[Guest
post by Rahul Bajaj, a final year
law student at the University of Nagpur and a SpicyIP fellow]
post by Rahul Bajaj, a final year
law student at the University of Nagpur and a SpicyIP fellow]
The issue of corporate criminal
liability has always been a vexed one, raising as it does profound
jurisprudential questions that go to the heart of the separate legal status
enjoyed by companies.
liability has always been a vexed one, raising as it does profound
jurisprudential questions that go to the heart of the separate legal status
enjoyed by companies.
As Professor Varottil noted in his
analysis of the Sunil Bharti Mittal judgment on this Blog that can be found here,
the concept of corporate criminal liability covers within its fold two distinct
sets of circumstances: first, when the company can be held liable for the acts
of its directors by virtue of the principle of attribution and, second, when
directors can be held liable for the acts of the company through the
application of the principle of vicarious liability.
analysis of the Sunil Bharti Mittal judgment on this Blog that can be found here,
the concept of corporate criminal liability covers within its fold two distinct
sets of circumstances: first, when the company can be held liable for the acts
of its directors by virtue of the principle of attribution and, second, when
directors can be held liable for the acts of the company through the
application of the principle of vicarious liability.
Insofar as the second issue is
concerned, through its two significant judgments that continue to hold the
field today — Sunil Bharti Mittal versus v. CBI
(analyzed here)
and Maksud
Saiyed versus v. State of Gujarat (analyzed here)
— the Supreme Court has made it clear that: (1) directors cannot be held
vicariously liable for the acts of a company unless there is a statutory basis
for the same; and (2) the principles of attribution and vicarious liability
operate in entirely different spheres.
concerned, through its two significant judgments that continue to hold the
field today — Sunil Bharti Mittal versus v. CBI
(analyzed here)
and Maksud
Saiyed versus v. State of Gujarat (analyzed here)
— the Supreme Court has made it clear that: (1) directors cannot be held
vicariously liable for the acts of a company unless there is a statutory basis
for the same; and (2) the principles of attribution and vicarious liability
operate in entirely different spheres.
Against this backdrop, I would like
to analyze a recent Supreme Court judgment in K. Sitaram v. CFL Capital Financial Service Ltd.,
which throws up several interesting questions about the practical application
of these principles in different fact situations.
to analyze a recent Supreme Court judgment in K. Sitaram v. CFL Capital Financial Service Ltd.,
which throws up several interesting questions about the practical application
of these principles in different fact situations.
Factual
Matrix
Matrix
The respondent-complainant company,
CFL Capital Financial Service Ltd., borrowed a loan of Rs. 900 lakhs
(comprising Rs. 180 lakhs cash credit and Rs. 720 lakhs working capital) from a
consortium of banks led by the State Bank of Travancore. Since the respondent
failed to repay the loan in the prescribed timeframe, it became a
non-performing asset. As a result, the State Bank of Travancore instituted
proceedings before the Debt Recovery Tribunal (DRT) against the respondent in
2003 which resulted in a partial decree in its favour in 2005.
CFL Capital Financial Service Ltd., borrowed a loan of Rs. 900 lakhs
(comprising Rs. 180 lakhs cash credit and Rs. 720 lakhs working capital) from a
consortium of banks led by the State Bank of Travancore. Since the respondent
failed to repay the loan in the prescribed timeframe, it became a
non-performing asset. As a result, the State Bank of Travancore instituted
proceedings before the Debt Recovery Tribunal (DRT) against the respondent in
2003 which resulted in a partial decree in its favour in 2005.
Very significantly, on 29 March 2006,
the State Bank of Travancore assigned the loan amount due to it from the
respondent to Kotak Mahindra Bank. On 11 January 2007, the respondent assigned
to the Kotak Mahindra Bank, which was one of its advisors as per a previous
agreement, a debt of almost 32 crores due to it from one Ravishankar Industries
with the agreement that any recovery in excess of 90 lakhs would be shared
equally between the Kotak Mahindra Bank and the respondent. The factum of the
assignment of the debt by the State Bank of Travancore to Kotak Mahindra Bank dated 29 March 2006 came to the knowledge of the respondent only on 17 January
2007 when it accessed an application filed by the Kotak Mahindra Bank for
substituting itself in place of the State Bank of Travancore before the DRT.
