"Can the directors be automatically held vicariously liable for alleged illegal actions by a company?" — is a question that is deliberated time and again by the Courts of law in India.
Recently, the Supreme Court, in case of Sanjay Dutt & Ors. v. The State of Haryana (2025) INSC 34, deliberated the issue by setting out the applicable legal principles. In the said case, the Range Forest Officer had lodged a complaint against the Managing Director and Chief Executive Officer as well as General Manager of Tata Realty and Infrastructure Limited (“the Petitioners”) under the provisions of the Punjab Land Preservation Act, 1900 (“the Act”) but not the Company. The Special Environment Court, Faridabad took cognizance of the complaint and issued process under Section 19 of the Act. The petitioners had challenged the aforesaid complaint before the High Court of Punjab and Haryana by filing a petition under Section 482 of the Code of Criminal Procedure, which came to be rejected. Hence, the petitioners had challenged the said judgment before the Supreme Court. The Supreme Court arrived at a finding that the courts below went on an erroneous assumption that the petitioners being responsible officers of the company are liable for the alleged offence.
The Supreme Court reiterated some of the well settled legal principles on vicarious liability of the directors viz. there is no automatic liability of directors if the company may be held liable for the wrongful acts of its employees; directors can be held vicariously liable only if they have personally acted in a manner that directly connects their conduct to the company’s liability; there must be a statutory provision to the effect that the director can be held vicariously liable in such circumstances and that there must be specific allegations attributing a particular role or conduct to such director.
Earlier, in the case of Ravindranath Bajpe v. