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Criminal Liability of Heads of Business in India

The world no more view Indian companies as ‘family businesses’. Internal structure of Indian companies has seen a rapid growth over the time with increase in specialization and complexity where specific directors take charge of specified activities of the company. Though the Act has specific provisions for making the direction and management of the company liable, however, while dividing the duties in case of criminal liability, stakeholders might hold the director nominated for overlooking that aspect of its business as criminally liable. In this article we will discuss the legal framework and judicial interpretation of the standards to impose criminal liability on directors. Companies have evolved and so have our statutory provisions and our understanding of the corporate actions in case of criminal offences and who shall be deemed liable for the same.
 

Corporate Criminal Liability:

Identifying a company as a separate legal entity has been basis of laws on corporate liability. However, the courts have struggled to impose liability over companies for the acts that come under the purview of criminal offence. Major hold back has been on two issues a) criminal intent factor to fictional entities such as companies (termed as mens rea) b) to punish corporates via imprisonment. To end this struggle, doctrine of corporate criminal liability has been introduced, which basically enables the courts to single out individuals who are responsible for criminal acts committed in the name of companies. In cases which did not require proof of mens rea, courts came up with simple solution by incorporating Doctrine of Vicarious Liability through which the controlling person of the company was made liable. However, soon the directors of the company were also brought under this concept. This was termed as theory of ‘identification’ or ‘attribution’ which is a modified version of vicarious liability. Under this the person who is in control of the affairs of company (directors and managers) and the company were considered one and the same.

Previously, Indian courts held that companies can act through their managers and directors only, however the Apex Court’s decision in case of Standard Chartered Bank vs. Directorate of Enforcement and Iridium Telecom Ltd. vs. Motorola Inc. clarified that companies are as culpable as any living person and can be prosecuted for the same.
 

Liability of the Director:

The Companies Act, 1956 used the concept of ‘officer who is in default’ to impose the liability of any default of the company over officers in charged for the management. However, penalties under the Act were deemed very ineffective in cases of serious internal frauds committed by promoters and senior management of companies. But, with the enactment of the Companies Act, 2013 the statutory duties of a director such as exercise of due and reasonable care, skill, diligence and independent judgment were also recognized. Previously only MD, whole-time directors, company secretaries used to fall under the purview of ‘officer who is in default’ but the new Act has been expanded to include any person who would have superintendence/control/direction/management over the company affairs. Now independent directors are also answerable for any lapse in performing their duties. The Act also focuses on knowledge and intent in determining who is an officer who is in default.

Besides the Companies Act, 2013 there are other legislations that cover offences committed by the companies. However, these provisions mostly provide a non-obstante clause which clarifies that if it is proved that the director or officer of the company is committed or consented the offence then only he shall be deemed guilty and prosecuted accordingly.
 

The important question that arises here is whether any person simply designated as an officer-in-default by the company, can be held criminally liable?

The Supreme Court recognized the theory of attribution/identification in determining whether a director or officer in charge of the company can be prosecuted for the offence committed by the company, in the case of Sunil Bharti Mittal vs. Central Bureau of Intelligence. The court stated that the person on whom company’s offences must be attributed must be the ‘alter-ego’ of the company. This means that the degree of identity between the acts of the company and the ‘directing mind and will’ of the person responsible must be high enough for the courts to deem them as one and the same. Further, just because a person is steering the affairs doesn’t make him/her liable for the crimes that require intent. Therefore, the Apex court held that no charge sheet against the MD can be filed just because he was the head of the company.

Therefore, the discerning principle is whether the proof of intent is required or not. An officer who is in default for contravention which does not require proof of intent may be prosecuted by virtue of their position. However, the same is not tenable in offences where proof of intent is essential.
 

Safe Harbor Provisions:

There are such provisions which help directors to escape the liability. In any case, a director can take relief on the ground that he/she acted honestly and reasonably. The Companies Act seeks to limit the liability of independent directors only for the matters directly related to them. An independent director is liable only for those acts committed by the company which had occurred with his knowledge, attributable through board processes and with his consent or where he had not acted diligently. This protects the liability of independent directors for acts of the company for no fault of their own. While these provisions are helpful, much would depend on the manner in which court interpret it on based of specific facts of the cases.
 

Conclusion:

We can say that the thumb rule in this case is that unless specifically provided in a statue, a director may be made criminally liable only if there is existing proof of intent against the director. In case of foreign companies in India, it is important to have a clear shareholders agreement that will shift the responsibility on the Indian team and create clear roles defined for foreign directors and not become a general director. Therefore, it is advisable for the companies to actively develop standards of accountability at each key level within the organization and implement procedures which prevent such acts beforehand.

Gautam Khurana
15 March 2019

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