Gone are the times when the world viewed Indian Companies as ‘family businesses’. With time, the structures adopted in Indian companies have grown increasingly specialized and complex, with specific directors being nominated to take charge of specified activities of the Company. As we will see, the provisions for making the direction and management of a company liable are mostly deeming provisions. However, there can be an opinion amongst stakeholders while dividing duties amongst the board members that in case criminal liability arises against the company then the director nominated for overlooking that aspect of its business shall also be held criminally liable. The legal approach, though, is a little more complex than that.
This article is a disambiguation in this regard, and through the following paragraphs an understanding of the theoretical framework, the legislative intent and the judicial interpretations in developing the standards to impose criminal liability on directors will be discussed. As companies have grown with time, so have statutory provisions and the understanding with respect to corporate actions which amount to criminal offences, and who is deemed liable for it.
Laying the Theoretical Framework: Corporate Criminal Liability
The recognition of the company as a separate legal entity is the basic cornerstone of laws relating to corporate liability around the world. However, courts struggled in attempting to fasten liability over companies for acts which were considered criminal offences. The courts had historically struggled on two main fronts in this regard (1) to assign mens rea, i.e. a criminal intent factor to fictional entities such as companies, and (2) to punish corporates where statutory punishments were mostly corporal in nature, i.e. requiring punishment via imprisonment.
On the face of this need, emerged the doctrine of corporate criminal liability, which basically enables the courts to single out individuals responsible for criminal acts committed in the name of companies. For offences which did not require the proof of mens rea, the simple answer that courts came up with was to introduce a modified version of the Doctrine of Vicarious Liability through which the controlling persons of the company would be made liable[i]. But soon company directors were also brought to answer for the criminal acts for which criminal intent was also necessary to be proven[ii]. This was called the theory of ‘Identification’ or ‘Attribution’, a modified form of vicarious liability, where for the purpose of the criminal act, the person in control of the affairs of the company (that is to say its directors and managers) and the company were considered one and the same.
Earlier, the courts in India only recognized that companies can act through their managers and directors, but the law as it stands now however, consolidates the position that companies are as culpable as any living person and can be prosecuted and punished for the same, this is governed by two major decisions in this regard. First is the case of Standard Chartered Bank v. Directorate of Enforcement[iii] wherein the constitution bench of the Supreme Court held that a company can be prosecuted and convicted for an offence requiring minimum imprisonment. And secondly, in Iridium India Telecom Ltd. v. Motorola Inc[iv], wherein the issue was whether a company could be held liable under Section 420 of the Indian Penal Code, 1860, the Apex Court answered in the affirmative and clarified further, that even if the offence would require the proof of mens rea, a company can be made liable to the act as the guilty mind of the person in control of the company’s affairs is ‘attributed’ to the company as well.
Director’s Liability under India’s Legislative Framework
The Companies Act, 1956 employed the concept of “officer who is in default”, to impose the liability for defaults by a company over officers responsible for its management. However, penalties under the Companies Act, 1956 were seen as largely ineffective against cases of serious internal frauds committed by the promoters and senior management of companies. But, with the enactment of the Companies Act, 2013 ( the “Act”), came also the statutory recognition of the duties of a director, such as exercise of due and reasonable care, skill, diligence, and independent judgement. Earlier, by virtue of their positions, only the MD, whole-time directors, and company secretaries used to fall within the scope of “officer who is in default”, but the Act has significantly expanded this scope to include any person who would, in the given scenario, have had superintendence/ control/ direction/ management over the affairs of the company. Under the Act, independent directors can also be made answerable for lapses in performing their duties. The Act also includes the elements of knowledge and intent in determining who is an officer who is in default. Moreover, section 447 of the Act, which deals with fraud, makes persons liable who act or abuse their position with intent to deceive, to gain undue advantage, or to injure the legitimate interests of others (company/ shareholders/ creditor/ persons) whether or not there is wrongful gain or loss. Nevertheless, it is necessary to prove intent and knowledge in most cases.
