M J Antony: Vicarious liability tangle

A complaint for criminal negligence must name the director or officer who was specifically in charge of operations

M J Antony / New Delhi August 11, 2010, Business Standard

The normal assumption is that no one is criminally liable for the act of another. But an exception, which haunts company directors and top executives these days, is the rule of vicarious liability. It can ensnare anyone in the corporate ladder, whether it is in a mass disaster like Bhopal or a food adulteration case against a pizza chain. The trauma of defending oneself in a court of law for the fault of a low-ranking employee can be worse than the punishment itself.

This is an issue that comes up very often in all courts, civil or criminal, because many statutes have an identical provision which fixes responsibility on individuals for the wrongs committed by the company. Last week, the Supreme Court dealt with such a provision in the Insecticides Act, where an executive of the Reckitt & Coleman of India was in the dock (State of NCT vs Rajiv Khurana). The regional technical director of the company handling quality control of the firm’s products was facing prosecution for selling products below the Bureau of Indian Standards’ specifications. The Delhi High Court quashed the summons issued to him, but the Delhi government pursued him up to the Supreme Court. However, the government’s appeal was dismissed.

The typical provision, which is the nightmare of the honchos, reads: “Whenever an offence under this law has been committed by a company, every person who at the time of the offence … was in charge of, or was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence.” The punishment is imprisonment and fine.

Thus, when a cheque issued by a company bounces for want of sufficient fund in the bank, the hunt is for the person who was “in charge of, or was responsible for the conduct of business”. The signatory of the cheque is clearly liable for the offence. In a leading case, the Supreme Court has stated that the managing director and the joint managing director are responsible under Section 141 of the Negotiable Instruments Act (SMS Pharmaceuticals Ltd vs Neeta Bhalla).

Though every partner in a firm is liable for its acts, there is no presumption that each of them knows about the transactions. Therefore, when a complaint is filed against a partner, it should be specifically asserted that he was in charge of the affairs of the firm (Monaben vs State of Gujarat).

The food inspector of the Delhi Municipal Corporation prosecuted the company, three of its directors and the manager for selling “Morton” brand toffees under the Prevention of Food Adulteration Act in 1983. The Delhi High Court quashed the prosecution because the Corporation could not show that those persons named were in charge of the company’s affairs.

The Supreme Court dealt with a case under the Drugs and Cosmetics Act in the State of Haryana vs Brij Lal Mittal (1998) case. It said that simply because a person was a director of the company, it did not necessarily mean that he was in charge of and responsible to the company for the conduct of its business. On the other hand, without being a director a person could be in charge of and responsible to the company for the conduct of its business.

The Delhi High Court dealt with the Vishnu Prakash Bajpai vs Sebi case which involved offences under the Sebi Act. The defendant submitted that he was a promoter of the company and was not even a director. The court directed that the facts must be ascertained before fixing the responsibility on him.

Last year, in the K K Ahuja case, the Supreme Court stated: “There may be many directors and secretaries who are not in charge of the business of the company at all. A person may be a director and thus belong to the group of persons making the policy, but yet may not be in charge of the business of the company; a person may be a manager who is in charge of the business but may not be in overall charge of the business; and a person may be an officer who may be in charge of only some part of the business.” This is especially so when currently there is a strong westerly wind of “job title inflation” sweeping the corporate field (Chief Receptionist Officer, Chief Blog Officer, Vice President-Transport…).

Though the law seems rather clear, it can still lead to long litigation and consequent harassment as well as hardships to accused persons. A Supreme Court judge said last week that the Bhopal case took 25 years to fix responsibility on the convicts; it may take another 25 years if it starts all over again and “none of the victims would be alive by then”.



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