Can directors be held liable personally for the act of the company - Supreme Court Order

Introduction

Directors and the key managerial personnel are the brain of the company and responsible for running the company by making crucial decisions. But are these reasons enough to make them liable for the acts committed in the name of the company especially considering that a company is a separate legal entity. 

The Supreme Court of India in the matter of Ravindranatha Bajpe vs Mangalore Special Economic Zone dated 27th September, 2021 held that merely because someone is a Chairman, Managing Director, Executive Director, Deputy General Manager and/or Planner/Supervisor of an Accused Company, he cannot be held vicariously liable for the offences committed by the Accused Company, without any specific role attributed to them. 

In this article, the Author will walk you through the stepwise facts, relevant judgements, order of this case and a few takeaways from the judgement.

Factual Matrix

1. About Appellant: Mr. Ravindranatha Bajpe (“Complainant”) filed a criminal complaint before the Judicial Magistrate, First Class, Mangalore. He is the absolute owner and in possession & enjoyment of immovable properties surrounded by a stone wall as boundary. The properties are abutting Mangalore-Bajpe Old Airport Road. It was stated that there were valuable trees on the properties. 
2. About Respondents:  It was contended a Company (“Accused”) intended to lay a water pipeline by the side of the Airport Road abutting the schedule properties. In that regard, it had obtained permission from the Department of Public Works, Mangalore. The Chairman of the Accused Company appointed another company as a contractor for execution of the said project. The Deputy General Manager of the Accused Company was entrusted with the work of supervision and overseeing.
3. What is the Complaint?: It was contended that the Chairman, Managing Director and the Deputy General Manager had conspired with common intention to lay the pipeline beneath the properties belonging to the complainant without any lawful authority and right whatsoever. In furtherance thereof, they had trespassed over the properties and demolished the compound wall. They had cut and destroyed 100 valuable trees and laid pipelines beneath the properties.
4. What was the Prayer?: The accused have committed the act of mischief and waste and caused pecuniary loss of more than Rs. 27 lakhs to the complainant. All the accused are jointly and severally liable to make good the loss to the complainant.
5. Grounds of the Complaint: Trespass: It was contended that the Accused were having no right whatsoever to commit trespass over the properties and to cause damage. Each one of the accused had common intention to lay the pipeline by damaging the property of the complainant. With that intention, they have committed criminal trespass and caused damages.

Impugned orders: 

1. Learned Judicial Magistrate, First Class, Mangalore directed to register the case against all the accused for the offences punishable under Sections 427, 447, 506 and 120B read with Section 34 IPC.
2. Learned Sessions Court: The Accused Company and its Chairman, Director and Manager preferred Criminal Revision Petition before the learned Sessions Court which set aside the order passed by the learned Judicial Magistrate, First Class, Mangalore.
3. Karnataka High Court: Complainant preferred revision applications before the Karnataka High Court which dismissed the said revision applications and hence, Complainant filed the present appeal before the Hon’ble Supreme Court of India.

Accused Contentions:

The Accused vehemently submitted that when it was found that there are no specific allegations and the role attributed to the accused except the bald statement that all of them have connived with each other, the learned Sessions Court was absolutely justified in setting aside the order passed by the learned Magistrate issuing the process/summons against all the accused. 

It was submitted that as held by the Supreme Court in catena of decisions that issuing summons/process by the Court is a very serious matter and therefore unless there are specific allegations and the role attributed to each accused more than the bald statement, the Magistrate ought not to have issued the process.

That the Chairman, Director and Manager of the Accused Company were stationed at Hyderabad at the time of the commission of the alleged offence and there are no allegations that at the time of commission of the alleged offence, they were present.

Judgement

About Trespass: The Supreme Court stated that the accused had/has no right whatsoever to commit trespass into the properties and cause  damage. Each one of them with common intention to lay the pipeline by damaging the property of the complainant and improvements thereof, have committed criminal trespass into the property and remained inside the property till the act of devastation was complete.

About issuance of summons/process by the Court: Except the bald statement that accused persons have conspired with common intention to lay the pipeline within the properties belonging to the complainant, without any lawful authority and right whatsoever and demolished the compound wall, there are no other allegations that at that time they were present. 

Accused persons were stationed at Hyderabad. There are no further allegations that at the command of the Accused persons, the demolition of the compound wall has taken place. 

Therefore, as such, in absence of any specific allegations and the specific role attributed to them, the learned Magistrate was not justified in issuing process against accused nos. 1 to 8 for the offences punishable under Sections 427, 447, 506 and 120B read with Section 34 IPC. 

