By Dibisha Mishra (email@example.com; firstname.lastname@example.org)
While directors are the brain and neural control center of companies, but it is evident that the day to day affairs of companies are not run by the board of directors , or even the executive directors of companies. Under circumstances can directors be prosecuted, merely because they hold board positions, for something as operational as the lack of safety measures in a smoking zone in a hotel? The SC in a recent ruling of Shiv Kumar Jatia vs. State of NCT of Delhi has taken forward its earlier rulings in the case of Maksud Saiyed vs. State of Gujarat & Ors and Sunil Bharti Mittal vs. CBI, and has held the doctrine of vicarious liability cannot be applied to offences under the IPC unless specifically provided for.
The concept of a corporate structure is based on the very premise of a business idea brought into by a group of persons [also known as promoters], backed up with funds from shareholders and creditors and set to implementation by directors who are elected by the shareholders. While shareholders continue to hold certain decision making powers, the directors are broadly responsible for the functioning and performance of the company. Having said so, it is also to be understood that a director of a company is not always in charge of everyday affairs. It depends upon the respective role assigned to different officers in a company.
Liability of officers for offences under Companies Act
The Companies Act, 2013 (‘the Act’), has explicitly identified officers who are in default for the purpose of the Act which includes directors and KMP.
Further, Section 149(12)(ii) of the Companies Act 2013 provides that liability of a NEDs arises only with respect to such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. Hence, obligation is on the ROC to verify relevant information and records before initiating prosecution against independent or nominee directors.
However, it is to be noted that the above provisions are to be considered only where there has been any contravention with the provisions of the Companies Act while in case of other statutes, respective provisions is to be seen.
Liability for criminal felonies
When a Corporate gets accused of a criminal offence, the individual to be prosecuted for the same remains a matter of consideration. The extent of liability of Non-Executive Directors in case of offences has been discussed in our earlier article. The present article discusses the Supreme Court’s judgment on the case of Shiv Kumar Jatia vs. State of NCT of Delhi which quashed the impugned order of the High Court and freed the Managing Director from the criminal liability imposed on the basis of doctrine of ‘vicarious liability’.
Facts of the case:
Shiv Kumar Jatia is the Managing Director of M/s. Asian Hotels which looks after Hyatt Regency Hotel. He had authorized Mr. PR. Subramanian to apply for lodging license of the hotel.
There was a contravention the condition of the lodging license which led to a hotel guest enter into a semi lit under-construction terrace for smoking. The guest fell from the terrace of 6th floor to the 4th floor and got injured. Case was brought before the High Court which ordered for prosecution the Managing director along with the other three accused by relying on the case of Sushil Ansal vs. State through CBI.
Shiv Kumar Jatia appealed before the Apex Court against such impugned order of the High Court where the case was decided in his favour vide judgment dated 23rd August, 2019.
Provisions of law considered:
Alleged offences under Section 336 and 338 of the Indian Penal Code
“Whoever does any act so rashly or negligently as to endanger human life or the personal safety of others, shall be punished with imprisonment of either description for a term which may extend to three months, or with fine which may extend to two hundred and fifty rupees, or with both.”
“Whoever causes grievous hurt to any person by doing any act so rashly or negligently as to endanger human life, or the personal safety of others, shall be punished with imprisonment of either description for a term which may extend to two years, or with fine which may extend to one thousand rupees, or with both.”
Apex court stated that the essential elements to prove an alleged offence under section 336 are:
- an act
- done rashly or negligently
- to endanger human life or personal safety
while for section 338, the condition of grievous hurt is to be met in additional to elements in section 336.
Doctrine of vicarious liability
Under the doctrine of vicarious liability, one person is held responsible for the wrong doing of the other. Such liability arises only when both persons are somehow connected to each other like employee-employer relationship or principal-agent relationship. In case of corporates, the applicability of the said doctrine is to be determined on the basis of provisions of statute dealt with.
There is no vicarious liability unless the statute specifically provides so.
- The court referred to the judgment of Maksud Saiyed vs. State of Gujarat & Ors, where the Court held that the Penal Code does not contain any provision of vicarious liability on the part of the Managing Director/ Director of the company where the accused is a company.
- Further, the case of Sunil Bharti Mittal vs. CBI was also referred to wherein it was held that:
“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. It would be more so, when the criminal act is that of conspiracy. However, at the same time, it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so.”
This means where the statutory provision itself does not specifically attract the doctrine of vicarious liability, an individual cannot be implicated under the same.
Existence of Active Role and Criminal Intent
It was stressed that in the absence of any statutory provision incorporating vicarious liability, an individual cannot be made accused, unless there is a sufficient evidence of his ‘active role coupled with criminal intent’. Further such criminal intent must have direct nexus with the accused.
In the given case, the Managing Director was outside the country on the day of the accident. Moreover, mere authorizing an official for obtaining license cannot be construed to his active role with criminal intent. Hence, the same was also failed to be established before the Court.
The Apex Court held that there is no specific provision of applicability of doctrine of vicarious liability in the Indian Penal Code. Further, the allegations made on the Managing Director could not establish any active role coupled with criminal intent having direct nexus with the accused.
Concluding the same, the Court passed the judgment that the allegations made on the Managing Director was vague in nature and the criminal proceedings against Shiv Kumar Jatia as passed by the High Court were quashed.
Time and again the court have taken the view that merely because of holding the position as a director/managing director, a person cannot be vicariously held liable for offence committed by Companies. It has to be proved how he was responsible for, or in control of, or negligent in conducting the affairs of the company. In the absence of definite averments, a director cannot be deemed to be liable.