Friday, May 7, 2010

Vicarious Liability for a Company's Offences

The Delhi High Court, in Vishnu Prakash Bajpai v. SEBI, seems to have widened the scope of the vicarious liability of persons for offences by companies, under section 27 of the Act. The issue came before the Court by virtue of a petition for quashing of criminal proceedings, under section 482 of the CrPC filed by Mr. Bajpai. The crux of the matter was the level of involvement required to be established in order to render a person vicariously liable under section 27 of the SEBI Act.

The provision in question reads-

Where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly ... [emphasis supplied]

The meaning the highlighted phrase was recently considered by the Supreme Court in K.K. Ahuja v. V.K. Vohra, (2009) 10 SCC 48. The Court there was primarily concerned with vicarious liability under section 141 of the Negotiable Instruments Act. However, the language of that provision and section 27 of the SEBI Act being virtually identical, the Court’s findings would be of great relevance here. The Court provided a list of persons who may satisfy the statutory test of vicarious liability, one of which was-

(e) any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act;

The Supreme Court went on to observe that-

It is evident that a person who can be made vicariously liable ... is a person who is responsible to the company for the conduct of the business of the company and in addition is also in charge of the business of the company. There may be many directors and secretaries who are not in charge of the business of the company at all ... a person may be a director and thus belongs to the group of persons making the policy followed by the company, but yet may not be in charge of the business of the company; that a person may be a Manager who is in charge of the business but may not be in overall charge of the business; and that a person may be an officer who may be in charge of only some part of the business.

Thus, what emerges from the decision of the Supreme Court is that the test to be employed in determining vicarious liability is functional, and that the position of the person within the organisation cannot be conclusive. On the facts of Vishnu Prakash Bajpai, the only admitted fact was that he was a promoter of the company. There was a factual dispute over whether he was a director, since Form 29 and Form 32 did not contain his name as a director, while a letter written by the company to the SEBI did contain his name as a director. On this basis, the Court concluded that, on a quashing petition under section 482, it was not apposite for it to examine questions of fact. Since was “quite possible for the complainant/respondent to establish, during trial that being a promoter of the company, the petitioner was a person in accordance with whose directions the Board of Directors ... was accustomed to act”, the Court dismissed the quashing petition.

Admittedly, given the nature of the proceedings, it was not for the Court to look into detailed questions of evidence, and only determine the prima facie strength of the complainant/respondent’s contentions. However, on a reading of the judgment, it does not appear that any of the facts relied on by the respondent dealt with the role played by the petitioner in the affairs of the company, other than his post as a promoter, or his alleged position as a director. The Court also relies very heavily on the petitioner’s position as a promoter, believing it to be an important factor in determining vicarious liability. The only issue with this approach is that it leaves the door open for criminal complaints to be filed against anyone associated in whatsoever capacity with a company, on the mere “possibility” that he is the person in accordance with whose directions the Board acts. While the threshold for quashing a criminal complaint is undoubtedly high, none of the contentions of the respondent/complainant were based on facts suggesting such a relationship between the Board and Vishnu Prakash Bajpai. Thus, this decision certainly seems to lower the standard required to maintain a complaint under section 27, and similar provisions, and also possibly, lowers the standard required for establishing such vicarious criminal liability.

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