the State Bank of Travancore assigned the loan amount due to it from the
respondent to Kotak Mahindra Bank. On 11 January 2007, the respondent assigned
to the Kotak Mahindra Bank, which was one of its advisors as per a previous
agreement, a debt of almost 32 crores due to it from one Ravishankar Industries
with the agreement that any recovery in excess of 90 lakhs would be shared
equally between the Kotak Mahindra Bank and the respondent. The factum of the
assignment of the debt by the State Bank of Travancore to Kotak Mahindra Bank dated 29 March 2006 came to the knowledge of the respondent only on 17 January
2007 when it accessed an application filed by the Kotak Mahindra Bank for
substituting itself in place of the State Bank of Travancore before the DRT.
Thereafter, the Kotak Mahindra Bank withdrew
two criminal complaints filed by the respondent against Ravishankar Industries
and filed an application for the recovery of 50% of the amount received in
excess of Rs. 90 lakhs from Ravishankar Industries. The respondent then filed
criminal complaints against Kotak Mahindra Bank and its officers, which was
quashed by the additional sessions judge by way of an order passed in April 2008.
two criminal complaints filed by the respondent against Ravishankar Industries
and filed an application for the recovery of 50% of the amount received in
excess of Rs. 90 lakhs from Ravishankar Industries. The respondent then filed
criminal complaints against Kotak Mahindra Bank and its officers, which was
quashed by the additional sessions judge by way of an order passed in April 2008.
Undeterred, the respondent filed a
fresh complaint against State Bank of Travancore and Kotak Mahindra Bank and
its officers under sections 409, 418, 423, 425 and 120-b of the Indian Penal
Code (IPC), which resulted in issue of process through an order dated 25 January
2008. On 11 May 2008, the Magistrate quashed the issuance of process against
officers of Kotak Mahindra Bank by virtue of the respondent withdrawing its
complaint against them.
fresh complaint against State Bank of Travancore and Kotak Mahindra Bank and
its officers under sections 409, 418, 423, 425 and 120-b of the Indian Penal
Code (IPC), which resulted in issue of process through an order dated 25 January
2008. On 11 May 2008, the Magistrate quashed the issuance of process against
officers of Kotak Mahindra Bank by virtue of the respondent withdrawing its
complaint against them.
Since the appeal of the officers of
the State Bank of Travancore against the issuance of process was dismissed by
the High Court, they filed a special leave petition before the Supreme Court.
the State Bank of Travancore against the issuance of process was dismissed by
the High Court, they filed a special leave petition before the Supreme Court.
Arguments
of Parties
of Parties
Before the Supreme Court, the
appellants advanced the main arguments in support of the proposition that the
criminal complaint lodged against them should be quashed.
appellants advanced the main arguments in support of the proposition that the
criminal complaint lodged against them should be quashed.
First, they contended that they were
not employed by the State Bank of Travancore on the date of signing of the
assignment deed viz. 29 March 2006. Since the decision to enter into the
agreement was taken by the Bank’s Executive Committee and they did not actively
participate in the same, they argued that they cannot be held liable for the
same.
not employed by the State Bank of Travancore on the date of signing of the
assignment deed viz. 29 March 2006. Since the decision to enter into the
agreement was taken by the Bank’s Executive Committee and they did not actively
participate in the same, they argued that they cannot be held liable for the
same.
Second, the appellants argued that since
the respondent had withdrawn its complaints against directors of the Kotak Mahindra
Bank, criminal proceedings against the appellants could not be allowed to
continue. Since directors of both companies were accused of the same illegal
acts, they ought to be treated on the same footing insofar as criminal proceedings
against them are concerned.
the respondent had withdrawn its complaints against directors of the Kotak Mahindra
Bank, criminal proceedings against the appellants could not be allowed to
continue. Since directors of both companies were accused of the same illegal
acts, they ought to be treated on the same footing insofar as criminal proceedings
against them are concerned.
Finally, relying on the Supreme
Court’s judgments in Maksud Saiyed and Sunil Bharti Mittal, the appellants
argued that it is a well settled principle that directors cannot be held
vicariously liable without a provision to that effect being statutorily
engrafted. Since there is no statutory basis for the respondent’s allegations
as to the appellants’ liability, they reasoned, proceedings against the
appellants should be quashed.
