Priyanka's Blog

February 4, 2010

General Liabilities of the Managing Director of a Company under Indian Law (including penal liability)

Filed under: Companies Act — P S @ 11:49 am

General Background on Position of Directors

1. Generally stated, directors of a company have always been considered and treated as trustees of a company and all its shareholders. Since directors of a company are persons selected to manage its affairs for the benefit of shareholders, it is an office of trust which, if they undertake it is their duty to perform fully and entirely in good faith.

2. As agents of the company, directors have a fiduciary relationship with the company and such a fiduciary relationship imposes upon the directors, duties of loyalty and good faith towards the company. Further, directors, as fiduciaries, are required not to put themselves in a position where there is conflict (actual or potential) between their personal interests and their duties to the company.

3. The duty of directors have been laid down as requiring them to act with such care as is reasonably to be expected from them, having regard to their knowledge and experience. They are not absolved from the duty of reasonable supervision, nor are they permitted to be shielded from liability because of lack of knowledge or wrongdoing, if that ignorance is the result of gross inattention. However, a director is not required to have an expert’s knowledge.

Position of a ‘Managing Director’ under the [Indian] Companies Act, 1956

1. The term “Managing Director” has been defined under Section 2(26) of the Companies Act as follows:

Section 2(26)     “managing director” means a director who by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called:
Provided that the power to do administrative acts of a routine nature when so authorized by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management:

Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of Directors 

Duties of Directors

1. With a view to understand the liabilities attaching to a director, it is important to first note the duties of a director which vary according to the nature and size of the company, and have to be ascertained on the facts of each case. In all cases, in discharging the duties of his / her position, a Managing Director must act honestly and without negligence, i.e., with that amount of care which an ordinary man will be expected to take, as if the business of the company was his / her own. To explain this point succinctly, I note here three propositions (on this subject) laid down by Justice Romer in
City Equitable Fire Insurance Co. (1925) Ch 407 (which was relied upon in India in the case of National Bank of Upper India, Lucknow vs. Dina Nath Sapru and others AIR 1926 Oudh 243):
 

(i) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge or experience.

(ii) A director is bound to give continuous attention to the affairs of his company, his duties being of an intermittent nature to be performed at periodical Board meetings or committee meetings. He is not bound to attend all Board and committee meetings, though he ought to attend all such meetings as he is reasonably able to.

(iii) In respect of all such duties as may be properly left to some other official having regard to the exigencies of business or articles of association of the company, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.

In addition to the above, the following few points deserve to be noted:

(iv) Though all books of accounts and other books and papers of a company are open to inspection by a director, he / she is not bound to examine individual entries in the books

(v) While a director is undoubtedly liable for loss caused to the company through gross or culpable negligence on his part, he is not expected to take all possible care inasmuch as his duty to the company extends only to the taking of such care as an ordinary person is expected to take in his own affairs.

(vi) Directors should ensure that the company’s funds are properly invested and not indulge in dangerous speculation.

(vii) In discharging their duties, directors must act honestly and must exercise such reasonable degree of skill and diligence as would amount to reasonable care which an ordinary man might be expected to take (Govind Narayan Karkade vs. Rangnath Gopal Rajopadhye, AIR 1930 Bom 572).

2. In Gower’s principles of Modern Company Law (6th Edition, 1997, page 601) it is stated that in applying the general equitable principles to directors of a company, four separate rules have emerged. These are: (1) that directors must act in good faith in what they believe to be the best interests of the company; (2) that they must not exercise the powers conferred upon them for purposes different from those which they were conferred; (3) that they must not fetter their discretion as to how they shall act; and (4) that, without the informed consent of the company, they must not place themselves in a position in which their personal interests or duties to other persons are liable to conflict with their duties to the company.

3. Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors. Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions. It has been held that no universal application can be formulated as to this duty of supervision, and the question of whether it has been discharged, must depend on the facts of each particular case, including the director’s role in the management of the company (Barings plc (No. 5) Re (1999) 1 BCLC 433 at page 489: (1999) 1 All ER 1017 (Ch D) by Jonathan Parker, J.).

