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Directors’ Liability Under Various Corporate Laws

Directors’ Liability Under Various Corporate Laws. BY P.K.MITTAL B. Com, LLB, FCS ADVOCATE DELHI HIGH COURT CENTRAL COUNCIL MEMBER – THE INSTITUTE OF COMPANY SECRETARIES OF INDIA. CHIEF ADVISOR : PKMG LAW CHAMBERS

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Directors’ Liability Under Various Corporate Laws

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  1. Directors’ Liability Under Various Corporate Laws BY P.K.MITTAL B. Com, LLB, FCS ADVOCATE DELHI HIGH COURT CENTRAL COUNCIL MEMBER – THE INSTITUTE OF COMPANY SECRETARIES OF INDIA. CHIEF ADVISOR : PKMG LAW CHAMBERS Mobile 9811044365, 01122540549, 22524229

  2. In this Presentation I wish to make an attempt to circumscribe the `Liability of Directors’ in respect of offences alleged to have been committed by a Company of which he is a director under the provisions of various Corporate Laws.

  3. We see that Invariably, in the criminal complaint containing allegations of violation of provisions of any of the corporate laws (including Companies Act, 1956) filed by various Government Departments before the court of Chief Metropolitan Magistrate, all the Directors are arrayed as Accused persons

  4. The result is that When routinely, their names are included in the complaint as Accused persons, they have naturally to undergo an ordeal of trial which, probably, in almost all cases, result in their discharge or acquittal.

  5. VICARIOUS LIABILITY Code does not cast vicarious liability on a party not directly charged for commission of an offence, unless specifically provided there for IN THE MATTER OF S.K.ALAGH VS STATE OF UTTAR PRADESH AND OTHER 2008 (5) SCC 662.

  6. OFFENCES BY COMPANIES If the person committing an offence under Section 138 is 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.

  7. COMPANIES ACT, 1956 Section 5 defines an Officer in default as follows: 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:-

  8. (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;

  9. (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 clause (a) to (c) any director or directors who may be specified by the Board in this behalf or where no directors is so specified, all the directors Provided that where the Board exercises any power 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.

  10. COMPANIES ACT, 1956. The Department of Company Affairs, (now Ministry of Company Affairs), had issued a Circular 6/94 dt.24.06.1994, which, inter-alia, says that an ordinary director (i.e. non-working director) shall not be liable for offences under the Companies Act, 1956, if the company has, Managing Director, Manager, or Director specifically entrusted to comply with the provisions of Companies Act, 1956. This circular came up for consideration before the Hon'ble Rajasthan High Court in the case of Ravindra Narayan Vs.ROC Jaipur 1994 (81) Company cases 925 (Raj) wherein High court held that ordinary director would not be "officer-in-default".

  11. OFFENCES COMMITTED DURING TENURE At the same time, many a time, the prosecuting agency also file complaint even against those Directors who ceased to be Directors even before the commission of offence. The Hon'ble High Court has held that the "Officer" would be liable only when default has been committed during his tenure – [C.V.Shiva Prasad Vs. ROC 1997 (88) Company Cases 420]

  12. The Delhi High Court in the case of Manish Kant Aggarwal Vs. NAFED 2009(156)DLT 415 has observed. The resignation of the Director is effective from the date he submits it, because of his intention to resign and it is for the company to comply with the formalities, required under Section 302 or 303 of the Act. It is not the duty of the company to fill Form No.32 or inform the Registrar of Companies because that is the duty of the Company Secretary and on the basis of resignation, the complaint against the Director could be quashed.

  13. The Delhi High Court in the case of Luk Auto Ancillary (India) Ltd Vs. Laxmi Narain Raina 1999 (50) DRJ 101 has held that Official Liquidator is not entitled to prosecute a Director who has resigned five years ago from the date of default by the company.