Court’s judgments in Maksud Saiyed and Sunil Bharti Mittal, the appellants
argued that it is a well settled principle that directors cannot be held
vicariously liable without a provision to that effect being statutorily
engrafted. Since there is no statutory basis for the respondent’s allegations
as to the appellants’ liability, they reasoned, proceedings against the
appellants should be quashed.
On the other hand, the State argued
that appellant no. 1 was the managing director of the bank on the date of the
agreement and was tasked with the responsibility of handling its day-to-day
affairs. Similarly, appellant no. 2 was the Bank’s deputy general manager on
the relevant date and signed the assignment deed. Not only did the appellants
collude with officers of the Kotak Mahindra Bank to defraud the respondent, the
State argued, but they also violated clause 2.3 of the assignment deed in
accordance with which they were duty-bound to inform the respondent about the
assignment. In light of the fact that they were granted custody of the
respondent’s property, their actions amounted to cheating and criminal breach
of trust.
that appellant no. 1 was the managing director of the bank on the date of the
agreement and was tasked with the responsibility of handling its day-to-day
affairs. Similarly, appellant no. 2 was the Bank’s deputy general manager on
the relevant date and signed the assignment deed. Not only did the appellants
collude with officers of the Kotak Mahindra Bank to defraud the respondent, the
State argued, but they also violated clause 2.3 of the assignment deed in
accordance with which they were duty-bound to inform the respondent about the
assignment. In light of the fact that they were granted custody of the
respondent’s property, their actions amounted to cheating and criminal breach
of trust.
Decision
of Court
of Court
At the outset, the court noted that
both the State Bank of Travancore and Kotak Mahindra Bank had failed to inform
the respondent about the assignment deed, because of which the same came to the
knowledge of the respondent a full nine months after its signing. Since a bare
perusal of clause 2.3 of the assignment deed indicated that both parties were duty-bound
to inform the respondent about the assignment, the Court held, it was difficult
to fathom why the banks did not discharge this obligation.
both the State Bank of Travancore and Kotak Mahindra Bank had failed to inform
the respondent about the assignment deed, because of which the same came to the
knowledge of the respondent a full nine months after its signing. Since a bare
perusal of clause 2.3 of the assignment deed indicated that both parties were duty-bound
to inform the respondent about the assignment, the Court held, it was difficult
to fathom why the banks did not discharge this obligation.
I quote the relevant portion of para
21 of the judgment, which directly addresses the issue that forms the subject
matter of this post:
21 of the judgment, which directly addresses the issue that forms the subject
matter of this post:
a
corporate entity is an artificial person which acts through its officers, Directors,
Managing Director, Chairman, etc. If such a company commits an offence
involving mens rea, it would normally be the intent and action of that individual
who would act on behalf of the company that too when the criminal act is that
of conspiracy. Thus, an individual who has perpetrated the commission of an
offence on behalf of the company can be made an accused, along with the
company, if there is sufficient evidence of his active role coupled with criminal
intent. Second situation in which an individual can be implicated is in those
cases where the statutory regime itself attracts the doctrine of vicarious liability,
by specifically invoking such a provision.
corporate entity is an artificial person which acts through its officers, Directors,
Managing Director, Chairman, etc. If such a company commits an offence
involving mens rea, it would normally be the intent and action of that individual
who would act on behalf of the company that too when the criminal act is that
of conspiracy. Thus, an individual who has perpetrated the commission of an
offence on behalf of the company can be made an accused, along with the
company, if there is sufficient evidence of his active role coupled with criminal
intent. Second situation in which an individual can be implicated is in those
cases where the statutory regime itself attracts the doctrine of vicarious liability,
by specifically invoking such a provision.
Insofar as the appellants’
contentions that they were not employed by the company on the date of signing
of the assignment deed is concerned, the Court negatived this contention by
holding that they were responsible for the day-to-day management of the
company. Since Appellant no. 1 was employed by the company on 29 March 2006 and
appellant no. 2 signed the assignment deed, the Court arrived at the prima
facie conclusion that they had a role to play in the respondent being kept in
the dark about the assignment deed.
contentions that they were not employed by the company on the date of signing
of the assignment deed is concerned, the Court negatived this contention by
holding that they were responsible for the day-to-day management of the
company. Since Appellant no. 1 was employed by the company on 29 March 2006 and
appellant no. 2 signed the assignment deed, the Court arrived at the prima
facie conclusion that they had a role to play in the respondent being kept in
the dark about the assignment deed.
