[Guest post by Rahul Bajaj, a final year law student at the University of Nagpur and a SpicyIP fellow]
The issue of corporate criminal liability has always been a vexed one, raising as it does profound jurisprudential questions that go to the heart of the separate legal status enjoyed by companies.
As Professor Varottil noted in his analysis of the Sunil Bharti Mittal judgment on this Blog that can be found here, the concept of corporate criminal liability covers within its fold two distinct sets of circumstances: first, when the company can be held liable for the acts of its directors by virtue of the principle of attribution and, second, when directors can be held liable for the acts of the company through the application of the principle of vicarious liability.
Insofar as the second issue is concerned, through its two significant judgments that continue to hold the field today — Sunil Bharti Mittal versus v. CBI (analyzed here) and Maksud Saiyed versus v. State of Gujarat (analyzed here) — the Supreme Court has made it clear that: (1) directors cannot be held vicariously liable for the acts of a company unless there is a statutory basis for the same; and (2) the principles of attribution and vicarious liability operate in entirely different spheres.
Against this backdrop, I would like to analyze a recent Supreme Court judgment in K. Sitaram v. CFL Capital Financial Service Ltd., which throws up several interesting questions about the practical application of these principles in different fact situations.
The respondent-complainant company, CFL Capital Financial Service Ltd., borrowed a loan of Rs. 900 lakhs (comprising Rs. 180 lakhs cash credit and Rs. 720 lakhs working capital) from a consortium of banks led by the State Bank of Travancore. Since the respondent failed to repay the loan in the prescribed timeframe, it became a non-performing asset. As a result, the State Bank of Travancore instituted proceedings before the Debt Recovery Tribunal (DRT) against the respondent in 2003 which resulted in a partial decree in its favour in 2005.
Very significantly, on 29 March 2006, the State Bank of Travancore assigned the loan amount due to it from the respondent to Kotak Mahindra Bank. On 11 January 2007, the respondent assigned to the Kotak Mahindra Bank, which was one of its advisors as per a previous agreement, a debt of almost 32 crores due to it from one Ravishankar Industries with the agreement that any recovery in excess of 90 lakhs would be shared equally between the Kotak Mahindra Bank and the respondent. The factum of the assignment of the debt by the State Bank of Travancore to Kotak Mahindra Bank dated 29 March 2006 came to the knowledge of the respondent only on 17 January 2007 when it accessed an application filed by the Kotak Mahindra Bank for substituting itself in place of the State Bank of Travancore before the DRT.
Thereafter, the Kotak Mahindra Bank withdrew two criminal complaints filed by the respondent against Ravishankar Industries and filed an application for the recovery of 50% of the amount received in excess of Rs. 90 lakhs from Ravishankar Industries. The respondent then filed criminal complaints against Kotak Mahindra Bank and its officers, which was quashed by the additional sessions judge by way of an order passed in April 2008.
Undeterred, the respondent filed a fresh complaint against State Bank of Travancore and Kotak Mahindra Bank and its officers under sections 409, 418, 423, 425 and 120-b of the Indian Penal Code (IPC), which resulted in issue of process through an order dated 25 January 2008. On 11 May 2008, the Magistrate quashed the issuance of process against officers of Kotak Mahindra Bank by virtue of the respondent withdrawing its complaint against them.
Since the appeal of the officers of the State Bank of Travancore against the issuance of process was dismissed by the High Court, they filed a special leave petition before the Supreme Court.
Arguments of Parties
Before the Supreme Court, the appellants advanced the main arguments in support of the proposition that the criminal complaint lodged against them should be quashed.
First, they contended that they were not employed by the State Bank of Travancore on the date of signing of the assignment deed viz. 29 March 2006. Since the decision to enter into the agreement was taken by the Bank’s Executive Committee and they did not actively participate in the same, they argued that they cannot be held liable for the same.
Second, the appellants argued that since the respondent had withdrawn its complaints against directors of the Kotak Mahindra Bank, criminal proceedings against the appellants could not be allowed to continue. Since directors of both companies were accused of the same illegal acts, they ought to be treated on the same footing insofar as criminal proceedings against them are concerned.