  14. DIRECTOR RESIGNED BEFORE ISSUANCE OF CHEQUE A Director has resigned before the issuance of a cheque which has ultimately been dishonoured and for which a complaint under Section 138 of Negotiable Instrument Act was filed, the Hon'ble Bombay High Court in the case of Chaitan M Mania Vs. State of Maharashtra 2004(2) Maharashtra Law Journal 1035 has held that such Director shall not be liable.

  15. B The prosecution of directors of company who were neither "officers in default" nor connected with furnishing of alleged false statement is unwarranted and, therefore, liablen to be quashed. [Vijay Kr Gupta Vs. ROC 2003 CLC 777]

  16. UNDER SEBI LAW 1. The prosecution would not lie against an ordinary Director without examining their role for the commission of default [G.Vijaya Lakshmi Vs.SEBI 2000 (100) Company Cases 726]

  17. The Delhi High Court in the case of Rashi Verma Vs. SEBI 2009(157) DLT 417, in a prosecution launched by the SEBI, has observed as under:- In the complaint, it is averred that Petitioner was Director and was in charge of the affairs of the company and was responsible for the conduct of its day to day business. There has to be specific accusation against the Director or each of the persons arrayed as accused in the complaint and simple narration of the contents of the provision under the Statute or the requirement of law is not enough to summon such persons as accused.

  18. UNDER FERA LAWS In a landmark judgement in the case of Girdhari Lal Gupta Vs.D.N.Mehta AIR 1971 (SC) 2162, the Hon'ble Supreme Court had interpreted the words "in-charge and responsible for day to day affairs of the company" to mean the person who is in overall control of the day to day business of the company. And this judgment has been invariably quoted in all subsequent judgments

  19. UNDER POLLUTION CONTROL & DRUGS LAWS Likewise, in the case of Haryana Pollution Control Board Vs. Bharat Carpets Ltd 1995 (84) Company Cases 681, it has been held that persons responsible for conduct of day to day business of the company alone can be prosecuted. The Gujarat High Court in the case of Laxmikant Bhagubhai Vs. D K Solanki 2005 (118) ECR 321 (Guj) has held that under Prevention & Control of Pollution Act, 1974, the persons who are in-charge and responsible are only liable in case the offence has been committed by the company.

  20. PREVENTION OF FOOD ADULTERATION ACT, 1973. The Court has held that for violation of Prevention of Food Adulteration Act, the persons who were nominated by the company to be in charge of company's affair's would be liable. [R Banerjee Vs. H D Dubey 1992 (75) Company Cases 723] That the Hon'ble Delhi High Court, while dealing the prosecution under the Delhi Development Authority Act, in the case of Vidyavati Vs.State 1988 (3) Company Law Journal 117 (Delhi), has held that " the person in charge means" the persons who in overall control of the affairs of the company and all the persons cannot be held to be in overall control of the affairs of the company.

  21. TIME BARRED COMPLAINTS By far, in almost all cases, the prosecution is generally filed after the expiry of period of limitation as prescribed under Section 468 of Code of Criminal Procedure. The provisions of Limitation Act,1963 has no application to the criminal complaints filed under various laws by the prosecuting agencies. The provisions of Section 482 of Cr PC talk of inherent extra-ordinary powers of the High Court and the question then arises as to whether an aggrieved person could file a petition under Section 482 Code of Criminal Procedure before the High Court seeking quashing of complaint which is prima-facie barred by time.

  22. The Hon'ble Supreme Court in the case of State of Punjab Vs. Sarvan Singh AIR 1981 (SC) 1054 has held that petition could be maintainable for quashing of criminal complaint if prima-facie the complaint is time-barred as the continuation of time-barred complaint would be an abuse of the process of the Court and would amount to travesty of justice. To this effect case of Rakesh Kumar & Anr. Vs.ROC 1995 (82) Comp Cases 681.

  23. The Hon'ble Supreme Court in the case of ROC Vs. Rajshree Sugar & Chemicals Ltd AIR 2000 SC 1643 has held that the ROC would be "aggrieved person" for the purpose of Section 113 of the Companies Act, 1956 and that period of limitation of six months would commence from the date ROC came to know of the offence. The Department of Company Affairs had also issued a Circular No.2/40/85-CL-IV dt.25.8.1985 wherein it has been clarified that the complaints be filed within a period of six months in respect of those offences punishable with fine especially under Section 162, 220 and Rule 11 of Companies Acceptance of Deposit Rules.