Apart from the Companies Act, 2013, offences by companies are also stipulated under various other legislations. These provisions extend the liability for contravening the provisions under the relevant statute to companies, and the persons in charge of and responsible for the conduct of the business of the company. Further, these provisions typically provide for a non-obstante clause which stipulates that if it is proved that the director, manager, secretary or other officer of the company connived, consented to the offence or can be attributed to the negligence, then such director, manager, secretary or other officer shall also be deemed guilty and proceeded and punished accordingly.
Some of the legislations that contain the above-mentioned provision would be as follows:-
- the Air (Prevention and Control of Pollution) Act, 1981;
- the Water (Prevention & Control of Pollution) Act, 1974;
- the Prevention of Money Laundering Act, 2002;
- the Securities Contracts (Regulation) Act, 1956;
- the Securities Exchange Board of India Act, 1992;
- the Competition Act, 2002; and
- the Income Tax Act, 1961.
The question that arises basis the above discussion, then, is whether any person simply designated as an officer in default by the Company, can be held criminally liable.
In Sunil Bharti Mittal v. Central Bureau of Intelligence[v] the Supreme Court gave recognition to the theory of attribution/ identification in determining whether a director or person in charge of the company can be prosecuted for an offence by the company. The court stated that the person upon whom the acts of the company must be attributed must be the ‘alter-ego’ of the company, that is the degree of identity between the acts of the company and the ‘directing mind and will’ of the responsible persons must be high enough for the courts to infer them as one and the same. Moreover, just because a person is at the helm of the affairs, that would not make him/her liable for crimes requiring intent. In this case, the Supreme Court held that the special court was right to not accept charge sheet against the managing director just because he was the head of the company.
The discerning criteria thus is whether the proof of intent is required to prove an offence. An officer who is in default for contraventions which do not require proof of intent, may, thus, be prosecuted by virtue of his/her position, but the same is simply not tenable in offences where proof of intent is required.
An example of a statute which allows the nomination of person-in-charge for the obligations under a legislation is under section 66 of the Food Safety and Standards Act, 2006,. The provision in this enactment state that a director or manager can be nominated to be responsible for any contraventions of the provisions of the respective enactments.
It is to be noted, that only when the legislation permits the nomination of the responsible director, and such nomination is made before the commission of the offence, only then a director specifically nominated for offences under an act can be prosecuted, even if there is no direct intent[vi].
The thumb rule is thus that unless it is specifically provided in a statute, a director may be made criminally liable only if there is existing proof of intent against the director. The directors must ensure that they diligently avoid the commission of such offences in the name of the Company, the onus shall nevertheless remain upon them to prove that the offence was committed without their knowledge or consent[vii].
The laws are changing in their focus from structural to functional aspects of the companies in determining criminal liability, for example, the 2018 amendment to the Prevention of Corruption Act, 1988 brings forth a stricter provision for liability of any director/manager/other officer who “acted in consent or connivance” with the commercial organization (which includes a company) in the commission of an offense under the legislation. The position of the officer in the company would thus be less important to fasten the liability, and whether the company had standards/code of conducts in place to demand the level of diligence and care from its officers in preventing the offence from being committed will also be a factor under the Prevention of Corruption Act, 1988.
It is now more important than ever that companies must actively develop standards of accountability from each level of key people responsible within the organisation and adopt procedures which prevent such conduct in the first place.
[i] Queen v. Great North of England Railways Co.,  9 QB 315; State v. Morris & Essex Rail Co., 23 N.J.L. 360 (1852); Commonwealth v. Proprietors of New Bedford Bridge, 68 Mass (2 Gray) 339 (1854)
[ii] New York Central and Hudson River Rail Road Co. v. United States, 212 US 431 (1909); Moussell Brothers Ltd. v. London & North West Railway Co Ltd,  2 KB 836; Lennard's Carrying Co Ltd v. Asiatic Petroleum Co Ltd,  AC 705
[iii] AIR 2005 SC 2622
[iv] (2011) 1 SCC 74
[v] AIR 2015 SC 923
[vi] R. Banerjee v. H.D. Dubey, MANU/SC/0731/1992
[vii] Ministry of Agriculture v. Mayhco Monsanto Biotech (India) Limited, (2016) 137 SCL 373 [CCI]
Author: Avaneesh Satyang