India: Director Liability: Supreme Court Quashes Case Against Managing Director

Last Updated: 23 September 2019
Article by Mohammad Kamran and Ashish Kabra

The Supreme Court ("Court") in the recent case of Shiv Kumar Jatia v. State of NCT of Delhi, 1 quashed the criminal proceedings that were initiated only on the ground that the accused was the managing director of the company and that he was the only non-independent executive director of the company. The Court in this case reaffirmed its views set forth in the case of Sunil Bharti Mittal v. Central Bureau of Investigation 2 ("Sunil Bharti Mittal Case"), where it inter-alia held that de hors any vicarious liability provision, individual directors can be made accused only if there is sufficient material to prove their active role coupled with criminal intent.

Facts

The facts of the case relate to Hotel Hyatt Regency, New Delhi which is run by a public listed company, Asian Hotels (North) Limited ("Asian Hotels"). One of the guests who was at the hotel, went to the terrace of 6th Floor for smoking and suffered a fall. It was alleged that there was no light on the terrace and the hotel staff did not stop the guests from going there. Accordingly, there was lapse on part of the hotel management in taking proper safety measures for the guests and allowing them to smoke in an area which was not safe.

The investigation agency charged the managing director, general manager and other employees of the company for offences under Section 336 3 (act endangering life or personal safety of others) /338 4 (causing grievous hurt by act endangering life or personal safety of others) read with Section 32 5 (words referring to acts include illegal omissions) of the Indian Penal Code, 1860 ("IPC"). In other words, the case was made for criminal negligence endangering life or personal safety and for causing grievous hurt due to criminal negligence endangering life or personal safety and a charge sheet was filed by the investigation agency. In addition to Section 336/338 of IPC, the accused persons were also sought to be prosecuted under Section 4 6 of the Cigarettes and other Tobacco Products (Prohibition of Trade and Commerce, Production, Supply and Distribution) Act, 2003 ("COTPA").

The managing director and the general manager filed petitions under Section 482 of the Code of Criminal Procedure, 1973 ("CRPC") before the Delhi High Court ("DHC") for quashing of the aforesaid proceedings initiated against them. However, the DHC held that it was not proper to quash the proceedings against the said accused persons. Both the accused persons thereafter challenged the order of the DHC before the Court.

Judgment

The Court referred to its judgment in the Sunil Bharti Mittal Case. In this case, it was held that, in the absence of a vicarious liability provision in the statute, an individual who acts on behalf of the company can be made an accused, along with the company, only if there is sufficient evidence of his active role coupled with criminal intent. The Court in the present case held that though there are allegations of negligence on part of hotel and its officers who were incharge of day to day affairs of the hotel, so far as managing director was concerned, no allegation was made directly attributing the negligence with the criminal intent. Placing reliance upon its judgment of Maksud Sayed v. State of Gujarat & Ors. 7 Court held that the penal code does not contain any provision providing for vicarious liability of directors, and even if it did, the complaint must make requisite allegations bringing the vicarious liability provision in play. Further relying upon the judgment in Sharad Kumar Sanghi v. Sangita Rane 8 the Court held that the allegations against directors and managing director cannot be vague in nature else they can be a ground for quashing of proceedings under Section 482 of CRPC.

In the present case, the Court observed that principally the allegations were made only against the company and other staff members who were incharge of day to day affairs of the company. So far as the managing director, the allegations were that he was attending all the meetings of the company and various decisions were being taken under his signatures. This, the Court held was clearly a vague allegation and does not establish any link between the managing director and the act/omission alleged. Hence, the Court quashed the proceedings so far as the managing director was concerned.

The Court however, did not quash the proceedings against accused no.4 who was the general manager of the hotel. He pleaded that he too was out of country on the date of incident but the Court held that general manager stands on a different footing than that of, Managing Director. It would be a matter of trial to assess whether any in charge arrangements were made for his responsibilities etc.

Analysis and conclusion

The present judgment gives credence to the long standing jurisprudence that has developed over the years in relation to liability of directors. Broadly, there are two ways in which liability can be fastened on directors for the acts of the company:

(1) Vicarious liability provided under different statutes. This can be further divided into three       categories:

  1. Companies Act, 2013: primarily the Companies Act hold "officer in default" liable for most of the violations. The term 'officer in default' includes any whole-time director, key managerial person, person on whose advice board is accustomed to act, director with whose consent and connivance the default took place, etc. In some cases, specific individuals (such as director in charge of finance, company secretary) are identified who shall be held liable for violation of certain provisions. 9
  2. Vicarious liability provisions under different statutes: these provisions are found in many statutes. 10 Primarily, they hold persons who, at the time of contravention, were in charge of, and responsible for the conduct of the affairs of the company liable or with whose consent or connivance the offence is committed.
  3. Specific Liability on certain persons under statutes: Some statutes provide for liability of certain designated individuals. 11

(2) If no express provision providing for vicarious liability of directors exists, then the individuals       can be prosecuted only if there is direct evidence of their role active role along with criminal       intent.

Since, IPC does not contain any vicarious liability provision, liability for crimes under IPC can only stem from point (2) above, i.e. only if the director has committed the act coupled with the intention. Investigation agencies however, have continued to remain oblivious to this jurisprudence. Directors of the companies get rounded up and proceeded against for crimes under IPC simply on account of being a director. Hence, to ensure that innocent individuals who act as directors of the company are not harassed and trapped in protracted criminal litigations, there is a strong need to sensitize all investigative agencies regarding this law.

Footnotes

1 Criminal Appeal No. 1263 of 2019

2 (2015) 4 SCC 609

3  S. 336, The Indian Penal Code, 1860 Act endangering life or personal safety of others 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

4 S. 338, The Indian Penal Code, 1860 Causing grievous hurt by act endangering life or personal safety of others Whoever causes grievous hurt to any person to 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.

5S. 32, The Indian Penal Code, 1860 Words referring to acts include illegal omissions In every part of this Code, except where a contrary intention appears from the context, words which refer to acts done extend also to illegal omissions.

6 S. 4, Cigarettes and other Tobacco Products (Prohibition of Trade and Commerce, Production, Supply and Distribution) Act, 2003: No person shall smoke in any public place provided that in a hotel having thirty rooms or a restaurant having seating capacity of thirty persons or more and in the airports, a separate provision for smoking area or space may be made

7 (2008) 5 SCC 668

8 (2015) 12 SCC 78

9 S. 128(6) The Companies Act 2013: If the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with the duty of complying with the provisions of this section, contravenes such provisions, such managing director, whole-time director in charge of finance, Chief Financial officer or such other person of the company shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to Five lakh rupees or with both.

10 See for example: S. 141(2) of Negotiable Instruments Act, 1881. where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly S. 27, Securities and Exchange Board of India Act 1992: 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 accord-ingly: Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence. Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly

11 S. 128(6) The Companies Act 2013, S. 42(2) Foreign Exchange Management Act 1999 where a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions