VICARIOUS LIABILITY OF MANAGING DIRECTORS AND OFFICERS OF THE COMPANY

[Mr. M. GOVINDARAJAN]

Vicarious liability refers to a situation where someone is held responsible for the actions or omissions of another person. In a workplace context, an employer can be liable for the acts or omissions of its employees, provided it can be shown that they took place in the course of their employment.

Vicarious liability is a form of a strict, secondary liability that arises under the common doctrine of agency, respondeat superior, the responsibility of the superior for the acts of their subordinate or, in a broader sense, the responsibility of any third party that had the "right, ability or duty to control" the activities of a violator. It can be distinguished from contributory liability, another form of secondary liability, which is rooted in the tort theory of enterprise liability because, unlike contributory infringement, knowledge is not an element of vicarious liability.  The law has developed the view that some relationships by their nature require the person who engages others to accept responsibility for the wrongdoing of those others. The most important such relationship for practical purposes is that of employer and employee.

The issue to be discussed in this article is whether the Managing Director and all officers of a company is held liable for vicarious liability for the actions of the company with reference to decided case laws.

In ‘S.M.S. Pharmaceuticals Limited V. Neeta Bhalla’  – 2005 (9) TMI 304 - SUPREME COURT OF INDIA the Supreme  Court held that a liability under section 141 of the Act is sought to be fastened vicariously on a person connected with a company, the principal accused being the company itself.   It is a departure from the rule in criminal law against vicarious liability.  A clear case should be specified out in the complaint against the person sought to be made liable.  Section 141 of the Negotiable Instrument Act, 1881 contains the requirements for making a person liable under the said provision.  That the respondent falls within the parameters of section 141 has to be spelled out.   A complaint has to be examined by the Magistrate in the first instance on the basis of averments which bring the case within section 141, he would issue the process.  Merely being described as a director in a company is not sufficient to satisfy the requirement of section 141.  Even a non director can be liable under section 141 of the Act.  The averments in the complaint would know what the case which is alleged against him is.  This will enable him to meet the case at trial.

In ‘Pepsico India Holdings Private Limited V. Food Inspector’ – 2010 (11) TMI 1047 - SUPREME COURT the Supreme Court held that it is not well established that in a complaint against a company and its Directors, the complainant has to indicate in the complaint itself whether the Directors concerned were either in charge of or responsible to the company for its day-to-day management or whether they were responsible to the Company for the conduct of the business.  A merely bald statement that a person was a Director of the Company against which certain allegations had been made is not sufficient to make such Director liable in the absence of any specific allegations regarding his role in the management of the company.

In ‘Aneeta Hada V. Godfather Travels and Tours Private Limited’ – 2012 (5) TMI 83 - SUPREME COURT OF INDIA the Supreme Court held that the Court arrived t the irresistible conclusion that for maintaining the prosecution under section 141 of the Negotiable Instrument Act, arraigning of a company as an accused is imperative.  The other categories of offenders can only be brought in the drag-net on the touchstone of vicarious liability as the same has been stipulated in the provision itself.

In ‘Reckitt Benchiser (India) Private Limited V. State of Bihar’ – 2018 (3) TMI 1061 - PATNA HIGH COURT the Food Inspector, Patna, in exercise of his powers under Section 10 of the Prohibition of Food Adulteration Act, 1954 collected 3 cans of Barley power of 400 grams each from Shalimar Cold Stores, a C&F of the company in Patna and sent to public analyst for its analysis and report.  The public analyst reported that the label on the Barley power can does not bear ‘Best before Date’ which is required under the Rule 32 (1) of the Act and it amounts to misbranding in terms of section 2(ix) (j) & (k) of the Act.  The Food Inspector filed a petition before the Civil Surgeon-Cum-Chief Medical Officer, Patna under section 20(1) of the Act seeking written consent to prosecute the Managing Directors, Directors, Chairman, all Administrative Officers and Production in charge of the company for the offence.  On the appeal a complaint was filed before the court of Sub Divisional Judicial Magistrate, Patna.