Liabilities of a Director under the Companies Act

1. A Managing Director can be held liable under the Companies Act firstly under provisions which impose liability on the ‘officer who is in default’ as defined in Section 2(31) of the Act and under Section 5. Section 2(31) of the Act provides that an ‘officer who is in default’ in relation to any provision referred to in Section 5, has the meaning specified in that Section. For ease of reference, the provision embodied in Section 5 of the Act is extracted here:

Section 5.     For the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty whether by way of imprisonment, fine or otherwise, the expression `officer who is in default’ means all the following officers of the company, namely:
(a)     the managing director or managing directors; (b) the whole-time director or whole-time directors; (c) the manager; (d) the secretary; (e) any person in accordance with whose directions or instructions the Board of Directors of the company is accustomed to act; (f) any person charged by the Board with the responsibility of complying with that provision: provided that the person so charged has given his consent in this behalf to the Board; (g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors: Provided that where the Board exercises any powers under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form.”

2. The tenor of the definition of “officer who is default” indicates that it is not necessary to prove that the default has been committed by the officer knowingly or willfully. Where there is a managing or whole-time director or manager, it would be an abuse of the process of the court if proceedings are launched against ordinary directors without examining their role in the default (Ravindra Narayan v. ROC, Jaipur, (1994) 81 Com Cases 925 (Raj); G. Vijayalakshmi v. SEBI, (2000) 100 Com Cases 726 (AP)). Nonetheless it goes without saying that any person can be covered by a prosecution if a role can be attributed to him in the default. Further the defaults for which liability may be attached mean defaults committed during the officer’s tenure (C. V. Siva Prasad v. ROC, (1997) 88 Com Cases 420).

3. The accepted legal position appears to be that where the penal provisions provide for punishment of ‘officers in default’ prosecution is filed against the managing director(s), whole time director(s) and Manager, apart from the Secretary, if any, and the company. Only in cases where there is no such managerial personnel (i.e. managing director/whole time director/manager), prosecution is filed against all ordinary directors, apart from the Secretary, if any, and the company (As also provided in Circular No. 6/94 F. No. 3/41/93-CL-V dated 24th June 1994 of the Department of Company Affairs). It is settled law that the liability of a person is dependent on the statutory prescriptions governing such liability and it has been held that in order to attract liability under the Companies Act, it has to be seen as to on whom the Act / Statute fixes the liability (P.C. Agarwala vs. Payment of Wages Inspector, MP & Ors. AIR 2006 SC 3576).

4. Under the Companies Act, the expression ‘officer who is in default’ appears in several penal provisions and the officers identified in Section 5 (as per terms thereof) are liable for the consequences provided therein. The relevant portions of these penal provisions are briefly enumerated in another post.

5. There are also other penal provisions in the Companies Act where the expression ‘officer who is in default’ does not appear. In such cases prosecution would lie against the officers or persons (which in certain cases may include the directors also) specified, in the respective Sections. Here I may mention that “officer” is defined by Section 2(30) of the Act to include any director, manager or secretary or any person in accordance with whose directions or instructions the Board of directors or any one or more of the directors is / are accustomed to act. Those Sections under which other officers and persons including directors may be liable for defaults have been briefly set out in another post on this blog.

6. For most of the aforesaid provisions to get triggered, there needs to be a positive action by the officer that is in contravention of the statutory provision. In other words, the necessary mental state or mens rea, (i.e. mental element necessary for a particular crime whether by way of a guilty mind; a criminal intent; a guilty or wrongful purpose) will be relevant for such offences and it would have to be established that the offence was committed knowingly or willfully and prosecution is required to fix liability with respect to the particular officer. I will be discussing this issue in the context of criminal liability in the later part of this post.

