Criminal Liability of Company Directors

The statutory provision dealing with the criminal liability of Company Directors

Director cannot be held criminally liable on the basis of their ‘designation’. Director is in charge of the company who is responsible for conducting the business. The director can be held criminally liable for non-compliance of legal provision of Companies Act, 2013, such director are known as ‘officer in default’. The provision of the Act held director vicariously liable who are ‘in default’. ‘Section 2(60)’ characterizes the director who would be considered as ‘officer-in default’ and will be responsible for the conduct of business.

Sections determining Criminal Liabilities under Companies Act (2013)

• Under ‘Section 34’, the person shall be criminally held liable for ‘issuing the prospectus’ containing ‘untrue or misleading statements’ in the form of inclusion or omission which induces the person to buy shares from the Company. ‘Section 35’ provides that Director shall not be liable if he has withdrawn the consent before the issue of the prospectus or if the prospectus is issued without his knowledge or consent.
• ‘Section 53’ prohibits the ‘issuance of shares’ by a Company at a discount.
• The ‘Section 68’ provides guidelines for buying back its own shares and other securities but if there is any default in complying with the provisions then the Director shall be criminally held liable.
• The ‘Section 71’ provides that when a Company fails in ‘redeeming the debentures’ at the time of maturity, the debenture holders or debenture trustees can file the petition before the Tribunal which may by order ask the Company to make payment of the principal amount and the interest due without any delay. In the case of ‘non-compliance’ Tribunal by its order can hold the Director criminally liable.
• ‘Section 92’ provides that Director shall be held criminally liable for failing to file the annual return of the Company.
• ‘Section 118’ deals with Preservation of minutes proceedings of every general meeting, Board meeting and resolutions passed by postal ballot. The Director shall be held liable if he found guilty of tampering with the minutes.
• ‘Section 128’ makes it mandatory for a Company to maintain proper books of account including the ‘financial statement’ for every year. If the Director fails to comply with the provision then he shall be criminally liable.
• ‘Section 129’ mandates Company to provide the financial statements in the prescribed form which will give a ‘true and fair picture’ of the actual financial position of the Company and complies with the approved accounting standards. The Director shall be criminally held liable in case failure to comply with the requirements of this section.
• According to ‘Section 134’, the financial statement of the Company must be approved by the Board of Directors, the Director’s failure to do so will make him criminally liable under this section.
• The ‘Section 185’ provides that no Company shall advance an amount as loan represented by a book debt to a Director or any such person for whom Director gives a guarantee or any security against such loan and if Director acting in contravention to provision, then he shall be criminally liable.   
• According to ‘Section 188’, no Company shall enter into a contract or transaction without the approval of the Board of Directors. The ‘non-compliance’ of provisions may result in criminal liability of the Director.
• ‘Section 229’ provides for a penalty for furnishing ‘false statement’, ‘mutilation’ or ‘destruction of documents’ by any person bound to cooperate during an investigation. If the statement made by Director turns out to be false then he shall be criminally liable.
• The ‘Section 447’ provides that ‘commission of fraud’ by any person of the Company or ‘wrongful loss to shareholders’ or ‘wrongful gain’ to himself then such person shall be liable criminally liable.
• ‘Section 448’ deals with the punishment for providing a ‘false statement’ or ‘omission of fact’.
• The ‘Section 449’ deals with the punishment for providing ‘false evidence to authorities’. If a person intentionally provides false evidence in the course of the examination upon oath or in the form of deposition, affidavit or winding-up process of the Company.

These are the various sections under which a Director of a Company can be held criminally liable for any contravention of the provisions specified under the ‘Companies Act, 2013’. Apart from the provisions of the ‘Companies Act 2013’, there are other statutes like ‘Prevention of Corruption Act, 1988’; ‘Indian Penal Code, 1860’ etc. under which the Director can be held criminally liable for acting ‘Ultra vires’ to the provisions of the specified statute.

Determining the Director criminal liability

Earlier the courts were reluctant to hold Companies liable for the wrongdoings done with intention. The criminal liability of the Company depends on the nature of the offence resulting from the actions of its individual members[1]. So the offences to be punished with imprisonment cannot be imposed as the company does not have ‘mens rea’[2]. In a scenario, where both ‘fine and imprisonment’ have been imposed on the company, then the court could only impose the fine but a company cannot be imprisoned as a company has no ‘mens rea’[3]. The criminal intent of the Corporate entity can only be determined in a general body meeting of the company or by the ‘Memorandum of Association’ or ‘Articles of Association’ of the company[4].

