-Samridhi, Associate
In a corporate establishment, Section 179 stipulates the powers of a Board of Directors whereby the Board of Directors jointly exercise all powers to carry out actions on behalf of the company by passing resolutions at Board Meetings. It is this meeting of minds of the Board that gives rise to vicarious liability in the instances of white collar crimes. The investigating agencies and the prosecution presumes that all the Directors, regardless of their role and contribution in management, ought to be aware and contributory towards the criminal acts carried out by the company. However, as the Hon’ble Supreme Court clarified in the case of Maksud Saiyed v. State of Gujarat (2008) 5 SCC 668, this presumption can only arise if a provision exists in the statute to fixate such vicarious liabilities.
Interestingly, the penal code does not envisage the fiction of vicarious liability to fasten the liability on the management in cases where a company is an accused but several special legislations have incorporated the deeming fiction of vicarious liability to hold all those accountable who were in-charge of the affairs.
Section 70 of the Prevention of Money Laundering Act, 2002 [‘PMLA’] arises out of attributing vicarious liability to the management personnel. The said provision specifically states that where a company is found in contravention of the provisions of PMLA then ‘every person who, at the time the contravention 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 contravention and shall be liable to be proceeded against and punished accordingly’.
Hence, anyone ‘in charge’ of the affairs of the company during the period of offence is liable to be prosecuted against as it is presumed that the said actions were taken with his knowledge and consent. The Negotiable Instruments Act, 1881 also similarly stipulates under Section 141 whereby it deems vicarious liability upon those who were in-charge of the management and operations of the company. Similar provisions have been incorporated across several statutes to ensure that the all those in management personnel in-charge of the affairs of the company remain accountable and aware of the responsibilities and powers exercised by them.
However, an exception is provided in favour of those who are able to prove and establish that the offence was carried without their knowledge or that all steps towards due diligence were taken to prevent such contravention. The judicial precedents have also consistently aimed to circumscribe the sphere of the responsibility for those in management. In the case of S.M.S. Pharmaceuticals Ltd. (2) v. Neeta Bhalla [(2007) 4 SCC 70, the Hon’ble Supreme Court was pleased to hold that there may be a large number of Directors but some of them may not assign themselves in the management of the day-to-day affairs of the company and thus are not responsible for the conduct of the business of the company. Thus, the prosecution bears the burden to establish that the person was actively in-charge of the affairs in order to satisfy the legal fiction for vicarious liability. A mere designation as a director is not sufficient to invoke vicarious liability.
Moreover, there ought to be specific allegations that the said Director played the attributed role towards contraventions and commission of offences as certain directors may not be involved with running the entire gamut of affairs of the company. The Hon’ble Supreme Court further held in the case of Sunil Bharti Mittal v. Central Bureau of Investigation (2015) 4 SCC 609 that the liability must only lie with those who exercised significant and pervasive control over the day-to-day affairs of the company. The prosecution must lead with sufficient evidence to demonstrate that those in-charge had carried out the actions with the criminal intent. This was reiterated in the case of Shiv Kumar Jatia v. State of NCT of Delhi Criminal Appeal No. 1263 of 2019 Order dt. 23.08.2019 wherein the Hon’ble Supreme Court held that the criminal intent ought to have a direct link with the accused.
The requirement of active role and criminal intent arises due to presence of non-executing directors or independent directors along with several instances wherein it was discovered that certain individuals were made merely ‘dummy directors’ to either meet the quorum requirements under the Companies Act or to layer the management affairs of the company and avoid the trail of decision-making from leading to the main culprit. Thus, the exception carved out against the fiction of vicarious liability also safeguards these individuals during the investigation and prosecution stages. This is especially essential in cases wherein the special legislation, such as PMLA, incorporates the reverse burden of proof whereby the presumption is held establish unless the contrary is proved by the accused or any other person. In a country where judiciary is suffering from backlogs, such reversal of the burden of proof leads to instances where the process becomes the punishment in order to prove a lack of active role or no role. Hence, it is essential that the legislature incorporate requisite amendments and clarify the ambit of the vicarious liability for the purposes of investigation and prosecution to avoid further suffering of innocent parties in the process.