{"id":31402,"date":"2020-04-27T10:21:14","date_gmt":"2020-04-27T04:51:14","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=31402"},"modified":"2020-04-27T10:21:16","modified_gmt":"2020-04-27T04:51:16","slug":"concept-of-vicarious-liability","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/concept-of-vicarious-liability\/","title":{"rendered":"No Prosecution Against Directors for Operational Issues: Concept of Vicarious Liability"},"content":{"rendered":"

The concept of corporate structure is based on the very\npremise of the business idea brought into by a group of persons, backed up with\nfunds from shareholders and creditors set to implementation by directors who\nare elected by the shareholders. The shareholders continue to hold certain\ndecision-making powers, while the directors are broadly responsible for the\nfunctioning and performance of the company. It is needed to be understood that\na director\nof a company is not always in charge of everyday affairs<\/em><\/strong>. It always depends\nupon the respective role assigned to different officers in a company.<\/p>\n\n\n\n

The directors are considered as the brain and neural control\ncenter of the companies, but it is evident that the day to day affairs of\ncompanies are not run by the board of directors or not even the executive\ndirectors of companies. Therefore the question arises whether directors can be\nprosecuted, merely because they hold board positions, for something as\noperational? The answer is given in the SC recent ruling of Shiv\nKumar Jatia vs. State of NCT of Delhi<\/em><\/strong> has taken forward its earlier\nrulings in the case of Maksud Saiyed vs. State of Gujarat & Ors<\/em><\/strong>\nand Sunil\nBharti Mittal vs. CBI<\/em><\/strong>, has held unless specifically provided for, the\ndoctrine of vicarious liability is not applied to offences provided under the\nprovisions of IPC. <\/p>\n\n\n\n

Doctrine of Vicarious Liability<\/h2>\n\n\n\n

Under the concept of doctrine of vicarious liability, one\nperson is held responsible on behalf of the wrong doing of the other. Such type\nof liability arises only when both persons are somehow connected to each other\nlike employee-employer relationship or principal-agent relationship. In case of\ncorporate, the applicability of the said doctrine is to be determined on the\nbasis<\/a> of provisions of statute dealt with.<\/p>\n\n\n\n

Vicarious liability is a concept of doctrine of tort which\nstates the liability of employers. An employer is liable for the torts\ncommitted by his employee within the course of his employment. Also, for a\nprincipal can be held liable for the torts committed by his agent within the\nscope of the agency.<\/p>\n\n\n\n

It did not take long for the principle of vicariously\nliability to extend beyond its natural habitat. Accordingly, criminal law\nbecame an important site for the imposition of vicarious liability. In India,\nthe domain of vicarious criminal liability consists mostly of white collar\ncrimes. The issue of vicarious liability in India has been dominated by the\ndebate on whether a company can be held criminally liable for the actions of\nits employees whereas the law creating the relevant offence is silent on this\nquestion.<\/p>\n\n\n\n

Criminal vicarious liability for Indian Companies<\/h2>\n\n\n\n

Recently, the Supreme Court in Iridium India Telecom Ltd. v Motorola Inc<\/a>. <\/em><\/strong>has considered the issue whether a company being criminally responsible for the actions of its employees. In case Motorola sold a technology product to Iridium that was accompanied by assertions and promises by Motorola that allegedly turned out to be false. Iridium has filed a case of cheating against Motorola<\/strong>. The case was not against Motorola’s employees but against Motorola Company itself. Cheating requires an intention to deceive, under the provisions of the Indian Penal Code. Motorola presented an argument that being a corporate body and an artificial person, the company is not capable to have mental state and hence cannot be held criminally liable for offences such as cheating. The Supreme Court has rejected the Motorola’s arguments after considering the modern approach to the problem of corporate criminal liability.<\/p>\n\n\n\n

Of particular relevance the Supreme Court’s referred to the\nHouse of Lords decision given in Tesco Supermarkets Ltd. v Nattrass<\/em><\/strong>\nwhere it was held that, in the absence of a specific statutory or common law\nexception, the principle of corporate criminal liability was not based on the\nvicarious liability. Instead, it was based on the concept of attribution.\nHowever, it’s true that a company cannot think and act on its own as it is a\njuristic personality. The acts are done through certain of its employees. And\ntherefore, the mental states and actions of its employees are attributed to the\ncompany.<\/p>\n\n\n\n