Finally, relying on the Supreme Court’s judgments in Maksud Saiyed and Sunil Bharti Mittal, the appellants argued that it is a well settled principle that directors cannot be held vicariously liable without a provision to that effect being statutorily engrafted. Since there is no statutory basis for the respondent’s allegations as to the appellants’ liability, they reasoned, proceedings against the appellants should be quashed.
On the other hand, the State argued that appellant no. 1 was the managing director of the bank on the date of the agreement and was tasked with the responsibility of handling its day-to-day affairs. Similarly, appellant no. 2 was the Bank’s deputy general manager on the relevant date and signed the assignment deed. Not only did the appellants collude with officers of the Kotak Mahindra Bank to defraud the respondent, the State argued, but they also violated clause 2.3 of the assignment deed in accordance with which they were duty-bound to inform the respondent about the assignment. In light of the fact that they were granted custody of the respondent’s property, their actions amounted to cheating and criminal breach of trust.
Decision of Court
At the outset, the court noted that both the State Bank of Travancore and Kotak Mahindra Bank had failed to inform the respondent about the assignment deed, because of which the same came to the knowledge of the respondent a full nine months after its signing. Since a bare perusal of clause 2.3 of the assignment deed indicated that both parties were duty-bound to inform the respondent about the assignment, the Court held, it was difficult to fathom why the banks did not discharge this obligation.
I quote the relevant portion of para 21 of the judgment, which directly addresses the issue that forms the subject matter of this post:
a corporate entity is an artificial person which acts through its officers, Directors, Managing Director, Chairman, etc. If such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company that too when the criminal act is that of conspiracy. Thus, an individual who has perpetrated the commission of an offence on behalf of the company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent. Second situation in which an individual can be implicated is in those cases where the statutory regime itself attracts the doctrine of vicarious liability, by specifically invoking such a provision.
Insofar as the appellants’ contentions that they were not employed by the company on the date of signing of the assignment deed is concerned, the Court negatived this contention by holding that they were responsible for the day-to-day management of the company. Since Appellant no. 1 was employed by the company on 29 March 2006 and appellant no. 2 signed the assignment deed, the Court arrived at the prima facie conclusion that they had a role to play in the respondent being kept in the dark about the assignment deed.
That said, in light of the fact that the respondent had withdrawn its complaint against directors of the Kotak Mahindra Bank, the court held that the appellants ought to be treated on the same footing and resultantly quashed the complaint against them.
While the judgment largely involves the application of well settled principles to the fact situation obtaining in this case, one aspect that merits emphasis is the legal substratum upon which the court’s prima facie conclusion as to the appellants’ guilt is founded. More specifically, given that it was nobody’s argument that the appellants would be vicariously liable owing to any statutory provision in this case, it is clear that the court applied the first of the two tests delineated by it in para 21 of its judgment, viz. active role coupled with criminal intent.
While para 21 of the judgment reiterates the principle outlined in Sunil Bharti Mittal (by using the same language without citation, I might add), the court does not factor into its analysis the following sentence in Mittal which appears immediately after the para it quotes: “when the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect.”
Therefore, not only is the jurisprudential basis of the first test unclear, but it is also difficult to understand how these two tests, i.e. active role coupled with criminal intent and statutory basis interact with each other and operate in practice. Further, since the first test applied by the court in this case requires that the officer should play an active role for her to be liable, it is difficult to understand how the court could have arrived at a prima facie finding as to appellant no. 1’s guilt, given that he was merely an employee of the company on the relevant date and did not play any meaningful role in the signing of the agreement. If being an employee is sufficient for attracting vicarious liability, wouldn’t this defeat the very purpose of requiring the person in question to play an “active” role?
Further, the court also does not pay any heed to the second part of the test viz. criminal intent before expressing its prima facie view. Assuming that signing the agreement (which is what appellant no. 2 did) satisfies the active role requirement, how does the same indicate an employee’s criminal intent? Wouldn’t the approach adopted by the court in this case render the second part of the test superfluous?
In conclusion, while this judgment may not have resulted in any immediate consequences, inasmuch as the proceedings against the appellants were quashed on a technical ground, it throws up a number of significant questions about corporate criminal liability which will hopefully be definitively answered by Indian courts in the near future.
- Rahul Bajaj