When courts haul up honchos

Impleading top corporate executives is subject to strict conditions

Several laws prescribe the role and the liability of top executives of a company in cases of allegations of civil and criminal consequences against them. Signing cheques that bounce and complaints of breach of trust or cheating are some of them. When companies become hostile to each other, they use such tactics to harass their rival honchos and gain the most advantageous position.

However, courts have become cautious in their approach to such complaints against managing directors, company secretaries and directors. They have imposed strict conditions before executives can be hauled up before a criminal court. The latest judgment from the Supreme Court, M/s GHCL Employees Stock Option Trust vs Nilesh Shivji Vikamsey, should bring relief to those in the managing cadre who take day-to-day decisions.
 

In this case, two companies disputed over dues. One of them approached the metropolitan magistrate with charges of breach of trust and cheating against the managing director and some other directors. The magistrate summoned them for trial. They moved the Delhi High Court which quashed the summons. The matter was taken to the Supreme Court. It upheld the high court order.

Such instances are common in criminal courts, though the Supreme Court has laid down strict principles to be followed when a company's top people are hauled up. Summoning them is a serious matter. It distracts them from their ordinary work and leads to a waste of their time in court appearances and travel.

Therefore, the Supreme Court stated that "criminal law cannot be set in motion as a matter of course. The order of the magistrate summoning the accused person must reflect that he has applied his mind to the facts of the case and the law applicable thereto. He has to record his satisfaction with regard to the existence of a prima facie case on the basis of specific allegations made in the complaint supported by satisfactory evidence and other material on record".

There is a series of precedents in this field. In the case of Madhavrao Jiwaji Rao Scindia vs Sambhajirao Chandrojirao Angre, the court stated that "the test to be applied by the court is as to whether the uncontroverted allegations as made prima facie establish the offence. It is also for the court to take into consideration any special features, which appear in a particular case, to consider whether it is expedient and in the interest of justice to permit a prosecution to continue. This is so on the basis that the court cannot be utilised for any oblique purpose, and where in the opinion of the court, chances of an ultimate conviction is bleak and, therefore, no useful purpose is likely to be served by allowing a criminal prosecution to continue".

In yet another leading case, Punjab National Bank vs S P Sinha, a complaint of breach of trust was lodged against the chairman and managing director of the bank and a host of officers in a dispute over repayment of a loan. It was alleged that the officers of the bank embezzled the disputed amount to save themselves from financial obligation. The magistrate - in a mechanical manner - issued process against all the accused. The high court refused to quash the complaint and the matter finally came to the Supreme Court.

In its judgment, the Supreme Court stated: "It is necessary to note that judicial process should not be an instrument of oppression or needless harassment. There lies responsibility and duty on the magistracy to find whether the accused concerned were legally responsible for the offence charged for. Only on satisfying that the law casts liability or creates offence against the juristic person or the people impleaded then only process would be issued. At that stage, the court would be circumspect and judicious in exercising discretion and should take all the relevant facts and circumstances into consideration before issuing process, lest it should be an instrument in the hands of the private complainant as vendetta to harass the persons needlessly. Vindication of majesty of justice and maintenance of law and order in society are the prime objects of criminal justice, but it should not be the means to wreak personal vengeance."

In the 2011 case, Thermax Ltd vs K M Johny, even the former chairperson and directors who had no role in the dispute were roped in. The Supreme Court quashed their prosecution. The directors cannot be presumed to have vicarious liability, unless the concerned statute specifically states so.

In a proper complaint, it has to be specifically alleged that a particular director had consciously played a part in the wrongful act. A general statement implicating everyone in the managing team would not do, according to the court. This is a valuable shield for the directors and others who are in the daily management of a firm, and a pointer to those who tend to commit a wrong.