Against this complaint the petitioner approached the High Court for quashing the impugned order taking cognizance of the offence.  The petitioner submitted the following before the High Court-

• In this case the sanction for prosecution was granted mechanically as the company, Reckitt Benckiser (India) Private Limited was not made accused in the case.
• Sanction was not given to prosecute a specific individual, rather left vague against Managing Director, Directors, Chairman, all Administrative Officer sand Production in charge.
• Sanction was given for launching prosecution relating to offence of adulteration in case of alleged offence of misbranding.
• It is not the case that the collected sample was found adulterated.
• It is alleged that the product was misbranded because of absence of label ‘Best Before Date’.
• Sanction has been given to prosecute the petitioners under section 16(1)(A) of the Act which is an offence of adulteration in the food product, whereas for misbranding appropriate section is 16(1)(a) of the Act.
• Incomplete address was given by the prosecution only mentioning as ‘Reckitt Benckiser India Private Limited, Kolkata – 700071.
• The Sub Divisional Judicial Magistrate, without applying the judicious mind, has taken cognizance mechanically for the offence of adulteration.
• The Court issued bailable warrant without service of summons.
• The Court overlooking the fact whether bailable warrant was executed to the accused persons, issued non bailable warrant of arrest and on the same day, initiated proceeding to declare the accused as ‘proclaimed offenders’.
• The Managing Director of the company joined the company only on 31.01.2017 and the alleged offence was committed in 2003 during which he has no affairs with the company.
• Section 17(2) of the Act provides that in case of offence committed by the company, a person, who has been nominated, to be in charge of and responsible to, the company for the conduct of the business of the company and in case of absence of such nomination, every person, at the time of commission of offence, was in charge or responsible for the conduct of the business of the company and the company itself is considered guilty for committing the offence and liable to be proceeded against and punished accordingly.
• In this case the company has not been made accused, so in the absence of the company, being arraigned as an accused, no other officers of the company can be held criminally liable.

On behalf of the State it is contended that unless the company is arraigned as accused vicarious liability cannot be fastened to other officers of the company.   However the State objected that relating to locus standi of the petitioner for the reason that as the company is not an accused, so no cause of action to file quashing application.

The High Court heard the arguments of both sides.  The High Court also analyzed the provisions of Section 17 of the Act.  In view of section 17, a company may order in writing any of its Directors or Managers to exercise all such powers and take all such necessary steps expedient to prevent commission of any offence under the Act by the company.  A person so nominated becomes responsible for the offence committed by the company along with the company itself or in case of no nomination, every person, who at the time the offence was committed, was in charge of, and responsible to, the company for the conduct of its business.  The company is a juristic person, so making company an accused becomes mandatory, only in that situation, other officers responsible for the affairs of the company may be held responsible.  In case of offence committed by the company its officers cannot be made vicariously liable for commission of offence on the part of the company.

The High Court further held that on the question of the liability of the Directors of the company with respect to offence alleged to have been committed by the company, a clear case requires to be spelled out alleging and naming the particular Director responsible to the company for the conduct of its business.   In the present case no such name with such averment is mentioned in the complaint.  There is no specific allegation regarding individuals’ role in the management of the company rather all Directors or any Director by name has been made accused with the specific allegation regarding the specific role in the management of the company.

The High Court held that as the company namely Reckitt Benckiser (India) Private Limited, has not been arraigned an accused as per section17(1) of the Act, so it’s all officers including Managing Director, all Directors, Chairman, Production in charge in absence of specific name of any officers of the company with allegation of being responsible for the conduct of business of the company cannot be held vicariously liable for the alleged offence even some of the officers who are made accused, were not even employed in the company at the relevant point of time.  The continuation of criminal proceeding against the accused persons would be abuse of the process of the Court as in the absence of the company being arraigned as accused, only its officers cannot be prosecuted fastening vicarious criminal liability as the principal offender is the company itself being a juristic person.

Discussions to this article

[Srikanthan S]

Good article on the subject of Vicarious Liability of MD and Officers of the Company. With the permission of the author Mr M Govindarajan, I would like to add the following:

Principle of Attribution / “alter ego”

In Sunil Bharti Mittal v. Central Bureau of Investigation (“CBI”) and Others [2015 (9) TMI 1339 - SUPREME COURT OF INDIA] the Supreme Court addressed the following issues:

1. Whether the principle of attribution/alter ego can be applied to make the directors of the company liable for an offence committed by the company?
2. When can a director/person in charge of the affairs of the company be prosecuted for an offence committed by the company?

