances when a director/ person in charge of the affairs of the company can also be prosecuted when a company is an accused person. It was held that vicarious liability of the directors cannot be imputed automatically, in absence of any statutory provision to this effect.

The IPC does not contain any provision for attaching vicarious liability on part of the managing director or the directors of the company when the accused is the company. Thus, an individual who has perpetrated the commission of an offence on behalf of a company could be made accused, along with company, only if there was sufficient evidence of his active role coupled with criminal intent.

The Supreme Court then referred to the decision in Pepsi Foods Ltd Vs Special Judicial Magistrateto reiterate that summoning an accused in a criminal case was a serious matter. Criminal law could not be set into motion as a matter of course.

The Apex Court reiterated the position in GHCL Employees Stock Option Trust Vs India Infoline to observe that to initiate a criminal proceeding, a magistrate has to record his satisfaction about a prima facie case against the accused who are directors, or key managerial personnel of a company and the role played by them in their respective capabilities. Accordingly, the appeal was dismissed.

The instant judgment strengthens the jurisprudence in Indian law on the criminal liability of chairman, directors, and other managerial personnel when a company is made the accused. The vicarious liability of the directors would arise only when a statutory provision exists on that behalf. The IPC does not contain an express provision on the vicarious liability of the directors when a company is accused of criminal offences.

Therefore, only when there are specific averments on the role played by the directors in the commission of the crime can they be proceeded against under the law. The decision would bring a sigh of relief to the management of many corporates in India dealing with criminal matters.

The harassment of directors and other managerial personnel for criminal offences registered against the company is a recurring motif in India. We believe that the instant judgment would aid in preventing innocent directors of a company from being cornered for offences committed by the company.

(The authors are from Phoenix Legal, a law firm)

Published on October 18, 2021

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