Wednesday, August 6, 2008

When Can Directors be Held Responsible for Offences Committed by Their Companies?

(The following post contributed by Gautam Bhatia, a III Year B.A., LL.B (Hons.) student at the National Law School of India University, Bangalore deals with an important, but often controversial, issue of whether directors should be held criminally liable for offences by companies)

The case of Maksud Saiyed v. State of Gujarat, decided by a two judge bench of the Supreme Court in September 2007, is an important judgment dealing with the criminal responsibility of directors for offences committed by their companies.

In Maksud Saiyed, Dena Bank had published certain false and misleading information in its prospectus with regard to the sanction limits, and dues and export bills of Nagamai Nicotine Pvt. Ltd. It was alleged that the Bank was liable under Sections 120B, 425, 191, 192, 177 and 181 of the Indian Penal Code (IPC). It is important to note that the allegations in question were directed at the Bank, and the identity of the person who had acted on behalf of the Bank was not disclosed.

The Court held that while the acts or omissions on part of the Bank may give rise to a statutory violation on its part, that does not imply that its directors could be held personally liable. It cited the case of Saroj Kumar Poddar v. State (NCT) of Delhi and Anr., wherein it could not be shown that the director of a company (who had since resigned) was responsible for the conduct or business of the company. The Court then held that the IPC did 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. Therefore, in order to hold the directors responsible, it must be shown that they are personally responsible for the offence in question. The allegations in the instant case did not show that the directors had “anything to deal with personally either in discharge of their statutory or official duty.”

While analyzing the judgment in this case, we must distinguish the case of Avnish Bajaj v. State, decided by the Delhi High Court in May 2008. The relevant question that arose in Avnish Bajaj was whether the Managing Director of a company could be held liable for the fact that pornographic material was displayed on a website maintained by the company. It was held that the Managing Director could be proceeded against under Section 85 of the Information Technology Act (IT Act). Section 85(2) of the IT Act clearly states that “where a contravention… has been committed by a company, and it has been 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… such director shall also be deemed guilty of the contravention and shall be liable to be proceeded against and punished accordingly.”

Thus, Avnish Bajaj dealt with a situation where the governing statute itself allowed for holding company directors liable. Indeed, at Para. 13 of Maksud Saiyed, the Court states: “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.”

Thus, it may be said that the ratio of Maksud Saiyed is limited to the proposition that Directors can be held liable for offences committed by their companies only where the governing statute permits that by way of an express provision. It may, of course, be argued that the lack of such provision in the IPC is simply a lacuna on the part of the drafters, and so should be ignored. However, addressing this specific point, Avnish Bajaj pointed out that other statutes such as the IT Act and the Negotiable Instruments Act incorporated such provisions; and even more importantly, the Parliament had chosen not to amend the IPC to insert director’s liability. This, coupled with the requirement that criminal statutes must be construed strictly, meant that director’s liability could not possibly be read into the IPC. In the words of Avnish Bajaj, “if and when a statute contemplates creation of such a legal fiction, it provides specifically therefore.”

Lastly, it may be noticed that the decisions in Everest Advertising Pvt. Ltd. v. State (Govt. of NCT of Delhi and Ors.) and S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, both Supreme Court judgments of 2007, have imposed liability upon directors only under the express provisions of Sections 138 and 141 of the Negotiable Instruments Act, thus lending implicit support to the decision in Maksud Saiyed. Furthermore, Maksud Saiyed has been affirmed in the cases of Ashok Sikka v. State and R.C. Gupta and Ors. v. State and Anr. (two 2008 judgments where the Delhi High Court expressly held that there mere statement that certain persons were directors of a company would not be enough to attach liability), and the 2008 Supreme Court case of S.K. Alagh v. State of UP and Ors. The current position of law, therefore, does not admit of much doubt.


Anonymous said...

Reference to the latest judgment of Supreme Court in Aneeta Hada v. M/s Godfather Travels & Tours Private Limited, would offer additional assistance on the topic.

Gautam Bhatia said...

In the case of Aneeta Hada v. Godfather Travels and Tours Pvt. Ltd, the statute in question was the Negotiable Instruments Act. Paragraph 13 of Sinha J.'s judgment is especially instructive:

"Section 141 of the Act raises a legal fiction. Such a legal fiction can be raised only when the conditions therefor are fulfilled; one of it being that company is also prosecuted."

Therefore, this case impliedly supports the position of law existing, namely that directors can be held criminally responsible for misdemeanours of companies only when the statute has a provision that permits the same.