Principle of Attribution / Alter Ego

“To attribute” means to say or believe that somebody is responsible for doing something; to say or think that something is the result or work of someone else. The attribution principle seeks to attribute to the company actions of its agents who act on its behalf and manage its affairs, and enter into transactions on its behalf. Since a company has a separate legal personality, yet has no ability to think and act for itself, for a company to enter into any transaction, be held liable for any tort, or commit a crime, the law must determine which thoughts and actions of its directors, employees and other agents may be attributed to it.

The attribution principle is an extension of the 'directing mind and will' principle as laid down in the Lennard case. [Lennard's Carrying Co. Ltd. v. Asiatic Petrolium Co. Ltd. (1915) AC 705]. It is applied when the vicarious liability principle cannot be applied because an offence is such that it can be committed only by a human being, e.g. rape, murder, bigamy, etc, the company cannot be held liable and convicted if any of the offences falling in this category is committed by its agents, e.g. directors.

However, there are several other offences which may be committed by an agent of the company in relation to the business or affairs of the company or in the course of discharging his duties as an agent of the company, for which the company may be held liable, convicted and punished, and in doing so the mens rea of such agent may be attributed to the company.

In India, the attribution principle has been referred to and discussed in Iridium India Telecom Ltd v. Motorala Incorporated & Others [2010] 160 Comp Cas 147;(2011) 1 SCC 74 = 2010 (10) TMI 85 - SUPREME COURT OF INDIA with the following remark:

"The Courts in England have emphatically rejected the notion that a body corporate could not commit a criminal offence which was an outcome of an act of will needing a particular state of mind. The aforesaid notion has been rejected by adopting the doctrine of attribution and imputation. In other words, the criminal intent of the "alter ego" of the company/body corporate, i.e., the person or group of person that guide the business of the company would be imputed to the corporation."

The Court relied referred to the decision of the House of Lords in Tesco Supermarkets Limited v. Nattrass [(1972) AC 153] wherein it was held that the person whose mens rea is to be attributed must be the directing mind and will of the company.

Privy Council in Meridian Global Funds Management Asia Limited v. Securities Commission [(1995) UKPC 5] has expanded the rule laid down in Tesco by holding that, "the company builds upon the primary rules of attribution by using general rules of which are equally available to all natural persons, namely, the principles of agency" thereby making the rules of attribution a more flexible one to be decided on a case to case basis.

The decision of Tesco has been referred to by the earlier division bench decisions of the Supreme Court in J.K Industries Limited and Others v. Chief Inspector of Factories and Boilers and Others [(1996) 6 SCC 665 = 1996 (9) TMI 503 - SUPREME COURT OF INDIA] and P.C Agarwala v. Payment of Wages Inspector, M.P and Others [(2005) 8 SCC 104 = 2005 (9) TMI 305 - SUPREME COURT OF INDIA] wherein it has been held that in the context of vicarious liability under strict liability statutes, a person in charge would be deemed to be responsible for the acts of the company.

The Supreme Court, in Sunil Bharti Mittal [supra] has held that the principle of alter ego can only be applied to make the company liable for an act committed by a person or group of persons who control the affairs of the company as they represent the alter ego of the company; however, it cannot be applied in reverse direction to make the directors of the company liable for an offence committed by the company.

The Supreme Court has clarified that the application of the principle of vicarious liability to make the directors of the company liable for an offence committed by the company can only be done if the statute provides for it.

Now, adverting to the Reckitt Benckiser decision referred to in the Article, it makes it clear that unless the Company is arraigned as an accused, only its officers cannot be prosecuted fastening vicarious criminal liability as the principal offender is the company itself, being a juristic person.

[Ganeshan Kalyani]

desert has been served by Sri Srikanthan Sir to the main course served by Sri Mariappan Sir.

[Ganeshan Kalyani]

please read "desert" as "dessert" in the view submitted yesterday .