7. With regard to mitigation of liability of the officers of a company, Section 201 of the Act puts certain restrictions on a company. The said Section reads as follows:

Section 201    (1) Save as provided in this section, any provision whether contained in the articles of the company or in an agreement with a company or in any other instrument, for exempting any officer of the company or any person employed by the company as auditor from, or indemnifying him against, any liability which, by virtue of any rule of law, would otherwise attach to him in respect of any negligence, default, misfeasance, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void:

Provided that a company may, in pursuance of any such provision as aforesaid, indemnify any such officer or auditor against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgement is given in his favour or in which he is acquitted or discharged or in connection with any application under Section 633 in which relief is granted to him by the court.”

8. The object of the proviso to Section 201(1) of the Act is to enable a company to indemnify any of its officer / auditor against liability incurred in defense by any of them only in the event of their having been found to be innocent or to have acted bona fide i.e. honestly by a competent court and not in any other case. I note that a company cannot spend its own funds or give financial help to any officer for defending him / her in any civil or criminal proceeding, it can only indemnify him / her in cases where he / she has succeeded and thereby has shown to the competent court that his / her conduct was bona fide or justified in circumstances of the case. The question of reimbursement may arise only after the termination of the proceedings in favor of the concerned officer.

9. Here it may be noted that the liability incurred in the course of ordinary and proper management is different from the liability arising from breaches of duty as contemplated by Section 201 of the Act. In the ordinary course of things directors or officers of a company being agents (or acting as agents of a company) can expect to be indemnified under the provisions of Section 223 of the Indian Contract Act, 1872 (“Contract Act”) in respect of liabilities incurred in managing the business of the company in good faith. Section 223 of the Contract Act, reads as follows:

“Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes an injury to the rights of the third person.”

Further, Section 222 of the Contract Act, which deals indemnification of agents against lawful acts, reads as follows:

“The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.”

10. It is also possible for a company to take an appropriate insurance policy (where the company pays the premium, etc.) for its own protection against loss caused to it by its directors, and also to re-compensate the officer, against any loss he / she suffers because of any act done in his / her capacity as an officer of the company. This is not in contravention of Section 201 of the Act, since the company does not agree to indemnify the directors against their liability to the company, but merely agrees to meet the expense of procuring an undertaking from the insurer to do so. 

A General Discussion on Liabilities of Directors based on judicial decisions

Director’s Knowledge as knowledge of the company

1. Where an individual can be identified with a company then that individual’s knowledge may be regarded as the knowledge of the company, if he is under a duty to communicate that knowledge to the company. In most cases, a Managing Director is identified with his company and therefore the Managing Director’s knowledge is imputed to the company (Union India Sugar Mills Co. Ltd., Re, AIR 1933 All 607). The officer of a company is under a duty, if he is aware that a transaction into which his company or a wholly owned subsidiary is about to enter is illegal or tainted with illegality, to inform the board of the company of this fact (Belmont Finance Corporation vs. Williams Furniture Ltd. (No. 2), (1980) 1 All ER 393).

2. It has been held that the default of the managing director who is the ‘directing mind and will’ of his company, could be attributed to the company (Lennard’s Carrying Company vs. Asiatic Petroleum Ltd. 1915 AC 705 (HL)). In the same case (i.e. Lennard’s Carrying Company Case) Viscount Haldane articulated the alter ego doctrine peculiar to company law and as something distinct from the ordinary principle of agency and vicarious liability. In a celebrated passage (At page 713), he observed that “… a corporation is an abstraction. It has no mind of its own any more than a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation.”