That said, in light of the fact that
the respondent had withdrawn its complaint against directors of the Kotak
Mahindra Bank, the court held that the appellants ought to be treated on the
same footing and resultantly quashed the complaint against them.
the respondent had withdrawn its complaint against directors of the Kotak
Mahindra Bank, the court held that the appellants ought to be treated on the
same footing and resultantly quashed the complaint against them.
Comments
While the judgment largely involves
the application of well settled principles to the fact situation obtaining in
this case, one aspect that merits emphasis is the legal substratum upon which
the court’s prima facie conclusion as to the appellants’ guilt is founded. More
specifically, given that it was nobody’s argument that the appellants would be
vicariously liable owing to any statutory provision in this case, it is clear
that the court applied the first of the two tests delineated by it in para 21
of its judgment, viz. active role coupled with criminal intent.
the application of well settled principles to the fact situation obtaining in
this case, one aspect that merits emphasis is the legal substratum upon which
the court’s prima facie conclusion as to the appellants’ guilt is founded. More
specifically, given that it was nobody’s argument that the appellants would be
vicariously liable owing to any statutory provision in this case, it is clear
that the court applied the first of the two tests delineated by it in para 21
of its judgment, viz. active role coupled with criminal intent.
While para 21 of the judgment
reiterates the principle outlined in Sunil Bharti Mittal (by using the same
language without citation, I might add), the court does not factor into its
analysis the following sentence in Mittal which appears immediately after the
para it quotes: “when the company is the offender, vicarious liability of the
Directors cannot be imputed automatically, in the absence of any statutory
provision to this effect.”
reiterates the principle outlined in Sunil Bharti Mittal (by using the same
language without citation, I might add), the court does not factor into its
analysis the following sentence in Mittal which appears immediately after the
para it quotes: “when the company is the offender, vicarious liability of the
Directors cannot be imputed automatically, in the absence of any statutory
provision to this effect.”
Therefore, not only is the
jurisprudential basis of the first test unclear, but it is also difficult to
understand how these two tests, i.e. active role coupled with criminal intent
and statutory basis interact with each other and operate in practice. Further,
since the first test applied by the court in this case requires that the
officer should play an active role for her to be liable, it is difficult to
understand how the court could have arrived at a prima facie finding as to
appellant no. 1’s guilt, given that he was merely an employee of the company on
the relevant date and did not play any meaningful role in the signing of the
agreement. If being an employee is sufficient for attracting vicarious
liability, wouldn’t this defeat the very purpose of requiring the person in
question to play an “active” role?
jurisprudential basis of the first test unclear, but it is also difficult to
understand how these two tests, i.e. active role coupled with criminal intent
and statutory basis interact with each other and operate in practice. Further,
since the first test applied by the court in this case requires that the
officer should play an active role for her to be liable, it is difficult to
understand how the court could have arrived at a prima facie finding as to
appellant no. 1’s guilt, given that he was merely an employee of the company on
the relevant date and did not play any meaningful role in the signing of the
agreement. If being an employee is sufficient for attracting vicarious
liability, wouldn’t this defeat the very purpose of requiring the person in
question to play an “active” role?
Further, the court also does not pay
any heed to the second part of the test viz. criminal intent before expressing
its prima facie view. Assuming that signing the agreement (which is what
appellant no. 2 did) satisfies the active role requirement, how does the same
indicate an employee’s criminal intent? Wouldn’t the approach adopted by the
court in this case render the second part of the test superfluous?
any heed to the second part of the test viz. criminal intent before expressing
its prima facie view. Assuming that signing the agreement (which is what
appellant no. 2 did) satisfies the active role requirement, how does the same
indicate an employee’s criminal intent? Wouldn’t the approach adopted by the
court in this case render the second part of the test superfluous?
In conclusion, while this judgment
may not have resulted in any immediate consequences, inasmuch as the
proceedings against the appellants were quashed on a technical ground, it
throws up a number of significant questions about corporate criminal liability
which will hopefully be definitively answered by Indian courts in the near
future.
may not have resulted in any immediate consequences, inasmuch as the
proceedings against the appellants were quashed on a technical ground, it
throws up a number of significant questions about corporate criminal liability
which will hopefully be definitively answered by Indian courts in the near
future.
– Rahul Bajaj