  24. CONTINUING OFFENCE The dictum that the criminal complaint would be liable to be quashed is again subject to a dictum that the offence should not be a continuing offence. Section 472 of Code of Criminal Procedure deals with continuing offence and in such case the petitioner could not contend that the complaint is barred by time.

  25. It has been held that failure to file Annual Return is not a continuing offence – [Praveen Jha and Ors. Vs. State 2000 (3) Company Law Journal 426 Allahabad. National Cotton Mills Vs.A ROC 1984 (56) company cases 222 S.P.Punj & Ors. Vs.ROC 1991 (71) Company Cases 509 The failure to file Balance Sheet and Profit and Loss Account is also not a continuing offence as has been held in the case of Chandra Spg. & Wvg.Mills Pvt.Ltd. Vs.ROC 1990 (69) Company Cases 117.

  26. In CWT Vs.Suresh Seth 1991 (129 ITR 328 it has been held that wrong or default which is complete but whose effect may continue to be felt even after its completion is not a continuing wrong or default. Failure to disclose true and fair account of Annual Account of the company is not a continuing offence as has been held by the Madras High Court in the case of C.K.Ranganathan Vs.ROC 2003 (52) CLA 16, There are certain central legislation to which the provisions of Applicability of the Economic Offences (Inapplicability of Limitation) Act, 1974 are attracted and provisions of Section 468 of Cr PC shall not be applicable.

  27. REMEDY FOR SEEKING REDRESSAL OF GRIEVANCE Upon summons being served the Accused person would have following remedy:_ a) Application for recall of summons by the Trial Court. (This remedy is now no longer available in view of the judgement of the Hon'ble Supreme Court in the case of Adalat Prasad's Vs. Roop Lal Jindal 2004 (113) DLT 356where the Supreme Court has held that the trial court has no power to review its own order and recall summons. b) Criminal Revision before the Addl. Session Judge under Section 397 Cr PC; Dhariwal Tobacco Vs.State 2009(2)SCC 370

  28. c) Petition under Section 482 Cr PC before the High Court is maintainable under the inherent powers of the High Court. Krishnan Vs. Krishnavel 1971(1) RCR 724. Sham Lal Vs. Raj Kr Aggarwal 2002 (3) All India Criminal Law Reporter In case disputes of civil nature, Ajay Mitra Vs. State of Mizoram 2003 (3) SCC 11. If a complaint under Section 138 is pending, then filing complaint of cheating under Section 420 as a pressure tactics would not be maintainable. G Sagar Suri Vs. State of UP 2000 (2) SCC SCC 636.

  29. The Supreme Court in the case Zandu Pharmaceutical Works Ltd. and Ors. v. Mohd. Sharaful Haque and Anr. MANU/SC/0932/2004 observed thus: It would be an abuse of process of the court to allow any action which would result in injustice and prevent promotion of justice. In exercise of the powers, court would be justified to quash any proceeding if it finds that initiation/continuance of it amounts to abuse of the process of court or quashing of these proceedings would otherwise serve the ends of justice. When no offence is disclosed by the complaint, the court may examine the question of fact. When a complaint is sought to be quashed, it is permissible to look into the materials to assess what the complainant has alleged and whether any offence is made out even if the allegations are accepted in to.

  30. The Supreme Court in the case of Inder Mohan Goswami Vs. State of Uttaranchal Pradesh AIR 2008 SC 251 has observed as under:- 44. The court must ensure that criminal prosecution is not used as an instrument of harassment or for seeking private vendetta or with an ulterior motive to pressure the accused. On analysis of the aforementioned cases, we are of the opinion that it is neither possible nor desirable to lay down an inflexible rule that would govern the exercise of inherent jurisdiction. Inherent jurisdiction of the High Courts under Section 482 Cr.P.C. though wide has to be exercised sparingly, carefully and with caution and only when it is justified by the tests specifically laid down in the Statute itself and in the aforementioned cases. In view of the settled legal position, the impugned judgment cannot be sustained.