3. This principle has also been followed in India inasmuch as the Supreme Court of India has, in J. K. Industries Ltd. & Ors. v. Chief Inspector of Factories and Boilers & Ors., [1997] 88 Comp Cas 285 (SC) held that, “…since a company is a legal abstraction, without a real mind of its own, it is those who in fact control and determine the management of the company, who are held vicariously liable for commission of statutory offences. The directors of the company are, therefore, rightly called upon to answer the charge, being the directing mind of the company”. The Supreme Court relied upon the Lennard’s Carrying Company’s case as well as Tesco Supermarkets vs. Nattras (1972) AC 153 (HL), where the House of Lords held that “… the question: what natural persons are to be treated in law as being the company for the purpose of acts done in the course of its business, including the taking of precautions and the exercise or due diligence to avoid the commission of a criminal offence, is to be found by identifying those natural persons who by the Memorandum and Articles of Association or as a result of action taken by the directors, or by the company in general meeting pursuant to the Articles, are entrusted with the exercise of the powers of the company.

4. In criminal law, the alter ego of the company may, depending on the circumstance of the case, be found at a lower level in the managerial hierarchy and not necessarily at the level of the Board of Directors or the managing director. So for instance, in a case where the assistant managing director and the traffic manager of a company had surrendered ‘all relevant powers of control’ over the operation of its ships to the marine superintendent, he was held to be a directing mind for this purpose (The Lady Gwendolen (1965) 2 All ER 283 (CA)).

5. As regards the liability of directors, the Supreme Court of India has, while observing that it is a question of fact to be determined on the evidence in each case, said that a “director may be shown to be so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of, but also liable for fraud in the conduct of the business of the company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company even superficially. If he does so he could be held liable for dereliction of duties… even if he is not shown to be guilty participating in the commission of fraud. It is enough if his negligence is of such character as to enable frauds to be committed and losses thereby incurred by the company”. (Official Liquidator vs. P.A. Tendolkar (1973) 43 Com Cases 382: AIR 1973 SC 1104. See Also: Globe Motors Ltd. vs. Mehta Teja Singh & Co. (Agencies) (1984) 55 Com Cases 445 (Delhi – DB))

Liability for illegal acts

1. It is a settled principle of law that ignorance of the law is not a defence in legal proceedings for violation of any statutory obligation. Specifically in the context of companies and its directors, it has been observed that where directors use their powers to part with the moneys of their company in a manner or for a purpose which the law forbids, it is not a defence to proceedings to make them liable for their act to plead merely that they acted in ignorance of the law (Louis Steen vs. Charles Allen Law (1963) 3 All ER 770).

2. A similar prohibition would also apply in cases where a director obtains any secret commission or any illegal gratification for the award of a contract with the company (Boston Deep Sea Fishing & Ice Co. Ltd. vs. Ansell (1886-1890) All ER Rep 65 (CA)). A company can recover from its director any money received by him by way of a bribe in fraud of the company and the company can also sue him and the person giving the bribe for any loss sustained through entering into a disadvantageous contract or the company may rescind the contract.

3. In a particular case, the managing director of a company withdrew money from the company’s account and used it to pay bribes to a contract awarding authority, and when sued by the company contended that the company had benefited by having substantial contracts awarded to it. The Court observed in this case that as a director of the company, he had no authority to use the company’s money to pay bribes and the fact that the company may have benefited from the payment of the bribes did not provide the director with any defence (Hannibal (E) & Co. vs. Frost (1988) 4 BCC 3 (CA)).

Liability for Negligence

1. While there are no objective standards of skill and care which could help determine whether a director has been negligent, there are a few general principles (arising out of the duties imposed on a director) which may be kept in mind while exercising the functions of the director of a company. For ease of reference, we have noted here some principles that emerge from judicial decisions on this subject.

2. Directors are not liable for negligence if they act honestly, for the benefit of the company and within their powers with such care as is reasonably expected of them, having regard to their knowledge and experience. Directors are not bound to bring any special qualifications into their office. The mere omission to take every possible care will not amount to negligence (Lagunas Nitrate Co. Ltd. vs. Lagunas Syndicate (1899) 2 Ch. 392). We note however, that given the fiduciary nature of a director’s role coupled with his duty to act in the best interest of the company, it is incumbent on directors to share and use any special knowledge they have for the benefit of the company’s business.

