DIRECTORS VICARIOUS CRIMINAL LIABILITY - END OF NIGHTMARE
Are directors Vicariously liable for the acts of the company done through the instrumentally of its officers and employees situated throughout the length and bregth of this vast country, even though they may not have any knowledge of the same ? Can they be made accused in criminal offences on the basis of vicarious liability concept and be compelled to face the hardships of criminal trials ( which may be scattered throughout the country ) and in which obtaining Bail ( which is the complete discretion of the
CONCEPT OF VICARIOUS LIABILITY OF DIRECTORS
The concept of vicarious liability is not a new concept but a time honored concept and has been one of the most acceptable legal concepts. Putting it simply this concept says that the person who has the ultimate control over the affairs, control and management of things will be held vicariously liable of the act if the same is done by his employee, servant and / agent. In other words, a master is vicariously liable for the acts of his servant to an outsider, if the outsider suffers any loss. In such case the outsider can directly sue the master for damages, though he has suffered loss due to the acts of the servant and not master. This concept ha been extensively used in the civil law in contrast to the criminal law, where the offence is directly attributable to the person committing it. The use of the concept of vicarious liability has not found much role to play in the criminal law. But here we will concentrate on the use of the concept in criminal law alone.
VICARIOUS LIABILITY IN STATUTE BOOKS
Nonetheless this concept found some favour in special statues where Director’s of the company has been held vicariously liable for the acts of the company e.g., under the various sections of the Companies Act, 1956 directors are vicariously liable for the offence committed by the company under the act. The Companies Act either makes the director personally liable in many of the sections or they became liable being an “officer in default “as per section 5 of the Act. The common paraphrasing which is found in various section of the companies Act states that if an offence is attributable to connivance or neglect on the part of the director or other officers of the company, he shall be deemed to be guilty of the offence and shall be liable to be proceeded accordingly.
Though the concept of vicarious liability has been incorporated in some other Acts also, but the common thread which runs through all of them is that they make vicariously directors liable for non compliance of the statutory provisions e.g., failure to deposit Tax, Provident Fund etc., or failure to file the periodic return with the concerned Government Department / Authority.
USE OF DOCTRINE OF VICARIOUS LIABILITY IN CRIMINAL LITIGATION
But 1989 has seen a phenomenal change for the corporate world in respect of the concept of vicariously liability. Provisions of Section 138 under the Negotiable Instruments Act has been incorporated and the bouncing of cheque was made a criminal offence,(which was earlier a civil offence in which recovery of money in cheque bouncing cases was a lengthy process) with the intent of making the cheque (which is a Negotiable Instruments) truly acceptable in the commercial world. Needless to add that the other negotiable instruments does not possess the same status which has been conferred to cheque under section 138 of the Negotiable Instruments Act.
Not only this but the concept of vicarious liability has also been incorporated by Section 141 of the Negotiable Instruments Act , 1881 making the directors, manager , secretary and other officer of the company liable if the offence is attributable to any neglect on their part, thereby incorporating the concept of vicarious liability.
The fall out of the above is that it has opened a flood gate of Criminal litigations under Section 138 & 141 of the Negotiable Instruments Act, 1881 in which directors are also made parties (Accused). The issue has also been settled by the Hon’ble Supreme Court of India in line of Judgments which states that Directors are liable u/s 138 & 141 of the Negotiable Instruments Act, 1881. But, since the offence is bailable i.e., one can seek bail as a matter of Right, much heat is not felt by the Corporate World, although the rigors of Criminal Procedural law has to be undergone. In such cases normally, the relief obtainable from the various High Courts are exemption from Personnel appearance by the directors before the Ld Trial Court. The impact is because of the exemption from personal appearance, the rigors of Criminal Procedural Law has been diluted to the large extent.
Inspite of the above remedies available with them, the corporates in many cases, try to settle the score, so as to save their directors and top officials from the embarrassment of passing through the rigorous criminal recourse. Settlement of the cases in this manner would not have been possible in the absence of the criminal procedure. Such is the karishma of Criminal Procedure.
Interestingly, with the passage of time another situation has cropped up and Criminal Complaint u/s 406, 409, 420 of the Indian Penal Code and other allied sections are also being filed with the Courts against the directors and other senior officials taking the recourse of vicarious liability concept , in which Directors are being implicated as an accused. The courts are also taking cognizance of these complaints against the Directors.