This is a legal fiction which was required in order to the\nseparate legal personality of the company to sustain itself over a period of\ntime. Otherwise, the company would not be able to sign contracts, negotiate\nwith business partners, acquire property<\/a>, sue and be sued and make public disclosures.\nHence, it is followed from Tesco Supermarkets case that corporate criminal\nliability is not a species of vicarious liability but is a species of attribution<\/em><\/strong>\nof natural actions and states of minds to artificial entities.<\/p>\n\n\n\n

Vicarious criminal liability under the Companies Act, 2013<\/h2>\n\n\n\n

The issue of vicarious criminal liability for the directors and other key personnel of companies take an alarming turn when it comes to the provisions of the Companies Act, 2013<\/a><\/strong>. The Companies Act approaches the issue of criminal liability in an all-embracing fashion when compared to the statutes noticed above. Much like the other legislation concerned with economic crime, the Companies Act also has criminalized various kinds of activities in the course of the economic life of the company, chief among them being fraudulent activities committed by the company through its employees. For all offences committed by the company, the Companies Act imposes special vicarious liability on officers of the company who are ‘in default’.<\/p>\n\n\n\n

Liability of the officers for offences under Companies Act<\/h2>\n\n\n\n

The Companies Act, 2013 has explicitly identified officers\nwho are in default for the purpose of the Act, which includes directors. In\nfurtherance to Section 149(12)(ii)<\/em><\/strong> of the Companies Act 2013 provides that\nliability arises only with respect to such acts of omission or commission by a\ncompany which had occurred with the knowledge and attribute through which the\nBoard processes, or with the consent or connivance or where it does not act\ndiligently. The obligation relies upon the ROC to verify relevant information\nand records before initiating prosecution against independent or nominee directors.\nHowever, it is to be noted that it is to be considered only when there has been\nany contravention with the provisions given under the Companies Act while in\ncase of other statutes; respective provisions are to be monitored. <\/p>\n\n\n\n

Liability for the criminal felonies<\/h2>\n\n\n\n

When a Corporate body gets prosecuted for a criminal\noffence, the individual to be held liable for the same, but it remains a matter\nof consideration. The extent of the liability of Non-Executive Directors is a\nmatter of fact. The Supreme Court’s judgment in the case of Shiv\nKumar Jatia vs. State of NCT of Delhi<\/em><\/strong> has quashed the impugned order of\nthe High Court and held the release of the Managing Director from the criminal\nliability imposed on the concept of the doctrine of ‘vicarious liability’. <\/p>\n\n\n\n

Facts of the case<\/h2>\n\n\n\n

Shiv Kumar Jatia was the Managing Director of M\/s. Asian\nHotels who looks after Hyatt Regency Hotel. He was authorized by Mr. PR.\nSubramanian has to apply for lodging license of the respective hotel. <\/p>\n\n\n\n

There was a contravention in the condition of the lodging\nlicense which has led to a hotel guest enter into a semi under-construction\nterrace for smoking purpose. The guest has fallen from the terrace of the 6th\nfloor and got badly injured. The matter was presented before the High Court,\nwhich ordered for prosecution the Managing director along with the other three\naccused by relying on the case of Sushil Ansal vs. State through CBI<\/em><\/strong>.<\/p>\n\n\n\n

Shiv Kumar Jatia appealed before the Supreme Court against\nsuch impugned order of the High Court where the case was decided in his favour\nvide judgment dated 23rd Aug 2019.<\/em><\/p>\n\n\n\n

Provisions of law considered<\/h2>\n\n\n\n

Alleged offences were of Section 336 and 338<\/em><\/strong> of\nthe IPC <\/p>\n\n\n\n

Section 336:<\/em><\/strong> It states that who so ever does any act rashly or\nnegligently which endanger human life or the personal safety of others, must be\npunished with impris­onment for a term which may extend to 3 months, or with\nfine which may maximum extend to two hundred or with both. <\/p>\n\n\n\n

Section 338:<\/em><\/strong> It states that who so ever causes grievous hurt to\nany person by doing any act rashly or negligently which endanger human life, or\nthe personal safety of others, must be punished with imprisonment for a term\nwhich may extend to 2 years, or with fine which may maximum extend up to one\nthousand rupees or with both. <\/p>\n\n\n\n

Apex court has stated that the essential elements required\nto prove an alleged offence for the provisions of section 336 that are:<\/p>\n\n\n\n