Who's Liable: The Company Or Its Directors: Landmark Supreme Court Judgement

INTRODUCTION 

On 27 September, 2021, a division bench of the Supreme Court of India (“Apex Court”), comprising of Hon’ble Justice M.R. Shah and Hon’ble Justice A.S. Bopanna, in Ravindranatha Bajpe v. Mangalore Special Economic Zone Ltd. & Ors, took cognizance of its previously passed judgments, on the vicarious liabilities of the key personnel of a company in criminal matters and held that merely because an individual is a Chairman, Managing Director/ Executive Director and/ or Planner/ Supervisor of a company, they cannot be held vicariously liable unless specific allegations are levied against them with respect to their individual role in a criminal case.

FACTS OF THE CASE 

In the present case, the Appellant, Mr. Ravindranatha Bajpe (“Complainant”), filed a private complaint, against all the thirteen accused, before the learned Judicial Magistrate, First Class, Mangalore (“Judicial Magistrate”). It was the case of the Complainant that he is the absolute owner of the property (“Property”), which was adjoining Mangalore- Bajpe Old Airport Road, under which Mangalore Special Economic Zone Limited (Accused No. 1) (“Company”) intended to lay a water pipeline. After obtaining all the requisite permissions from the Public Works Department, the chairman of the Company, on behalf of the Company, appointed M/s Koya and Company Construction Private Limited (Accused No. 6) (“Contractor”) for laying the said water pipeline. Thereafter, the Contractor authorized its chairman and executive directors to oversee the said work, who in turn appointed a site supervisor (“Site- Supervisor”) and a sub- contractor (“Sub- Contractor”), to execute the work through his three labourers. (“Labourers”). The Complainant contended that the Companies chairman, managing director, deputy general manager (civil & eng.), planner and executor of the project (Accused Nos. 2 to 5 respectively) along with the Contractor, the chairman and executive directors of the Contractor, the Site Supervisor, the Sub- Contractor and the Labourers (Accused Nos. 6 to 13 respectively) conspired with common intention to lay the pipeline beneath the Property of the Complainant without having lawful authority to do so. Further, he also contended that not only did the Accused Nos. 1 to 13 demolish his boundary wall but also cut and destroyed 100 valuable trees belonging to the Complainant, thereby, causing the Complainant pecuniary loss of more than Rs. 27 Lakhs.  

The Judicial Magistrate vide order dated 24 September, 2013 directed to register a case against all the accused i.e., Accused Nos. 1 to 13, for the offences punishable under Sections 427, 446, 506 and 120B read with Section 34 of the Indian Penal Code. Dissatisfied with the order passed by the Judicial Magistrate, Accused Nos. 1 to 9, preferred Criminal Revision Petitions before the Sessions Court. The Sessions Court, however, was pleased to set aside the order passed by the Judicial Magistrate against Accused Nos. 1 to 8 and confirmed the order passed against Accused No. 9 i.e., Site- Supervisor. 

Feeling aggrieved by the order of the Sessions Court the Complainant preferred a Revision Application before the High Court of Karnataka (“High Court”), however, the Hon’ble High Court dismissed the application of the Complainant and upheld the order passed by the Sessions Court. Thereafter, the Complainant preferred the present appeal to the Apex Court. 

ARGUMENTS BY THE APPEALLANT 

1. The Appellant argued that the both the Sessions Court as well as the High Court were wrong in quashing the order passed by the Judicial Magistrate. The Appellants submitted that the Judicial Magistrate had after examining the Complainant on oath and after considering the evidence placed on record, issued summons against the Accused Nos. 1 to 13 and that the Sessions Court was not justified in setting aside the order passed by the Judicial Magistrate.
2. The Appellants stated that at the stage of summoning the accused what is required to be considered is whether a prima facie case can be made out on the basis of the statement of the Complainant on oath and the material produced at this stage and that a detailed examination on merits is not required.
3. The Appellants specifically alleged that the Accused Nos. 1 to 8 conspired with the co- accused to lay the water pipeline under the Property of the Complainant and therefore at the stage of issuing summons, the Sessions Court and the High Court could not have overturned the order passed by the Judicial Magistrate. Further, as Accused Nos. 1 to 8 were the administrators of the companies, all executives would be vicariously liable.

ARGUMENTS ON BEHALF OF THE ACCUSED 

1. The Accused stated that the Sessions Court was absolutely justified in overturning the order passed by the Judicial Magistrate as no specific allegations were levied by the Complainant in respect of the role played by the Accused in the commission of the crime except the “bald statement” that all the Accused had connived with each other.
2. The Accused submitted that the Apex Court has held in several past judgments that issuing of summons by a court is a very serious matter and that unless specific allegations in respect of the role played by each Accused has been provided for by the Judicial Magistrate no summons should be issued.
3. The Accused Nos. 2 to 5 and the Accused Nos. 7 & 8 prayed that no allegations have been made against them that at the time of the commission of the offence they were present at the site. Further, they stated that at the time of the commission of the alleged offence they were all stationed at Hyderabad.

WHAT DID THE APEX COURT HOLD?

Upon hearing both the sides, the Apex Court held that the issuing of summons by a court is a very serious matter and that in the present case there were no specific allegations levied against the Accused Nos. 2 to 5 and 7 & 8 except the “bald statement” that all the accused persons have conspired with common intention to lay the pipeline under the property of Complainant without any lawful authority and right. Further, the Apex Court also stated that there were no allegations that the Accused Nos. 2 to 5 and 7 & 8 were either present at the time when the compound wall was demolished and the trees were cut or that such demolition or cutting took place at their command. Hence, in absence of any specific allegations and specific role attributed, the Judicial Magistrate was not justified in issuing process against the accused no 1 to 8.

The Apex Court, passing its order, reaffirmed its earlier judgment in Sunil Bharti Mittal v. Central Bureau of Investigation, which held that employees cannot be held vicariously liable for the actions of a company unless the statute specifically provides so. There are no specific provisions under IPC for attaching vicarious liability on the part of the managing directors or the directors of the company when the accused is the company. Therefore, an individual, who has perpetrated the commission of an offence on behalf of a company, can be made an accused along with the company only if there is sufficient evidence of active role coupled with criminal intent. Further, the Apex Court then referred to the decision in Pepsi Foods Ltd. v. Special Judicial Magistrate, wherein, it was held that issuing a summons in criminal case is a serious matter. Criminal law cannot be set into motion as a matter of course. The magistrate has to carefully scrutinize the evidence bought on record and may even themselves put questions to the complainant and his witnesses to ascertain the veracity of the allegations and then examine if any offence is prima facie committed by any or all.

Therefore, the Apex Court held that the High Court has duly dismissed the revision applications and confirmed the order passed by the Sessions Court. Further, the Apex Court directed the Judicial Magistrate to proceed with the complaint against original accused nos. 9 to 13 on its own merits, in accordance with law.

ANALYSIS 

This Judgment protects the interests of non-active independent directors and managers of a company. This Judgment has reaffirmed the stance, which the Apex Court has held on previous occasions that a director or a manager can be held vicariously liable, only if the statute specifically provides for it. Vicarious liability cannot be imposed on any director in the absence of legislative mandate. The Chairman, Managing Directors, Directors, Managers etc., cannot automatically be held vicariously liable only by virtue of their position in the company but there has to be specific allegations about them showing their role in commission of the offence. Hence, office bearers of a company who have no role in the commission of an offence are protected.

*Authors: Krrishan Singhania, is the Managing Partner at K. Singhania & Co. Kapeesh Grover is an Associate at K. Sisnghania & Co. and trainee Manisha Prajapati, fourth-year law student of Rizvi Law College.