Vicarious liability is a doctrine by which a person can be held responsible for the actions of another when there is a legal or contractual relationship between the parties. In the context of companies, their key managerial personnel and investors, vicarious liability in India's criminal laws framework primarily refers to a situation where a person or entity (such as an employer or principal) is held liable for the unlawful acts of someone under their control, even though they may not have directly participated in or had knowledge of the offence.
The doctrine of vicarious liability is not expressly stipulated in Indian criminal statutes and has primarily developed and evolved through judicial interpretations – while it plays a crucial role in ensuring corporate accountability by holding employers and entities responsible for the wrongful acts of their employees or agents, Courts have consistently reinforced that the attribution of criminal liability is personal, unless otherwise specified in law. As such, the application of vicarious criminal liability, particularly in cases involving corporate liability and principal-agent/employee relationships, has been significantly shaped by a spate of judgments. Some of the notable decisions in this regard are :
- SK Alagh v. State of Uttar Pradesh:1 The Supreme Court held that since a company is a separate legal entity, a director cannot be held responsible for offences committed by the company unless it is specifically provided for in a statute. Criminal liability is personal and cannot be attributed to a director solely based on their position in the company without the existence of mens rea (guilty mind), which is an essential component of a criminal offence.
- Ashok Basak v. State of Maharashtra:2 The Supreme Court held that the concept of vicarious liability in criminal law does not automatically apply unless explicitly stated in the statute. Where the statute does not explicitly provide for such presumption against the director, the burden of establishing liability through evidence of intent or direct involvement in the alleged wrongdoing lies on the prosecution.
- Sunil Bharati Mittal v. CBI:3 The Supreme Court held that, unlike civil law, for an individual to be held criminally liable, there must be sufficient evidence of their active role coupled with criminal intent. Merely holding a senior position (such as chairman or managing director) in a company is not enough to presume liability. The Court cannot summon an individual based solely on the person's official designation without being satisfied about the prima facie involvement of the person in the alleged offence.
- Shiv Kumar Jatia v. State of NCT of Delhi:4 The Supreme Court held that there is no provision for holding a managing director vicariously liable for offences committed by the company or its employees unless there is clear evidence of personal negligence or criminal intent. Mere occupancy of a high-ranking position does not automatically entail criminal liability.
In addition to the restricted scope of application of vicarious criminal liability outlined by the Courts, establishing the same can often prove to be a challenge given the difficulty in linking the offence directly to higher officials of the corporate entity and establishing their mens rea (the mental state or intent to commit a crime). Additionally, vicarious liability does not apply to all offences and is often restricted to specific statutory provisions or offences committed in the course of employment. For example, in cases of strict liability offences (where guilty mind/negligence is not required to be proved), vicarious liability may not extend to criminal liability.
While India's criminal laws framework provides limited recognition of vicarious liability, the following statutory provisions provide for a specific application of the doctrine, attributing vicarious liability in particular circumstances:
- Corporate and employer liability: Under the Companies Act, 2013, the Prevention of Corruption Act, 1988 (PC Act), Negotiable Instruments Act, 1881, and other such laws, corporate entities and their officials (directors or managers) can be held vicariously liable for offences committed by their employees or agents if the offence was committed in the course of their duties. For example, in cases involving fraud, bribery, or corruption, both the company and its directors can be held liable, provided the offence is attributable to their consent, knowledge, or negligence. It will be interesting to see how Courts approach the question of attributing vicarious criminal liability in light of the fraud allegations currently plaguing several startups, especially where investors or board members may have limited direct involvement but substantial control or oversight responsibilities.
- Common intention: Section 34 of the erstwhile Indian Penal Code, 1860 (IPC) and Section 3(5) of the Bharatiya Nyay Sanhita, 2023 (BNS) provide for the concept of 'common intention' wherein for cases involving two or more individuals having committed an offence with a shared intention, each can be held responsible for the actions of the other, even if one individual did not directly engage in the criminal act. However, a mere allegation against a director or any senior official of a company in the complaint would not constitute common intention since it is premised on the existence of a pre-arranged plan between the individuals who are acting pursuant to such a plan.
- Unlawful assembly: Section 149 of the IPC and Section 190 of the BNS deal with the concept of 'unlawful assembly' that holds all members of an assembly criminally liable if the group engages in an offence, even if some individuals did not directly partake in the act, as long as it was part of the group's common object.
Foreign investors and vicarious liability risks
Foreign investors acquiring part ownership in Indian companies must be particularly cautious, as they can become subject to vicarious criminal liability for offences committed by the Indian entity or its personnel. This risk arises not only under Indian law but potentially under the domestic laws of the investor's home country – especially in cases involving corruption, fraud, or regulatory breaches. For example, under statutes like the US Foreign Corrupt Practices Act, 1977 or the UK Bribery Act, 2010, parent companies and their officials can face liability for corrupt practices carried out by subsidiaries or affiliates abroad, including those in India. Therefore, foreign investors and holding companies must exercise enhanced due diligence and institute strong compliance oversight over their Indian operations.
In light of a tightening regulatory framework and heightened governance expectations from businesses, certain mitigating steps have become essential. Corporate entities must adopt robust compliance frameworks, internal monitoring mechanisms, and ethical business practices to mitigate the risks associated with potential vicarious liability. Some of the best practices in this regard include:
- Comprehensive internal policies to ensure legal and regulatory compliance across all levels of the organisation.
- Due diligence and employee training to promote awareness of ethical and legal obligations, particularly among leadership and frontline personnel.
- Stronger oversight and reporting mechanisms to detect and address misconduct early, including whistleblower protection measures.
- Legal safeguards, such as indemnity clauses, directors' and officers' liability insurance, and contractual protections to shield directors and key personnel from unforeseen liabilities.
As corporate liability continues to evolve through legislation and judicial pronouncements, businesses must stay ahead of regulatory developments and take a proactive approach to governance. By doing so, they not only minimise legal risks but also enhance their reputation for integrity and accountability in an increasingly demanding global corporate environment.
Jishnujit Roy, Associate - https://www.linkedin.com/in/jishnujit-roy-02121995/overlay/photo/
Footnotes
1. (2008) 5 SCC 662
2. (2010) 10 SCC 660
3. (2015) 4 SCC 609
4. (2019) 17 SCC 193
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