The court faces a parcel of difficulties at different levels when an offence is done by Companies. The gravity of crime done by the company can be extraordinary owing to the powers and reach of the Company. The judiciary has been dealing for a long time with the issue of ‘whether corporations can be held guilty of crimes since corporations do not have ‘mens rea’. For many years Companies were not held liable for criminal offenses due to the lack of criminal intent to commit the offence and also the Companies cannot be awarded imprisonment or arrest, etc. However, now due to various judgements corporations are no longer immune

In ‘Standard Chartered Bank v. Directorate of Enforcement[5]’, the court dismissed the idea that the corporate entity cannot be held liable for the criminal offences, the company can be prosecuted and imposed with both fine and imprisonment but as company cannot be sentenced with imprisonment, therefore, the court can only impose fines against the company. The director of the company can be held liable only if the offense was committed with the consent or result of his negligence[6]. If the company director is not in charge of the conduct of the business of the company then he cannot be made liable for any offense [7].

The Supreme Court in ‘Iridium India Telecom Ltd. v Motorola Inc.[8]’ the court applied modern approach to ‘Corporate criminal liability’ where the court held that in the absence of a specific statutory or common law exception, the principle of ‘Corporate criminal liability’ of the company will be based on the ‘concept of attribution’. The company is a ‘juristic person’ and actions and mental state of its employees are attributed to the company. The company itself cannot ‘acquire property’, ‘sign a contract’, ‘making public disclosures’, etc. All the affairs of the company are managed by the company employees.

The issue of criminal liability of the company again came up for consideration in the ‘Sunil Mittal / 2G Spectrum case[9]’ where the court held that Director is not vicariously liable under the provision of ‘Prevention of Corruption Act, 1988’[10]. The court stated that the ‘principle of attribution’ is applied only when the criminal intent of the Director can be attributed to the Company.  Thus, if director had not committed the offence on behalf of a Company then the director cannot be vicariously liable along with the company. The director can be prosecuted when the corporation is accused because the company is a juristic person which act through Directors[11].

Thus, if a corporation commits a crime then it will be presumed to be the intent and action of the director who acts on the behalf of the company. The company director cannot be held vicariously liable unless the statute specifically provides for it. There is a very high threshold to hold the director liable as there should be ‘sufficient evidence’ to prove the criminal intent of the director. If the director has ‘omitted or committed’ an act or with their knowledge or consent or where they have acted negligently then only the director can be criminally held liable otherwise the director cannot be vicariously held liable[12].

Conclusion

As of now, the settled position is that if a Company commits a criminal offence, then the director can only be held liable in two ways:

• When a company commits offense then the element of mens rea will automatically come down to the company director. The director can only be made accused if there is sufficient evidence of his active role coupled with the criminal intent.
• The director can only be vicariously liable if the statute specifically provides for it. 

One of the problems in determining the liability of the Company’s Director is that the court refused to hold the directing minds of Company vicariously liable in the absence of legislation. Another problem in holding the Director vicariously liable is that there is a high threshold to prove the fact that the Director was in charge of the overall day to day business. There is a need for strong evidence against the Director for prosecuting him for criminal liability.

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[1] State of Maharashtra v. Syndicate Transport Co. AIR 1964 Bom. 195.

[2] Ibid.

[3] Delhi Municipality v. J. B. Bottling Co. 1975 cri L.J. 1148.

[4] Esso Standard Inc. v. Udharam Bhagwandas Japanwalla. AIR 1975 Bom. 45.

[5] AIR 2005 SC 1072.

[6] National Small Industries v Harmeet Singh Paintal. Criminal Appeal No. 320-336 of 2010 (arising out of Special Leave Petition (CRL) Nos. 445-461 of 2010)).

[7] K.K Ahuja v. V.K Arora & Another (2009) 10 SCC 48

[8] AIR 2011 SC 20.

[9] (2015) 4 SCC 609

[10] Now, Prevention of Corruption Act, 1988 has been amended which provides provision for prosecution of Corporate entity. Section 8 of prevention of corruption Act 1988 provides that ‘If any person associated with such organisation gives or promises to give any undue advantage to a public servant’.

[11] Shiv Kumar Jatia v State of NCT of Delhi. Criminal Appeal No. 1263 of 2019 (arising out of Special Leave Petition (CRL) No. 8008 of 2018)).

[12] Debanshu Mukherjee & Astha Pandey,” The Liability regime for non-executive and independent Directors in India: A case of reform” (2019)