A company is a legal entity and does not have any physical existence. It can act only through natural persons to run its affairs. The person, acting on its behalf, is called Director. A Director is any person, occupying the position of Director, by whatever name called. They are professional men, hired by the company to direct its affairs. But, they are not the servants of the company. They are rather the officers of the company.
The directors of the company can be divided into two categories as Executive Director and Non – Executive Directors.
In case of Non – Executive Director : A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. However an Executive Director needs to give constant attention and take active interest in the affairs of the Company.
Liability of officers for offences under Companies Act 2013:
Section 2 (60) of the Companies Act 2013 identity the officers who are in default for the purpose of any provision in the Act, which includes : whole time director, KMP, Directors.
Under the Companies Act 2013, “officers” who are in default for the purpose of the Act are held liable, which includes Directors and KMP.
However, the provisions of section 149 (12) (ii) of the Companies Act 2013 provides immunity to non-executive director. The provision says is: “The non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.” (Note : This provision is not new, there was a circular from the MCA to a similar intent in 2011. However, now that this intent is coded in the law).
Now the question arise is whether the concept of Doctrine of Vicarious Liability is applicable to the Non – Executive Directors for the criminal act/s or criminal offences committed by the Executive Director ?
OR
Whether all the Directors (i.e. Executive and Non-Executive) shall be held liable for the offences committed by the Company ?
Meaning of Doctrine of Vicarious Liability :
Generally, a person is liable for his own wrongful acts and one does not incur any liability for the acts done by others. In certain cases, however, vicarious liability, that is the liability of one person for the act of another person, may arise. In order that the liability of A for the act done by B can arise, it is necessary that there should be certain kind of relationship between A and B, and the wrongful act should be, in certain way, connected with that relationship. Example : Employer – Employee , Principal – Agent.
Supreme Court of India in its judgment in the case N. Rangachari vs Bharat Sanchar Nigam Ltd on 19 April, 2007, stated that there shall be no vicarious liability unless the statue specifically provides so.
If the provision of any statue creates criminal liability, then the any conditions laid down for vicarious liability have to be strictly complied with. The conditions are intended to ensure that a person who is sought to be made vicariously liable for an offence of which the principal accused is the Company, had a role to play in relation to the incriminating act and further that such a person should know what is attributed to him to make him liable. In other words, persons who had nothing to do with the matter need not be roped in. A company being a juristic person, all its deeds and functions are result of acts of others. Therefore, officers of a Company who are responsible for acts done in the name of the Company are sought to be made personally liable for acts. It makes every person who at the time the offence was committed, was in charge of and was responsible to the Company for the conduct of business of the Company, as well as the Company, liable for the offence. However the conditions may provide an escape route for persons who are able to prove that the offence was committed without their knowledge or that they had exercised all due diligence to prevent commission of the offence
This means where the statutory provision itself does not specifically attract the doctrine of vicarious liability, an individual cannot be implicated under the same.
Further, the Company is a legal entity, and affairs or act/s of the company are controlled by the natural person (i.e. Directors of the Company). The learned counsel in the case Gunmala Sales Pvt. Ltd vs Anu Mehta & Ors on 17 October, 2014, held that the liability of the Director is determined by the role he plays in the Company. The Non-Executive Directors does not give constant attention and take active interest in the day to day affairs of the Company, hence they shall not be held liable.
However, the non-executive director cannot always take immunity under the provisions of section 149 (12)(ii) of the Companies Act 2013. Provision says is – a director shall be liable only such acts of omission or commission by a company (a) which occurred (i) with his knowledge being a part of the board; and (ii) with his consent or connivance; or (b) where he did not act diligently. In the case of Poonam Garg (appellant) vs Sebi on 22 March, 2018, where the appellant (i.e. Poonam Garg) was the promoter in the category of Non-Executive Director (NED) of the Company and her husband was the Promoter/ Managing Director/ Compliance Officer of the company.
The Adjudicating Authority stated that it is not open to the appellant to feign ignorance about the PIT Regulations and take shelter under the violations committed by her husband as Promoter/ Managing Director/ Compliance Officer of the company and held the appellant (Poonam Garg – Promoter & NED) liable for the day to day transactions taken by the company.
From the above analysis, it could be opine that while deciding whether to held the Non – Executive Director as liable or not, one should check the role of non-executive director which he plays in the company, the details about the voting of resolution passed or rejected, and other provisions of the statute which are specifically applicable for any particular offence committed by the Company.
Disclaimer : The views presented are in personal & in generic form and not as a legal advice, further it has nothing to do with where I am employed.
Article written by PCS Kavita Shah, email id: csshahkavita@gmail.com
Author Bio
Immnunity provided to Professionals as Non-Executive Directors needs to be considered too.
COURT: Bombay High Court
CORAM: Mridula Bhatkar J
SECTION(S): Companies Act
COUNSEL: Abhay Jadeja, Amit Desai, Pranav Badheka
DATE: February 20, 2019 (Date of pronouncement)
DATE: September 7, 2019 (Date of publication)
Liability of professionals acting as Non-executive directors: Practicing professionals are prohibited from acting as full time directors. They can only act as non-executive directors not performing administrative duties. Such persons cannot be prosecuted for offenses committed by the company. it will be a travesty of justice to prosecute all Directors if the offense is committed without their knowledge. The accounts are signed by such directors in a routine manner and they are not subject to vicarious liability (Homi Phiroz Ranina & Ors. vs. State of Maharashtra 2003 (3) Mh.L.J. 34 followed)