IMPACT ON CORPORATES OF THE DOCTRINE
The above situation, though in the process of evolution, have already started hitting many companies and which are being faced with the filing of the criminal complaints under the provisions of Section 406, 420 IPC and other allied sections against the directors based on Doctrine of Vicarious Liability, though the personal involvement of directors are not visible even from the complaint. The Hon’ble Courts, after taking cognizance in such cases, are issuing summons for the appearance of the accused including Directors. Since, the rigors of Criminal Procedures requires taking of Bail at the first instance before the accused can proceed to defend himself and since these sections are non Bailable i.e Accused ( Directors ) cannot claim Bail as a right, and the same is the entire discretion of the Court. Directors generally don’t want to take the risk of “Regular Bail” in which he is to appear before the court and take Bail as if the Bail is not granted by the Court he has to go behind the bars. The only recourse open is filing of petition, in majority of cases, for quashing or grant of anticipatory Bail (or arrest Stay in UP) before the Hon’ble High Court, which does not find much favour with the High Court(s) , as the offence complained is of “non bailable” nature.
The burning question is can a director be held liable on the basis of his vicariously liable only because he is responsible for conducting the affairs of the company in these criminal proceedings where the offences complained are non bailable, though the personal involvement of directors is not visiable even from the complaint. Are the courts justified in issuing summons against the directors of the company on the basis of concept of vicarious liability for an offence said to be committed by the company or any of its officers. Does it not amounts to the gross misuse of the Judicial Process ? Is Judicial process be permitted to be misused to pressurize the Directors to sit on the Negotiation Table and settle the dispute, if any, to the advantage of the complainant and to their gross disadvantage ? In other words, Is the Courts justified in taking cognizance against the Directors based on the doctrine of vicarious liability ?
THE WINDS OF CHANGE
Hon’ble Supreme Court of India has given a wind of relief to the Corporate World by holding that the concept of Vicarious liability of Directors cannot be extended to directors, for offence committed by the company or its officers. Hon’ble Supreme Court of India held that those statues which has no Section which is on lines of Section 5 of the Companies Act, 1956 or Section 141 of the Negotiable Instruments Act, 1881 which provides for the vicarious liability of directors, Doctrine of Vicarious liability cannot be incorporated in those statues. Admittedly, Indian Penal code does not contain any provision which provides for the vicarious liability of directors and therefore Magistrate’s Courts cannot take cognizance against the Directors based on vicarious liability concept, if nothing is visible from the complaint. .
Hon’ble Supreme Court in the recent Judgment of S K Alagh Vs State of UP 2008 (2) SCALE 523 held that :-
19. As, Admittedly, drafts were drawn in the name of the company, even if appellant was its Managing Director, he cannot be said to have committed an offence under section 406, of the Indian Penal Code. If and when a statues contemplates creation of such a legal fiction, it provides specifically therefore. In absence of any provision laid down under the statute, a director of a company, or a employee thereof cannot be held to be vicariously laible for an offence committed by the company itself . (Sabitha Ramamurthy and Another Vs. R B
20. We may in this regard, notice that the provisions of the Essential Commodities Act, Negotiable Instruments Act, employees’ Provident Fund ( Miscellaneous Provisions) Act, 1952 etc have created such vicarious liability. It is interesting to note that Section 14 A of the 1952 Act specifically creates an offence of criminal breach of trust in respect of the amount deducted from the employees by the company. In terms of the said explanation appended to section 405 of the Indian Penal Code, a legal fiction has been created to the effect that the employer shall be deemed to have committed an offence of criminal breach of trust. Whereas a person in charge of the affairs of the company and in control thereof has been made vicariously liable for the offence committed by the company alongwith the company, but even in case falling under section 406 of the Indian Penal code vicarious liability cannot be extendable to the directors of officers of the Company. ( Makshud Saiyeed Vs State of
in the light of this recent prouncement by the Hon’ble Supreme court, the law as is settled is that Since the Doctrine of vicarious liability has not been incorporated under the provisions of the Indian Penal Code, the doctrine of vicarious Liability cannot be incorporated therein only because it finds place in the Companies Act, 1956, Essential Commodities Act, Negotiable Instruments Act, and / or Employees’ Provident Fund ( Miscellaneous Provisions) Act, 1952 etc.
CONCLUSION
Such criminal complaints are liable to be quashed qua the directors and / or its officers by the respective High court in terms of the Above Judgment of the Hon’ble Supreme Court of India.
Written By :-
Praveen Agrawal,
B Com, LLB, ACS
Advocate on Record,
Supreme Court of
B 73, Shekhar Apartment,
Mayur Vihar – I Extension,
Phone 9811702850
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