3. Though the directors as a body are responsible for the conduct of the company’s business, it is undoubted law that they can delegate their powers to one or more of themselves for the purpose of carrying it on more conveniently (Public Prosecutor vs. T.P. Khaitan (1957) 27 Com Cases 77, 83: AIR 1957 Madras 4).

4. A director is entitled to trust persons in a position of responsibility until there is reason to distrust them. In a specific case (based on the facts therein) it was held that the director was not liable for the impugned business decision, taken by him in reliance on the advice of a senior partner in an eminent firm of city solicitors without making further inquiries (Norman vs. Theodore Goddard (a firm) (1991) BCLC 1028 (Ch D)).

5. Directors have been held to have acted negligently when they released company funds to pay a debt and purchase assets without verifying whether the company owed the debt and whether the assets had been or were being transferred to the company (United Rubber Estates Ltd. vs. Cradock (No. 3), (1968) 2 All ER 1073).

6. Directors who participated in the company’s transactions without making inquiries to ensure that the transactions had been duly authorized by the Board resolutions and were for the benefit of the company were held to be negligent (Land Credit Co. of Ireland vs. Lord Fermoy (1870) 5 Ch App 763).

7. It has been observed that a company director who knowingly makes a false representation while acting as a director can be held personally liable not only in deceit, but also for negligent misrepresentation (Thomas Saunders Partnership vs. Harvey, The Independent, May 5, 1989 : 1989 CLY 304).

8. In the context of this subject, we may note the comments of a learned author, A. Ramaiya, to the effect that “…decided cases on negligence belong to the 18th and early 19th century. It is suggested that the present conditions of professional management and whole-time directors, who make a career out of their directorship, require stricter standards of care and skill, on the part of directors.” This suggestion has become even more relevant in the current Indian context, particularly after the acts of corporate misfeasance / malfeasance which have come to light in the Satyam case which is briefly set forth in this post.

Liability for breach of warranty of authority and in respect of contracts

1. A director is not personally liable for his company’s failure to perform a contract which he has made on its behalf, but he is liable in damages to a person with whom he purports to make a contract which is not binding on his company at all. When a director representing a company negotiates a contract he impliedly represents to the other contracting party that he has the authority to bind the company as its agent. If he lacks this authority, he is guilty of a breach of warranty of authority, and is liable for the loss which the other party suffers as a result of entering into the contract. A director will be personally liable to the other party for breach of warranty of authority when the contract is ultra vires the company or even if intra vires, is beyond the authority of director.

2. While negotiating a contract for his / her company, a director should make it clear to the other party that the contract will be entered into by the company and not the director personally. If he does not do this and the other party believes that he is contracting with the director or agent and not the company, the contract they conclude will be a personal one made with the director and he will be personally liable for fulfillment of the promises made. (Raja Ram Jaiswal vs. Ganesh Prasad AIR 1959 All 29).

Liability under guarantee for company’s debts

1. In the context of a loan transaction of the company, it was held that the directors who had not given any personal guarantee for the loan could not be made liable merely because they were directors. The company is as much a separate entity from shareholders as from directors (Indian Overseas Bank vs. R.M. Marketing & Services Pvt. Ltd. (2001) 107 Com Cases 696 (Delhi)).

2. In another case, a bank granted a temporary overdraft accommodation to a company for the purpose of meeting its working capital requirements. The advance was granted on the strength of a specific undertaking or promise made by the respondents, who were the managing director and a director, to liquidate within one month the entire outstanding in the account including costs and expenses. A decree passed against the director and the managing director personally was held to be justified. They could not get an order that recovery should not be out of their personal assets (Indian Overseas Bank vs. A.B. Senan (1999) 96 Com Cases 839 (Kerala))

3. Where certain directors who had guaranteed the company’s debts retired and new directors were appointed in their place who also signed the guarantee bond and there was no agreement to show that the earlier guarantee had ceased to be operative, it was held that all the directors including retired directors were liable jointly and severally under the guarantee (Bank of Baroda vs. Official Liquidator (1992) 73 Com Cases 688 (MP)). Where the guarantee is in individual capacity, the director is not released from his liability by ceasing to be director (M R Lakshmi Narayanan vs. Syndicate Bank (2000) 99 Com Cases 87 (Madras)).

