Tag Archive for: Companies Act 2013

Introduction:

It is well established that a company, being an artificial legal entity, conducts its day-to-day operations through a collective body of individuals known as the Board of Directors. This body bears direct responsibility for the company’s functioning and decision-making. Consequently, in instances of default, both the company and its directors are often held accountable. Under Section 2(60) of the Companies Act, 2013 (hereinafter referred to as “the Act”), directors can be designated as “officers who are in default,” thereby making them personally liable in specific situations.

Despite its artificial nature, a company is recognized as a separate legal entity under the law. Therefore, for any offence committed by a company, it is primarily the company itself that is liable to face legal consequences. However, this fundamental principle is sometimes overlooked, and directors are held accountable for the corporation’s adverse actions. This stems from the perception that directors act as the “mind” of the company and control its operations.

Recently, the Supreme Court of India, in Sanjay Dutt & ORS. v. State of Haryana & ANR (Criminal Appeal No. 11 of 2025), reaffirmed the distinction between the company’s liability and that of its directors. This decision underscores the importance of adhering to the principle of separate legal personality, ensuring that directors are not unfairly held liable unless their personal involvement or negligence in the offence is established.

Brief facts of the Case: 

The case under discussion revolves around a complaint lodged under the Punjab Land Preservation Act, 1900 (PLPA) against three directors of a company, alleging environmental damage caused by uprooting trees using machinery in a notified area. The appellants (directors of Tata Realty and related entities) sought to quash the complaint, asserting that the alleged actions were conducted by the company and not attributable to them personally. The complaint, however, excluded the company as a party and focused on the directors’ liability under Section 4 read with Section 19 of the PLPA.

Key observations by the Supreme Court:

1. Primary Liability of the Company: The Court emphasized that the company itself, as the licensee and beneficiary of the land, was primarily liable for any violations. Excluding the company from the complaint undermined the case’s premise.

2. Vicarious Liability Not Automatic: The Court reiterated that directors cannot be automatically held vicariously liable unless the statute explicitly provides for such liability or there is evidence of their personal involvement in the offence.

3. Lack of Specific Allegations: The complaint failed to attribute specific actions or responsibilities to the directors. It merely assumed liability based on their official positions, which is insufficient for criminal prosecution.

4. Legal Fiction Requires Explicit Provision: Vicarious liability in criminal matters requires clear statutory backing. The PLPA contains no provisions imposing vicarious liability on directors for offences committed by the company.

Understanding the Concept of Vicarious Liability:

The concept of vicarious liability allows courts to hold one person accountable for the actions of another. This principle is rooted in the idea that a person may bear responsibility for the acts carried out by someone under their authority or on their behalf. In the corporate context, this doctrine extends to holding companies liable for the actions of their employees, agents, or representatives.

Initially developed within the framework of tort law, the doctrine of vicarious liability later found application in criminal law, particularly in cases involving offences of absolute liability. This marked a departure from the once-prevailing notion that corporations, as artificial entities, could not commit crimes. Modern legal interpretations now recognize that a corporation may be held criminally liable if its human agents, acting within the scope of their employment, engage in unlawful conduct.

Doctrine of Attribution:

Currently, a company does not have the immunity to safeguard itself under the blanket of laxity of mens rea, an important component for the constitution of a criminal intent. It was established that corporations are  liable for  criminal and civil wrongdoings if the offences were committed through the corporation’s ‘directing mind and will’. This attribution of liability to the corporations is known as the ‘Doctrine of Attribution’

‘Doctrine of Attribution’ says that in the event of an act or omission leading to violation of criminal law, the mens rea i.e. intention of committing the act is attributed to those who are the ‘directing mind and will’ of the corporations. It can be said that Doctrine of Attribution is a subset of Principle of Vicarious Liability wherein a corporation can be held responsible even in case of a criminal liability.

The landmark judgment in H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons Ltd., (1957 1 QB 159) provided a foundational understanding of corporate liability. The court compared a corporation with a human body, with its directors and managers representing the “mind and will” of the organization. These individuals dictate the company’s actions and decisions, and their state of mind is legally treated as that of the corporation itself. Employees or agents, by contrast, are viewed as the “hands” that execute tasks but do not represent the company’s intent or direction.

This conceptual framework underscores that while corporations are artificial entities, they can be held criminally liable when those who embody their directing mind commit offences. The recognition of corporate criminal liability has since evolved, balancing the need for accountability with the distinction between the roles of employees and the decision-makers within an organization.

You can read more about the corporate criminal liability here.

Analyzing the Sanjay Dutt Judgment:

1. Liability must be expressly mentioned

In the present case, the Court underscored the principle that vicarious liability cannot be imposed on directors or office-bearers of a company unless explicitly provided by statute. This was reiterated in Sunil Bharti Mittal v. Central Bureau of Investigation, (AIR 2015 SC 923) where it was held that individual liability for an offence must be clearly established through direct evidence of involvement or by a specific statutory provision. Without such statutory backing, directors cannot be presumed vicariously liable for a company’s actions.

The Court further emphasized that statutes must clearly define the scope of liability and the persons to whom it applies. This clarity is essential to prevent ambiguity and ensure that only those genuinely responsible for the offence are held accountable.

