This must be a bad season for company directors, if one goes by the judgments delivered in recent weeks by the Supreme Court and three major high courts in the country. They had to face criminal charges for the wrongs done by their subordinates, and their denial of vicarious liability has met with indifferent results. Some got away and others did not, depending on the facts of the case, luck or perhaps faith.
The Supreme Court was stern in its view that the managing director and other directors should face prosecution in a drug adulteration case. “In our opinion,” said the judgment in the criminal appeal, Dinesh B Patel vs State of Gujarat, “this was a case of manufacture of a drug for human consumption and, after being tested in laboratory, it was found to be defective since there was growth of fungus, which is a very serious matter related to public health”. The appeals of the top executives raising technical arguments were dismissed because of the seriousness of the allegations.
In another case, Maharashtra State Electricity Distribution Co vs Datar Switchgear Ltd, the chairman at the time when some forged documents were presented to an arbitrator by the company was absolved from prosecution and trial. The company will face the music on its own. Allowing the appeal of the power distributor, the Supreme Court stated: “It is a settled proposition of law that one cannot draw a presumption that a chairman of a company is responsible for all acts committed by or on behalf of the company. In the entire body of the complaint, there is no allegation that he had personally participated in the arbitration proceedings or was monitoring them in his capacity as the chairman of the board and it was at his instance the alleged interpolation was made in documents before the arbitrator.” Earlier, the Bombay High Court had declined to quash the prosecution.
The Madras High Court last week quashed the complaint against the chairman of Indo Biotech Foods Ltd, which issued cheques to India Equipment Leasing Ltd that were dishonoured by the bank. The payee company issued notices to the company, but not to the chairman personally. However, it filed a criminal case against the company as well as the chairman for issuing the cheques. The payee company asserted that the chairman would be liable along with the company though the notice under the Negotiable Instruments Act was not sent specially to the chairman. The high court rejected this argument and stated: “In the absence of statutory notice addressed to the chairman individually the notice sent to the company will not amount to the individual notice to the chairman.” The high court clarified that the company will continue to face prosecution under the Negotiable Instruments Act.
Most cases arise under this Act. In a large batch of cases, the Delhi High Court traversed the law and asked the directors to face trial and prove that they were not responsible for issuing cheques that bounced. In the case, Shree Raj Travels & Tours vs Destination of the World, the high court stated that the behaviour of the directors led to harassment of the payees, who had to spend time and money to get their money.
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The court made certain caustic remarks about the directors’ role: “It is a matter of common knowledge that when companies are floated and public issues are brought, big advertisements are issued giving big names as directors and promoters of the company. These names are those of successful chief executive officers or directors who have achieved success in other fields. Owing to these names at the very inception and formation of company, when there is no wealth or property of the company, the share of the company is sold at a premium promising big business and success. Once money is mopped up from the public, in all those cases in which the companies were created only for the purpose of mopping up hard-earned money of public or to befool them, it is found that those big names disappear. In almost every litigation, those directors who formed part of the core of the company and gave promises that the company would do roaring business quietly disappear from the scene or take the plea that they were not responsible for the business of the company. While the public stands cheated, the persons who had mopped up wealth and pocketed the public wealth are not prepared to take responsibility.”
The general trend of the court judgments is that the directors must show to the court that they were not responsible for the alleged wrong. The burden is on them. This is because the public is not aware of the internal distribution of power and duties in the board of directors of large corporations. So the court presumes collective responsibility of all the directors.