 Liability under Torts

1. A director is not automatically liable for torts of the company irrespective of the size of the company or of the degree of his control over its affairs. In determining his / her liability it is necessary to examine carefully the role he / she played in relation to the alleged tortuous acts. There is no general requirement that a director would be liable for torts committed by a company only if he / she has acted recklessly or with the knowledge that the acts are tortuous. The director’s state of mind may be relevant where there is necessary ingredient in proving the commission of the particular wrong, but different considerations would apply where the state of mind of the tortfeasor is not relevant, as for example in breach of copyright (Evans (C) Ltd. vs. Spritebrand Ltd. and Sullivan 1985 BCLC 105). Where evidence established that certain directors had authorized and certain others had engaged in activities which constituted infringement, the directors were held liable (Apple Computer Inc. vs. Mackintosh Computers Inc. (1987) LRC (Comm) 658). We note however, that much depends on the facts of each case.

2. We note in the context of tortuous liability that the fact that a director is the effective controller and owner of a company is quite insufficient of itself to fix him with a personal liability for torts committed by the company and that what is required for such liability is that the director must himself have expressly directed or procured commission of the tortuous act. This element of personal involvement is also discussed in the later part of this Memo in the context of criminal liability and liability accruing on account of specific statutory provisions.

 Criminal Liability: General Principles

1. The general premise of a penal provision is the presence of “mens rea“, i.e. mental element necessary for a particular crime whether by way of a guilty mind; a criminal intent; a guilty or wrongful purpose. This forms, generally, the presumption for holding a person guilty of a criminal offence (except in cases of strict or vicarious liability).

2. Specifically in the context of companies, as held by various courts in India, since a company is a legal abstraction without a real mind of its own, it is those who in fact control and determine the management of the company, that are held vicariously liable for commission of statutory offences by the company. The directors of the company are, therefore, called upon to answer the charge, being the directing mind of the company. This was held by the Supreme Court of India in the case of J. K. Industries Ltd. & Ors. v. Chief Inspector of Factories and Boilers & Ors., [1997] 88 Comp Cas 285 (SC) wherein the Supreme Court relied upon the cases of Tesco Supermarkets Limited v. Nattrass, [1972] AC 153 (HL) and Lennard’s Carrying Company Limited v. Asiatic Petroleum Company Limited [1915] A.C.705

3. In other words, it is understood and considered that ordinarily, a corporate body like a company acts through its managing director or board of directors or authorized agents or servants and the criminal act or omission of an agent including his state of mind, intention, knowledge or belief ought to be treated as the act or omission including the state of mind, intention, knowledge or belief of the company. Thus, it has been held that a corporate body ought to be indictable for criminal acts or omissions of its directors, or authorized agents or servants, whether they involve mens rea or not, provided they have acted or have purported to act under authority of the corporate body or in pursuance of the aims or objects of the corporate body (State of Maharashtra vs. Syndicate Transport Co. (P) Ltd. and Ors. AIR 1964 Bom 195).

Provisions under Specific Statutes in India

After noting the general principles above, I am now noting the liability of a Managing Director under some specific enactments in India. While in some instances, the statute itself may be fairly clear as to what would form the basis of liability of an officer including a managing director of a company, in other cases the statue may be wanting clarity.

Insecticides Act, 196

1. Section 33 of the Insecticides Act, 1968 (“Insecticides Act“) provides specifically in relation to offences by companies, as under:

“(1) Whenever an offence under this Act has been committed by a company, every person who at the time the offence was committed, was in charge of, or 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 offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any punishment under this Act if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any Director, Manager, Secretary or other officer of the company, such Director, Manager, Secretary or other officer shall also be deemed to be guilty of that offence and shall be  liable to be proceeded against and punished accordingly.”

