Liability of Directors for Actions of Company in India

1. Introduction

The Union Budget 2020-2021 proposes to decriminalise offences specified under the Companies Act, 2013, which may significantly impact the liability of directors for actions of companies in India. In view of the amendments proposed, this article aims to examine the circumstances in which presently, the directors of a company can be held liable for actions of the company.

2. Legislative Framework

This article examines the following frameworks for determining director liability in India for the actions of the company: (a) Companies Act, 2013; (b) Indian Penal Code, 1860; and (c) Negotiable Instruments Act, 1881.

3. Companies Act, 2013

3.1 Key Terms under the Companies Act, 2013 (“Act”)

Section 2 (34) of the Act defines “director” as a director appointed to the Board of a company; Section 2 (59) of the Act defines “officer” as any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or the directors are accustomed to act; Section 2 (60) of the Act defines “officer who is in default” as inter alia an officer of the company namely:

• whole-time director;
• key managerial personnel or such director(s) specified by the Board in this behalf and who has given his in writing to the Board to such specification, or all the directors, if no director is so specified;
• any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility and authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;
• any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person providing advice in a professional capacity; and
• every director, who is aware of such contravention, or where such contravention had taken place with his consent or connivance.

3.2 Company Liability and Director Liability under the Act

A company is a distinct and independent entity and thus, the liability of a company will be different from the liability of a director in such company. However, under the Act, liability for default by a company will be imposed on the officer who is in default, and such officer shall be liable for penalty, imprisonment, fine or otherwise. This includes:

• An offense and / or contravention was committed with a director’s consent and / or connivance;
• Every director who is aware of a contravention by virtue of participation in proceedings with respect to such contravention, and does not object to the same; or
• A director whose negligence resulted in the offense.

However, in Tristar Consultants v M/S Vcustomer Services India Pvt. Ltd. & Anr the Delhi High Court[1] stated that even though a company is a juristic person, it has to act through a living human being. The decisions on behalf of a company are taken by its board of directors and an individual director cannot act on behalf of the company unless such power is conferred upon him either through a specific board resolution or through the articles of association of the company. While directors have a fiduciary relationship with the company and act as agents of the company, the directors owe no fiduciary or contractual duties or any duty of care to third parties who deal with the company. The Hon’ble Court held that the liability of a director arises only if they derive any personal benefit while purporting to act on behalf of the company.

Similarly, in Hubtown Limited vs IDBI Trusteeship Service Limited, one of the contentions made before the Bombay High Court[2] was that the two subsidiaries of a parent company should be viewed as a single entity. However, the Bombay High Court held that, “the aforesaid contention is preposterous to say the lease, as the sequitur thereto, would be that all subsidiaries are the same entity as their respective parent”. The Bombay High Court inter alia held that the parent and its subsidiaries cannot be said to be the same entity.

4. Indian Penal Code, 1860

The Indian Penal Code, 1860 provides for offences of criminal breach of trust and cheating under Sections 405 and 415 respectively, pursuant to which a director may face criminal liability for actions of the company. However, in GHCL Employees Stock Option Trust vs. India Infoline Limited[3], the Hon’ble Supreme Court of India upheld the judgement passed by the Delhi High Court which had quashed the summons on the grounds that vicarious liability of the managing director and other directors of the company cannot be alleged and the complainant needs to specifically allege the act/complaint of/against the individual director and what role such individual director had played.

5. Negotiable Instruments Act, 1881

In 2010, in the case National Small Industries Corp. Ltd. vs. Harmeet Singh Paintal and Ors[4] before the Supreme Court of India, a director was accused of offences under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881. The Supreme Court held that for holding directors liable for offences committed by the company under Section 141 of the Negotiable Instruments Act, 1881, there must be specific averments against the directors, showing as to how and in what manner the directors were responsible for the conduct of the business of the company.

The Supreme Court further held that a company, though a legal entity, can act only through its Board of Directors. The settled position is that a managing director is prima facie in-charge of and responsible for the company's business and affairs and can be prosecuted for offences by the company. But insofar as other directors are concerned, they can be prosecuted only if they were in-charge of and responsible for the conduct of the business of the company.

6. Conclusion

To conclude, the liability of a company is separate and independent from the liability of its director. For a claim of liability to arise against the directors of a company, vicarious liability of directors cannot be alleged, and specific allegations have to be made and evidenced against the directors of a company. With anticipated implementation of the amendments to Companies Act, 2013 decriminalising offences, there may be changes in the way a director’s liability for the actions of a company is ascertained.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal Hyderabad.

[1] C.R.P. No. 365/2006

[2] Summons for Judgment No. 39 of 2013 in Summary Suit No. 520 of 2013

[3] Criminal Appeal No. 488 of 2013.

[4] Criminal Appeal Nos. 320-336 of 2010 and Criminal Appeal No. 337 of 2010.