Reliance on decided case laws

Reliance on Sunil Bharti Mittal v. Central Bureau of Investigation, (2015) 4 SCC 609:

In the case of Sunil Bharti Mittal, it is observed by the Supreme Court that: 

“(iii) Circumstances when Director/person in charge of the affairs of the company can also be prosecuted, when the company is an accused person

42. No doubt, a corporate entity is an artificial person which acts through its officers, Directors, Managing Director, Chairman, etc. If such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. It would be more so, when the criminal act is that of conspiracy. However, at the same time, it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so.
43. Thus, an individual who has perpetrated the commission of an offence on behalf of a company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent. Second situation in which he can be implicated is in those cases where the statutory regime itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision.
44. When the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect. One such example is Section 141 of the Negotiable Instruments Act, 1881. In Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661, the Court noted that if a group of persons that guide the business of the company have the criminal intent, that would be imputed to the body corporate and it is in this backdrop, Section 141 of the Negotiable Instruments Act has to be understood. Such a position is, therefore, because of statutory intendment making it a deeming fiction. Here also, the principle of “alter ego”, was applied only in one direction, namely, where a group of persons that guide the business had criminal intent, that is to be imputed to the body corporate and not the vice versa.

Otherwise, there has to be a specific act attributed to the Director or any other person allegedly in control and management of the company, to the  effect that such a person was responsible for the acts committed by or on behalf of the company.” 

Reliance on the case of Maksud Saiyed v. State of Gujarat, (2008) 5 SCC 668:

It was observed and held as under:

“13. Where a jurisdiction is exercised on a complaint petition filed in terms of Section 156(3) or Section 200 of the Code of Criminal Procedure, the Magistrate is required to apply his mind. The Penal Code does not contain any provision for attaching vicarious liability on the part of the Managing Director or the Directors of the Company when the accused is the company. The learned Magistrate failed to pose unto himself the correct question viz. as to whether the complaint petition, even if given face value and taken to be correct in its entirety, would lead to the conclusion that the respondents herein were personally liable for any offence. The Bank is a body corporate. Vicarious liability of the Managing Director and Director would arise provided any provision exists in that behalf in the statute. Statutes indisputably must contain provision fixing such vicarious liabilities.

Even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability.” 

Reliance was placed on the case of Pepsi Foods Ltd. v. Special Judicial Magistrate, (1998) 5 SCC 749:

It was observed and held as under:

“28. Summoning of an accused in a criminal case is a serious matter.

Criminal law cannot be set into motion as a matter of course. It is not that the complainant has to bring only two witnesses to support his allegations in the complaint to have the criminal law set into motion. The order of the  Magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the law applicable thereto. He has to examine the nature of allegations made in the complaint and the evidence both oral and documentary in support thereof and would that be sufficient for the complainant to succeed in bringing charge home to the accused. It is not that the Magistrate is a silent spectator at the time of recording of preliminary evidence before summoning of the accused. The Magistrate has to carefully scrutinise the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers to find out the truthfulness of the allegations or otherwise and then examine if any offence is prima facie committed by all or any of the accused.” 

About case against key personnel of Company: Supreme Court held that the learned Magistrate has to record his satisfaction about a prima facie case against the accused who are Managing Director, the Company Secretary and the Directors of the Company and the role played by them in their respective capacities which is sine qua non for initiating criminal proceedings against them. 

Looking at the averments and the allegations in the complaint, there are no specific allegations and/or averments with respect to the role played by them in their capacity as Chairman, Managing Director, Executive Director, Deputy General Manager and Planner & Executor. 

Merely because they are Chairman, Managing Director/Executive Director and/or Deputy General Manager and/or Planner/Supervisor of Accused Company, without any specific role attributed and the role played by them in their capacity, they cannot be arrayed as an accused, more particularly they cannot be held vicariously liable for the offences committed by the Accused Company.

In view of the above and for the reasons stated above, the Hon’ble Supreme Court dismissed the appeal.

Key Takeaways

The Supreme Court has over and over again emphasised on the basic principle that the Managing Director or the Directors of the Company, cannot be said to have committed an offence just because they are holders of offices.

In the absence of a charge of conspiracy, the mere fact that the appellant happened to be the Chairman or Director of the Company would not make him criminally liable in a vicarious sense.

When the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect. 

Here’s an article on the cases when directors can actually be held liable for offences of company.