  31. The Hon’ble Supreme Court in the case of Som Mittal vs. State of Karnataka AIR 2008 SC 1126 has held that the Petitioner may exercise its jurisdiction under Section 482 of the Cr PC where the interest of justice so require and not in the rarest of the rate cases. The expression 'rarest of the rare cases' was used in connection with Section 302 IPC to hold that death penalty should only be imposed in rarest of rare cases vide Constitution Bench decision of this Court in Bachan Singh v. State of Punjab MANU/SC/0111/1980. In my opinion, this expression cannot be extended to a petition under Section 482 Cr.P.C Though I agree with my learned brother Hon'ble Sema J. that the power under Section 482 Cr.P.C. should be used sparingly, yet there may be occasions where in the interest of justice the power should be exercised.

  32. The Supreme Court has held in the case of Saroj Kumar Poddar Vs. State AIR 2007 SC 912 that for roping in all the Directors of a company in a proceedings under Section 138 of Negotiable Instrument Act, that the complaint must disclose and aver in what manner the accused persons are incharge and responsible for day to day affairs of the company and, therefore, observed as under:- Apart from the Company and the appellant, as noticed hereinbefore, the Managing Director and all other Directors were also made accused. The appellant did not issue any cheque. He, as noticed hereinbefore, had resigned from the Directorship of the Company. It may be true that as to exactly on what date the said resignation was accepted by the Company is not known, but, even otherwise, there is no averment in the complaint petitions as to how and in what manner the appellant was responsible for the conduct of the business of the Company or otherwise responsible to it in regard to its functioning. He had not issued any cheque. How he is responsible for dishonour of the cheque has not been stated. The allegations made in paragraph 3, thus, in our opinion do not satisfy the requirements of Section 141 of the Act.

  33. The Supreme Court held, in Sabitha Ramamurthy Vs. RSS Channa AIR 2006 SC 3086 that the parraot like repetition of the words of Section 141 of the Negotiable Instrument Act is not enough. The complaint must specify in what manner the accused persons are incharge and responsible for day to day affairs of the company and, therefore, observed as under:- Apart from the Company and the appellant, as noticed hereinbefore, the Managing Director and all other Directors were also made accused. The appellant did not issue any cheque. He, as noticed hereinbefore, had resigned from the Directorship of the Company. It may be true that as to exactly on what date the said resignation was accepted by the Company is not known, but, even otherwise, there is no averment in the complaint petitions as to how and in what manner the appellant was responsible for the conduct of the business of the Company or otherwise responsible to it in regard to its functioning. He had not issued any cheque. How he is responsible for dishonour of the cheque has not been stated. The allegations made in paragraph 3, thus, in our opinion do not satisfy the requirements of Section 141 of the Act.

  34. The Hon’ble Supreme Court in the case of Everest Advertising (P) Ltd vs. State AIR 2007 SC 1650 has held that the complaint must disclose and aver in what manner the accused persons are incharge and responsible for day to day affairs of the as under:- 19. In view of the above discussion, our answers to the questions posed in the reference are as under: (a) It is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of business of the company. This averment is an essential requirement of Section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of Section 141 cannot be said to be satisfied.

  35. (b) The answer to the question posed in sub-para (b) has to be in the negative. Merely being a director of a company is not sufficient to make the person liable under Section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business. The requirement of Page 1775 Section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases

  36. The Constitution Bench Judgment in the case of SMS Pharmaceuticals Ltd Vs. Neeta Bhalla AIR 2005 SC 3512, in the following manner:- A Constitution Bench of this Court in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla MANU/SC/0622/2005 furthermore categorically stated that the complaint petition must contain the requisite averments to bring about a case within the purview of Section 141 of the Act so as to make some persons other than company vicariously liable therefore.

  37. THANK YOU

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