M J Antony: Fuzzy logic of vicarious liability

OUT OF COURT

Unless the law specifies, top executives are not liable for the fault of their employees.

If men at the helm of corporations read laws and recent Supreme Court judgements regarding their vicarious liability for wrongs done by persons below them, they might lose sleep despite counting sheep, or say, lawyers. The recent order to resume prosecution in Som Mittal Vs State of Karnataka overshadowed another important Supreme Court judgment delivered the same week, in which the Managing Director of Britannia Industries Ltd, Calcutta, was hauled to the court by a disgruntled sales agent for criminal breach of trust (S K Alagh vs State of UP). In the latter case, the court not only released the top executive from the litigative nightmare, but also emphasised certain principles which would come as a relief to those at the apex of large organisations.

Britannia terminated the dealership of an area wholesale agent in Uttar Pradesh and appointed another. However, the former agent sent two demand drafts for supply of goods. When the company did not respond, he filed a complaint before the magistrate alleging criminal breach of trust, Section 406 of the Indian Penal Code. Though the magistrate discharged him, the Allahabad high court let the prosecution revive. On appeal, the Supreme Court set aside the high court decision.

The Supreme Court noted that the drafts were drawn in the name of the company. The dealership agreement was also between the company and the agent. The company was not made a party in the complaint. The ire was against the executive. The judgment said that the Indian Penal Code did not contemplate any vicarious liability on the part of a person who is not charged directly for the commission of an offence. Since the drafts were drawn in favour of the company, the MD cannot be said to have committed the offence.

If and when a law contemplates vicarious liability on the part of the persons in charge of a company's affairs, the statute specifically would say so. The penal code is not one such law. This ruling will thus protect top executives from direct hits for the offences committed by the company or its employees. However, there are several laws which create the legal fiction that the men in charge would be vicariously liable for the wrongs of the company. Some such statutes are: the Essential Commodities Act, the Employees' Provident Fund Act and the Negotiable Instruments Act. Section 14A of the provident fund law specifically creates an offence of criminal breach of trust in respect of amounts deducted from the employees by the company.

A few months ago, the Supreme Court dealt with another case, Maksud Saiyed vs State of Gujarat, in which a former chairman and managing director of Dena Bank was accused of conspiracy, giving false evidence, providing false statements and a number of other criminal offences when the bank floated a public issue. The charges were made by a person who had taken a loan from the bank and who was summoned by the debt recovery tribunal. He found some mistakes in the prospectus and filed the complaint before the magistrate. The judge directed the police to investigate the allegations. The Gujarat high court quashed the charges. On appeal, the Supreme Court upheld the high court order and said that a bona fide mis-description of the pending case which did not materially influenced the decision of the investors did not give rise to a cause of action for filing a complaint. In the Jiyajirao Cotton Mills case (2005), the Supreme Court ruled that directors of a company could not be personally prosecuted for non-payment of wages, overruling the Madhya Pradesh high court.

There have been a number of cases recently where the directors of companies were accused of issuing cheques which were dishonoured for want of sufficient funds in the banks. In one of the leading judgments, the Supreme Court had laid down the principles to be followed in cases where the top executives are involved (SMS Pharmaceuticals vs Neeta Bhalla). However, more appeals have come from the high courts questioning the prosecution of directors, MDs and chairmen in bounced cheque cases.

Even the local laws can cause concern to the executive heads, as the Som Mittal case has shown. He was caught in the web of the Karnataka Shops and Establishments Act which compels the managements of IT firms to provide security to the women staff who are dropped back home during night shifts. Perhaps the honchos should at some time ask their legal counsel to get a list of all national, state and local laws where they are deemed to be liable for mistakes committed by their employees.