2. It is clear therefore, that this provision mandates imposition of liability not only on the company itself but also every person (including directors) who
at the time the offence was committed, was in charge of, or was responsible to the company for the conduct of the company’s business. The proviso to Section 33 however, affords protection against liability to (only) those persons who are able to prove that the offence was committed without their knowledge or that they exercised all due diligence to prevent the commission of such offence thereby underscoring the requirement of mens rea and duty of care.

3. Accordingly prosecutions under the Insecticides Act where there was not even an allegation that the directors in question were in charge of or were responsible for the conduct of the company’s business or had consented or connived in the matter were quashed (Bharat Pulverising Mills (P) Ltd. v. State of AP, (1991) 1 Comp LJ 403 (AP); D.K. Jhaver v. State of Punjab, (1996) 87 Com Cases 236 (P&H)).

 Income Tax Act, 1961

1. The Income Tax Act, 1961 (“IT Act“), which deals with inter alia the income tax payable by any person in India defines ‘person’ as including a company. Being a separate legal entity distinct from its shareholders and directors, a company is liable for the taxes payable by it.

2. Under the provisions of Section 179(1) of the IT Act, it is provided that in the case of a private company, if there is any tax due from it in respect of any income of any previous year, which cannot be recovered from the company, then every person who is a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

3. Further, Section 278B of the IT Act, which deals with offences committed by a company, reads as follows:

 (1)    Where an offence under this Act has been committed by a company, every person who, at the time the offence 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 offence and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.
(2)    Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
(3)    Where an offence under this Act has been committed by a person, being a company, and the punishment for such offence is imprisonment and fine, then, without prejudice to the provisions contained in sub-section (1) or sub-section (2), such company shall be punished with fine and every person, referred to in sub-section (1), or the director, manager, secretary or other officer of the company referred to in sub-section (2), shall be liable to be proceeded against and punished in accordance with the provisions of this Act.”

 4. Thus, according to Section 278B of the IT Act, every person who at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of such a company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. However, a person would not be held liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence. Further where any offence under the IT Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer, then such a person shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

5. With reference to the said provisions, certain penal provisions of the IT Act may be briefly mentioned. For instance, as per the provisions of Section 276B of the IT Act, if a person fails to pay to the credit of the Central Government, (a) the tax deducted at source by him as required by or under the provisions of Chapter XVII-B (Deduction at source); or (b) the tax payable by him, as required by or under sub-section (2) of section 115-O (Tax on distributed profits of domestic companies), he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 (three) months but which may extend to 7 (seven) years and with fine.

6. Less rigorous punishment such as imprisonment for a period of 2 (two) years/ 3 (three) years is prescribed for offences such as willful attempt to evade tax (Section 276C), failure to furnish returns of income (Section 276CC), failure to produce accounts and documents (Section 276D), falsification of books and accounts (Section 277A), etc. Also, as per the provisions of Section 278A, if any person convicted of an offence under Section 276B or sub-section (1) of Section 276C or Section 276CC or Section 276DD or Section 276E or Section 277 or Section 278 is again convicted of an offence under any of the aforesaid provisions, he shall be punishable for the second and for every subsequent offence with rigorous imprisonment for a term which shall not be less than 6 (six) months but which may extend to 7 (seven) years and with fine.

