Directors’ Liabilities – Recent judicial pronouncements

Indian law vests the powers of a company with its board of directors in general. However, in most companies, the powers in relation to a company’s day-to-day affairs vest with the management team reporting to the managing director/ CEO or the company’s board. Indian courts and tribunals have, in a plethora of rulings, applied principles of liability of directors for acts and omissions of a company, generally based on the directors’ involvement in the affairs of the company or their duties to the company. In this article, we examine the recent decisions of the Securities Appellate Tribunal (“SAT”) and the Supreme Court of India on the issue of civil and criminal liability of directors for acts and omissions of a company.

Responsibility over designation – Securities Appellate Tribunal

In Sayanti Sen v. Securities and Exchange Board of India[1] (“SEBI”), the SAT ruled that liability of a director for violation of a statutory provision by a company would depend on the person’s role in the company’s affairs and not designation. The case dealt with an appeal against an order of SEBI issued to Silicon Projects India Limited (“SPIL”) and its directors to inter alia refund monies collected by SPIL by issue of non-convertible debentures (“NCDs”) in violation of the provisions of the Companies Act, 1956 (“1956 Act”), the SEBI Act, 1992 and SEBI (Issue and Listing of Debt Securities) Regulations, 2008.

One of the directors, Ms. Sayanti Sen (“Appellant”) contended that she was initially appointed as a receptionist and was subsequently appointed as a director in SPIL. She further submitted that she had nothing to do with the issue of NCDs and had not attended any board meetings or signed any resolutions. However, SEBI held her to be jointly and severally liable for refunding the money collected by SPIL. SEBI held the Appellant liable stating that even though she might not have been involved in the decision making process, she could not wriggle out of her responsibility as a director of SPIL and plead ignorance of its affairs. SEBI ruled that being a director of SPIL, the Appellant was responsible for the prospectus and in the absence of material demonstrating that any specified director/ officer of the company was entrusted to discharge obligations under Section 73 of the 1956 Act, all the past and present directors would be officers-in-default under Section 5(g) of the 1956 Act, and were jointly and severally liable.

The SAT held that that SEBI’s order was patently erroneous and against the provisions of Section 5(g) and Section 73(2) of the 1956 Act, as SEBI had proceeded on the assumption that in the absence of any officer being nominated as an officer in default, all the directors would be liable. SAT further held that the approach adopted by SEBI ignored the evidence on record, making its order illegal and unsustainable. SAT found that Section 73(2) of the 1956 Act made directors liable in case the company fails to repay monies as required thereunder, only if such director was an officer in default. It reiterated the principle that director liability cannot be imputed automatically and that it was a cardinal principle that there can be no vicarious liability unless the statutes specifically provides for it.

The SAT cited two High Court decisions, in support of the principle that every director need not be penalized merely because he/she is a director and if the director can explain that he/she had no role to play in the alleged default, the presumption of guilt followed by penalty cannot be attached. SAT also relied on the Supreme Court decision in Sunil Bharti Mittal vs. Central Bureau of Investigation & Ors.[2], which held that a director can only be prosecuted if there was sufficient evidence of his active role or where the statutory regime attracted the doctrine of vicarious liability.

SAT examined Section 27 of the SEBI Act, 1992 and noted that an officer is deemed guilty of an offence by a company if he was in charge of and responsible to the company and that the proviso to Section 27(1) provides that liability shall not apply to a person who can prove that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence. SAT held that, in its view, it is not possible to lay down any hard and fast rule as to when a director could be held liable for acts of the company. However, applying the spirit of Section 27, if there is a finding that the officers had nothing to do with the day-to-day affairs of the company, they should not be held guilty. This is consistent with the interpretation of similar provisions in various other statutes in relation to offences by companies, as held by the Supreme Court in various decisions.[3]

The SAT held that the SEBI was required to arrive at a specific finding that the director was responsible for the acts of the company and the mere fact that a person was a director would not make him automatically responsible for refund of monies under Section 73(2) of the 1956 Act. SAT quashed the direction of SEBI against the Appellant to refund the monies collected by SPIL pursuant to the NCDs.

No vicarious liability in the absence of statutory provisions – Supreme Court of India

In Shiv Kumar Jatia v. State of NCT of Delhi[4], the Supreme Court quashed criminal proceedings initiated against the managing director of a company, ruling that in the absence of any vicarious liability provision, individual directors could be made liable only if there was sufficient material to prove their active role coupled with criminal intent.

The case dealt with a guest at Hotel Hyatt Regency, New Delhi run by Asian Hotels (North) Limited (“AHNL”), who had fallen from a terrace of the hotel while smoking. It was alleged that the terrace was dark and the hotel staff did not stop guests from accessing the terrace, and therefore, there was lapse on part of the hotel management in adopting adequate safety measures for its guests. The managing director, general manager and other employees of AHNL were charged with offences under the Indian Penal Code, 1860 (“IPC”). The managing director and the general manager’s petitions before the High Court of Delhi for quashing the aforementioned proceedings were rejected, and accordingly an appeal was filed against the order of the High Court to the Supreme Court.

The Supreme Court reiterating its decision in Sunil Bharti Mittal (supra), held that although there were allegations of negligence on the part of the hotel and its officers who were responsible for its day-to-day affairs, no allegation was made against its managing director directly attributing negligence with criminal intent. The court stated that he could not be proceeded against only on the ground that he was the managing director of the hotel and based on vague allegations that he was attending all meetings of the company and that various decisions were made under his signature. In the absence of specific allegations against the managing director, the court found it fit to quash the proceedings against the managing director.

The above decisions, one in the context of a civil proceeding involving statutory vicarious liability, and another in the context of a criminal proceeding where the statute did not provide for vicarious liability, reiterate that the role of the relevant director in the act or omission should be examined, rather than basing liability on designations or general averments of their involvement in the affairs of the company.

Authors:
Armaan Patkar, Senior Associate
Abhipsita Kundu, Senior Associate

Footnotes:

[1] Appeal No. 163 of 2018, Order dated August 9, 2019.
[2] (2015) 4 SCC 609.
[3] Municipal Corporation of Delhi v. Ram Kishan Rohtagi and Ors. (1983) 1 SCC 1, Sham Sunder and Ors. v. State of Haryana (1989) 4 SCC.
[4] AIR 2019 SC 4463

Date: May 28, 2020