The duties of a director have been codified with the enactment of the Companies Act, 2013 ("CA 2013") in India. Conditions such as 'reasonable care',' independent judgment' and 'reasonable and due care' are introduced in the CA 2013. The CA 2013 also imposes liability on an 'officer who is in default' for acts committed by the company because they occupy key positions in the company, such as being a managing director or an all-time director. It is very important to understand that, under the Companies Act, a person is appointed as director, but his liabilities as a director are not only limited to the offences committed under the Companies Act, but he is also responsible for the offences committed under the various other statutes, including the Negotiable Instruments Act, 1881, the Shops and Establishment Act, 1947, and other Labor Laws. Therefore, while acting as a director in any business and trying to hedge the same, it is very important to establish the liabilities.
The Criminal liability latched to directors can be divided into these subcategories:
LIABILITY OF DIRECTORS BASED ON ATTRIBUTION
It is a well-established legal concept that acts through its directors and agents, the company being the legal person. However, the Hon'ble Supreme Court in Sunil Bharti Mittal v. Central Bureau of Investigation,1 settles the debate as to whether the director will be held responsible for the company's criminal acts by applying the concept of alter-ego, in which the court analyzes the applicability of the concept of alter-ego to make directors responsible for the company's crimes. In the above case, the irregularities committed by Bharti Cellular Ltd were attributed to Sunil Bharti Mittal (Chairman and Managing Director) by the CBI Special Court, making him accused. Before the Supreme Court, the said directions of the special court were challenged as an error of law, and while deciding the challenge, the Court stated that the concept of alter-ego can only be applied to make the company responsible for the actions of the directors. However, unless the statute specifically provides for the same, any director cannot be held liable for the criminal offences committed by the firm.
VICARIOUS LIABILITY
For a very long time, the concept of vicarious liability has been embedded in legal jurisprudence, starting from the employers' liability for the tort committed by their employee subject to the activities performed in the course of his employment. Over the years, however, the forgoing notion has gone through strict legal scrutiny and has evolved and found its applicability in different laws. Generally speaking, individuals are responsible for their own wrongful actions or omissions. In Vicarious Liability, however, the individual is liable for the acts or omissions of another person.
LIABILITY UNDER THE COMPANIES ACT (BREACH OF FIDUCIARY DUTIES) AND OTHER STATUTES
The responsibility of each individual, including the managing director, full-time director, manager, company secretary and chief financial officer, arises from the provision of "officer who is in default" in the Companies Act, 2013, and that provision also includes the directors who were aware of the violations (effectively meaning the Independent Directors and Non-Executive Directors). Furthermore, the liability of directors is also established under various specific statutes and, as a general rule, a person is held liable only if, at the time of the infringement, the person concerned was liable or the offence was committed in connection with that person. Section 166 of the Companies Act, 2013, refers to the fiduciary duties of directors, which includes that the director must exercise his duties with due and reasonable care, skill and diligence and should not attempt to attain or attempt to obtain any undue advantage for himself or for any of his relatives. If the director takes an undue advantage, he shall be held liable to pay the company an amount equal to that gain and shall be liable to pay a fine of not less than one lakh rupees, which may be extended to five lakh rupees. Furthermore, fraud in 2013 is defined under section 447 of the Companies Act as any act or abuse of position committed with the intention of deceiving, gaining undue advantage from, or injuring the interests of a person, company, shareholders, or creditors, whether or not there is wrongful gain or loss, and the person is liable for imprisonment for up to 10 years. It is relevant to note that if no express provision is provided under the statute for the director for vicarious responsibility, then the individual can not be prosecuted unless he has played the active role with the criminal intention. Furthermore, it is also interesting to note that there is no provision on vicarious liability in the Indian Penal Code, 1860, which implies that a director can only be prosecuted if he has played an active role in the criminal intent.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.
