2014 (7) TMI 1377 - HC - Indian Laws

Vicarious Liability of Chairman Managing Director and Directors of the Company in the offence of the company - Liable to be prosecuted in a Criminal Case being the Director of M/s. Davangere Sugars Co. Ltd. and Chairman of M/s. Shamanur Sugars Co. Ltd. (by virtue of his position) - petitioner is having knowledge and has a specific role and active participation in the conduct and business of the Companies at the time of commission of the alleged offence by the companies or not - HELD THAT - The normal rule in the case involving criminal liability is against vicarious liability i.e. no one is to be held guilty of criminal liability for an act of another. This normal rule is however subject to exception on account of specific provision being made in the statute extending liability to others. One such provision is Section 10 of the EC Act. Therefore if an offence is committed by a company it extends the criminal liability to other officers of the company if the requirements contemplated under the said provision are satisfied before the liability is fastened on such Officers. Since the provision creates criminal liability the conditions have to be very strictly and meticulously complied with. With this background now let me go through the decisions in this regard. In fact this Court also had an occasion to deal with similar matters under the EC Act between Smt. Vidya Murkumbi and Others vs. India Sugars and Refineries Ltd. in Crl.P. No. 7563/2009 dated 4.11.2009 wherein learned brother Judge Justice Jawad Rahim evaluated the provisions under the EC Act as well as the NI Act - In the said decision the learned Judge has observed the wordings used in sub-Section (2) of Sec. 10 of the EC Act - that if proved pre-supposes sufficient material that such person by his consent or connivance or attributable negligence indulged in the crime. If such prima facie proof is not available in the complaint then such person cannot be fastened with liability. However the learned Judge has observed that the liability of the Chairman and the Director stand on a different footing and come in the category of sub-Section (1) of Section 10 of the EC Act. Therefore they could be termed as personnel being in charge of/or responsible to the Company and its business and an element of presumption is being available against them. Thus it is crystal clear that there is almost unanimous judicial opinion that necessary averments ought to be contained in the complaint particularly against a person who are not deemed to be persons in charge of a Company or looking after the day to day affairs of the Company and therefore it is necessary to specifically aver the duties role of each and every person to show his responsibility his duties and functions assigned under the Memorandum of Articles of the Company. Whether by virtue of his position as a Chairman ipso-facto liable for all the offences committed by the Company? - HELD THAT - The term Chairman is not defined under the Companies Act 1965. The Chairman is a necessary person in company meetings and is usually appointed by the articles of the Company. Generally Chairman is the highest post in the Company who represents the name and fame of the Company. Chairman s role is to attend the meetings and to act according to the byelaws of the Company and also exercise any defined or reserved rights or duties. Regulation 76(1) of table A to Schedule-I to the Companies Act 1956 provides that the Board may elect a Chairman and determine the period for which he has to hold the office. Generally the Directors elect one of them to be the Chairman of the Board who continues to be as such until he seizes to be a Director or some other Director who is appointed as a Chairman. Normally the Chairman is a Director who is authorised to preside over the Board and General Meetings - the Chairman of a Company presides over the meetings of the board and as a member on all the board committees and he presides over all the committee meetings. Therefore the Chairman has the powers under the common law such as (1) the power to preside over the meetings (2) bring the discussion on any question and (3) the power to adjourn the meeting if necessary under the circumstances. Looking to the powers and duties of the Chairman it goes without saying that the Chairman is as good as a Director but as he is higher in position he presides over the meetings of the Company. Therefore unless a specific role is given to a Chairman by virtue of articles of the Company to represent the management and participate in the day to day business conduct and affairs of the Company he is not liable for all the offences committed by the Company. The Chairman also stands on the same footing as that of a Director. If any liability has to be fastened on the Chairman in law a specific role has to be given to him and what is the overt act committed by him to share the criminal liability of the Company. Therefore in the absence of such allegations and specific averments in the complaint even Chairman also ipso-facto by virtue of his position cannot be made as an accused in a criminal case for the offence committed by the Company. It is a well settled law that at the time of issuing of the process the Magistrate is required to see the allegations in the complaint in order to ascertain whether the allegations made in the complaint constitute an offence against a person then only the Magistrate can call upon the persons cited as accused to answer the charges. Otherwise the complaint has to be dismissed by exercising powers u/s. 203 of the Code of Crl. Procedure - the cognizance taken by the Magistrate and the process issued against the petitioner who is a Director and Chairman of the respective companies is bad in law and the same is liable to be quashed. The petition is allowed.

Summary

Issues Involved:
1. Liability of the petitioner as a Director and Chairman of the companies.
2. Specific role and active participation of the petitioner in the conduct and business of the companies.
3. Adequacy of the averments in the complaint to constitute an offence against the petitioner.

Detailed Analysis:

1. Liability of the petitioner as a Director and Chairman of the companies:
The petitioner sought to quash the proceedings against him in three criminal cases, arguing that he, as a Director and Chairman, was not managing the affairs of the companies and thus should not be held liable. The court examined whether the petitioner, by virtue of his position, could be prosecuted in a criminal case.

The court noted that under Section 10 of the Essential Commodities Act (EC Act), a person in charge of and responsible for the conduct of the business of the company at the time of the contravention can be deemed guilty. However, this liability does not automatically extend to all directors or the chairman unless specific roles and responsibilities are assigned to them.

2. Specific role and active participation of the petitioner in the conduct and business of the companies:
The court emphasized that there must be specific allegations showing the petitioner's involvement in the day-to-day affairs of the company. The court referred to several rulings, including *SMS Pharmaceuticals Ltd. v. Neeta Bhalla* and *K.K. Ahuja v. V.K. Vora*, which established that mere designation as a director or chairman does not automatically make one liable for the company's criminal acts. There must be clear averments indicating how and in what manner the accused was responsible for the conduct of the business.

The court found that the complaints against the petitioner lacked specific allegations of his active participation or knowledge of the offences committed by the companies. The complaints contained only sweeping statements that all directors were managing the affairs of the company, which the court deemed insufficient.

3. Adequacy of the averments in the complaint to constitute an offence against the petitioner:
The court scrutinized the complaints and found that they did not contain adequate details to establish the petitioner's liability. The complaints merely stated that all directors, including the petitioner, were managing the affairs of the company without specifying any particular acts or roles attributed to the petitioner.

The court highlighted that the Magistrate must apply their mind to the contents of the complaint to ascertain if there is sufficient ground to proceed against the accused. In this case, the Magistrate's order to issue process was based on general and unspecific allegations, which the court found to be legally insufficient.

Conclusion:
The court concluded that the complaints did not meet the legal requirements to hold the petitioner liable as a Director and Chairman of the companies. The court quashed the proceedings against the petitioner in all three cases, directing the trial court to proceed against the other accused and conclude the trial within one year. The court's decision was based on the lack of specific allegations and the principle that mere designation does not imply liability without detailed averments of involvement in the offence.