In the last few years, Indian law enforcement agencies have been aggressively investigating businesses that are implicated in any malfeasance or even non-compliance of license terms as required under statutes. Typically, most of the offences committed by companies fall in the category of economic offences. Indian courts have held that economic offences need to be considered as grave offences as they often have a higher degree of mens rea and involve deep-rooted conspiracies which result in huge loss of public funds and affect the economy and financial health of the country.
The (Indian) Companies Act, 2013 (“Companies Act”) prescribes extensive duties for directors including the duty to ensure that the company is compliant with law. Many other statutes make directors responsible for a company’s offences on the presumption of directors being in charge of and responsible for the business of the company. It is also the general perception that directors are the ‘will and mind’ of a company and all decisions are taken with their knowledge and approvals. It is this exposure and perception that makes them an open target for being named in various investigations. This is despite the courts reiterating, time and again, that the concept of vicarious liability is absent in Indian criminal law, unless when provided in the statute. Therefore, we have seen that in serious offences alleged against companies, it has become common for investigation agencies to indiscriminately name the members of the board of directors irrespective of the role played by them. Such practice is often in disregard to the legal principles evolved by Indian courts governing criminal liability of directors.
As per the Companies Act, companies have executive and non-executive directors. Executive directors are whole-time directors who are in the whole-time employment of the
company, involved in day-to-day management and remunerated by the company. In contrast, non-executive directors have limited involvement and are typically not remunerated by the company, except for sitting fees or commission. For certain companies, the Companies Act also calls for appointment of independent directors (i.e., persons who are not related to promoter/ directors or do not have any pecuniary relationship with the company etc.) to serve as an independent check on the board.
Any contravention (such as failure to discharge duties of reasonable care, skill etc., or continuing to act as a director when disqualified) of the provisions of the Companies Act invites penalties upon the directors. Moreover, Companies Act has also incorporated a concept of ‘officer who is in default’ for the purpose of attaching liability for contravention of its provisions. By virtue of their positions, whole-time directors, managing directors, other key managerial personnel are deemed to be such officers and liable for the prescribed penalty/ punishment. However, this term also includes every director who is aware of the contravention by virtue of receipt of or participation in any Board proceedings without objecting to the same, or where such contravention had taken place with his consent/ connivance.
Thus, even non-executive directors may fall within the scope of ‘officer who is in default’ if a contravention or fraud has taken place with their knowledge. In
this regard, Section 149(12) of the Companies Act provides that an independent director and a non-executive director can be held liable only in respect of such acts by a company which had occurred with their knowledge, attributable through Board processes, and with their consent or connivance.
Further, recognizing the critical management roles in a company, the Companies Act has introduced the concept of Key Managerial Personnel (“KMP”) and given statutory
backing to the positions of Chief Executive Officer, Chief Financial Officer, and the Company Secretary. Despite identifying KMPs, during an investigation of a company, the investigative agencies still target the board of directors as they are considered the supreme executive authority of a company.
A cardinal principal of Indian criminal jurisprudence is that there is no vicarious liability unless provided in the statute. Therefore, the settled law in India is that when a company is an offender, vicarious liability cannot be automatically imputed on its directors. The Supreme Court of India in the case of Sunil Bharti Mittal v. CBI, (2015) 4 SCC 609, held that the criminal intention of directors can be attributed to the company on the principle of ‘alter ego’; however, this principle cannot be applied in reverse to make the directors liable for offences committed by the company. It was further held that when a company is named as an accused, its directors cannot be prosecuted along with the accused company unless there is sufficient evidence of their active involvement coupled with criminal intent, unless the statute provides for vicarious liability. The Indian Penal Code, 1860 also does not contain any provision for attaching vicarious liability on directors when the company is an accused. However, many special legislations such as the Negotiable Instruments Act, 1881, Copyrights Act, 1957, and Prevention of Money Laundering Act, 2002 expressly provide for vicarious liability by stating that persons in-charge of the company are liable for offences
by the company.
Even where statutes impute vicarious liability, it is important to note that vicarious liability under such statues arises from being in charge of and responsible for the conduct of the company’s business at the time of the offence and not on the basis of merely holding the designation or office of a director. It is paramount upon the investigation agencies that they make specific averments against such director and demonstrate the responsibility for the conduct of the business of the company. However, in certain sensitive investigations, involving cases of siphoning of funds and money laundering, we have observed that all the directors are questioned about the affairs of the company.
Hence, while contemplating the appointment of a nominee on the board of a company, it is critical to carefully curate the roles/functions and involvement of the nominated directors in the functioning of the Indian company – as typically such nominees are present to only oversee the macro business policies and to protect the interests of appointee. The scourge of investigations is augmented as unlike the United Kingdom or the United States, the concept of ‘deferred prosecution’ is not provided under the Indian Laws. This coupled with long delays in concluding the investigations and the court proceedings can hamper the effective functioning of various investor or parent entities which may have had nothing to do with the functioning of the local entities in India.
Vikrant Singh Negi (Partner) and Ekta Tyagi (Principal
Associate) are senior members of the White-Collar Crime & Fraud
Investigations practice of DSK Legal.