2. Personal involvement of Directors :

The Court reaffirmed that corporate liability does not inherently extend to directors unless supported by statutory provisions or evidence of personal involvement. In Pharmaceuticals Ltd. v. Neeta Bhalla and Anr. (AIR 2005 SC 3512), it was held that directors are not automatically vicariously liable for offences committed by the company. Only those who were directly in charge of and responsible for the conduct of the company’s business at the time of the offence may be held liable.

The judgment further emphasized that liability must stem from personal involvement or actions beyond routine corporate duties. Routine oversight or general authorization does not suffice to establish criminal liability unless it can be shown that the director personally engaged in, or negligently facilitated, the unlawful act.

3.  ‘In charge of’ and ‘responsible to’

In K.K. Ahuja vs V.K. Vora & Anr. (2009 10 SCC 48), the Supreme Court analysed the two terms often used in vicarious liability provisions, i.e., ‘in charge of’ and ‘responsible to’. It was held that the ‘in-charge’ principle presents a factual test and the ‘responsible to’ principle presents a legal test. 

A person ‘responsible to’ the company might not be ‘in charge’ of the operations of the company and so in order to be vicariously liable for the act, both the principles must satisfy. It stated as, “Section 141 (of the Negotiable Instrument Act, 1881), uses the words “was in charge of, and was responsible to the company for the conduct 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.”

4. The Complainant’s Burden of Proof:

Under Section 104 of the Bharatiya Sakshya Adhiniyam, 2023, the burden of proof lies on the complainant. It is the complainant’s responsibility to make specific allegations that directly link a director’s conduct to the offence in question. This principle was reiterated in Maksud Saiyed v. State of Gujarat (AIR 2007 SC 332), where the Court held that vague or generalized accusations against directors are insufficient.

A valid complaint must include:

1. Clear and specific allegations detailing the director’s role in the offence.
2. Evidence linking the director’s actions to the company’s criminal liability.
3. Statutory provisions or legal grounds for attributing vicarious liability.

Referring to Susela Padmavathy Amma and M/s Bharti Airtel Limited (Special Leave Petition (Criminal) No.12390-12391 of 2022), wherein it was reaffirmed by the Supreme Court that even when statutes explicitly provide for vicarious liability, merely holding the position of a director does not automatically render an individual liable for the company’s offences.

To establish a director’s liability, the Court emphasized the need for specific and detailed allegations that clearly demonstrate the director’s involvement in the offence. It must be shown how and in what manner the director was responsible for the company’s actions.

The Court further clarified that there is no universal rule assigning responsibility for a company’s day-to-day operations to every director. Vicarious liability can only be attributed to a director if it is proven that they were directly in charge of and responsible for the day-to-day affairs of the company at the time the offence occurred.

5. MCA Directive to RD and ROCs: Circular Dated March 2, 2020:

It’s noteworthy that, even MCA, vide its General Circular no. 1/2020 dated 2^nd March, 2020, directed Regional Directors and Registrar of Companies that at the time of serving notices relating to non-compliances, necessary documents may be sought so as to ascertain the involvement of the concerned officers of the company.

6. Duties of Directors under the Companies Act, 2013

Section 166 of the Act lists down duties of directors of a company. To summarise, directors must adhere to the company’s articles, act in good faith for members’ benefit, exercise due care and independent judgment, avoid conflicts of interest, undue gain. However, of note, it does not mention that a director shall be responsible for all the affairs of a company. 

In addition to the above case, the following related judgements are also noteworthy:

1. Pooja Ravinder Devidasani vs. State of Maharashtra and another, (2014) 16 SCC 1: In this case, the Court asserted that, only those persons who were in-charge of and responsible for the conduct of the business of the Company at the time of commission of an offence will be liable for criminal action.

2. S.M.S. Pharmaceuticals Ltd. vs Neeta Bhalla and another, (2005) 8 SCC 89: the Court considered the definition of the word “director” as defined in Section 2(13) of the Companies Act, 1956. It held that “…There is nothing which suggests that simply by being a director in a company, one is supposed to discharge particular functions on behalf of a company. It happens that a person may be a director in a company but he may not know anything about the day-to-day functioning of the company…”.

3. SEBI vs. Gaurav Varshney, (2016) 14 SCC 430: The Court held that even a person without any official title or designation such as “director” in a company may still be liable, if they fulfill the main requirement of being in charge of and responsible for the conduct of business at the relevant time. Liability is contingent upon the role one plays in the affairs of a company, rather than their formal designation or status.

4. Maharashtra State Electricity Distribution Company Limited and Anr., v. Datar Switchgear Limited and Ors., (10 SCC 479): The Supreme court held that wherever by a legal fiction the principle of vicarious liability is attracted and a person who is otherwise not personally involved in the commission of an offence is made liable for the same, it has to be specifically provided in the statute concerned and it is necessary for the the complainant to specifically aver the role of each of the accused in the complaint.

Vicarious liability must be explicitly provided for in the statute and supported by clear evidence of personal involvement and criminal intent. Also, it is necessary for the complainants to make specific averments in the complaints.  

Conclusion:

The above judgments reinforces the principle that corporate and individual liabilities are distinct. Vicarious liability of directors is not presumed and can only be imposed with statutory backing or compelling evidence of personal involvement. By placing the burden of proof on the complainant, the judiciary ensures fairness and prevents misuse of the legal system to harass directors without substantive evidence. This balanced approach safeguards both corporate governance and individual accountability.

You can read more about this subject here.