 Factories Act, 1948

1. Under certain enactments specific persons may be identified for imposition of liability. For example, under the Factories Act, 1948 (“Factories Act“), in respect of factory of a company only a director can be “occupier” (i.e. the person who has ultimate control over the affairs of the factory) as set forth in Section 2(n) of the Factories Act (J. K. Industries Ltd. & Ors. v. Chief Inspector of Factories and Boilers & Ors., [1997] 88 Comp Cas 285 (SC)). A director nominated as “occupier” of the factory of a company will be responsible for liabilities attached to an “occupier” under the Factories Act. For example under Section 92 of the Factories Act, there is general penalty for offences, inter alia, providing that if in or in respect of any factory there is any contravention of any of the provisions of the Factories Act or rules made thereunder or of any order in writing given thereunder, the occupier and manager of the factory shall each be guilty of an offence and punishable with imprisonment for a term which may extend to 2 years or with fine which may extend to Rs. 1 lakh or with both. 
 

Prevention of Corruption Act, 198

1. Before I make specific observations in the context of the Prevention of Corruption Act, 1988 (“PoC Act“) I’d like to note some of the statutory provisions of the PoC Act. Section 7 of the PoC Act, provides, inter alia, that whoever being a public servant accepts or obtains or agrees to accept or attempts to obtain from any person for himself or for any other person, any gratification whatever, other than legal remuneration, as a motive or reward for doing or forbearing to do any official act or for showing or forbearing to show, in the exercise of his official functions, favour or disfavour to any person or for rendering or attempting to render any service or disservice to any person, with the Central Government or any State Government or Parliament or the Legislature of any State or with any local authority, corporation or Government company, or with any public servant, shall be punishable with imprisonment which shall not be less than 6 months but which may extend to 5 years and shall also be liable to fine.

2. Section 11 of the PoC Act stipulates that whoever being a public servant, accepts or obtains or agrees to accept or attempts to obtain for himself or for any other person, any valuable thing without consideration, or for a consideration which he knows to be inadequate, from any person whom he knows to have been or to be or to be likely to be concerned in any proceeding or business transacted or about to be transacted by such public servant, or having any connection with the official functions of himself or of any public servant to whom he is subordinate, or from any person whom he knows to be interested in or related to the person so concerned, shall be punishable with imprisonment for a term which shall be not less than 6 months but which may extend to 5 years and shall also be liable to fine. Since the term “valuable thing” is not defined in the PoC Act, it is capable of an expansive interpretation.

3. Section 12 of the PoC Act provides for punishment for abetment of offences defined in Sections 7 or 11 and states that: “Whoever abets any offence punishable under Section 7 or Section 11 whether or not that offence is committed in consequence of that abetment, shall be punishable with imprisonment for a term which shall be not less than 6 months but which may extend to 5 years and shall also be liable to fine.”

4. The word used in Section 12 of the PoC Act is “whoever” which, in my view, would cover within its ambit, a company as well as a natural person. Thus, under the PoC Act, liability can be attached to an officer / managing director of a company for abetment of certain offences. However, what would be necessary to prove in either of these cases for prosecuting and convicting an accused is the presence of the requisite mens rea, i.e. a guilty mind; a criminal intent; a guilty or wrongful purpose for committing the offence. As has been held by courts in India, the relevant question is the state of mind of the accused when he offers a bribe (In re Varadadeskachariar, AIR 1950 Mad 93; Mohadeo Daunappa Gunaki v. State, AIR 1952 Bom 435; Bhimsingh v. State, AIR 1955 Raj 108).

Conclusion

Finally, I would like to make note that for prosecuting a person (whether a company or a natural person) some nexus must exist between the offence committed and the person charged / held responsible for the offence. As stated herein above, in some cases, the statute itself clearly identifies the person who will be held responsible for the commission of an offence, and in other cases much depends on the prosecution’s establishing a case against such person. In the current Indian scenario, one is observing renewed force and attention being given to norms of good corporate governance and a deprecation of corporate misfeasance / malfeasance. Unfortunately however, there is no codified law (other than provisions of the Companies Act) that could define clearly the roles and responsibilities of a Managing Director specifically in this context of corporate governance. However given the fiduciary nature of a Director’s position, it is obligatory for a Director to act, at all times, in a reasonable and responsible manner and in the interest of a company as well as its shareholders.

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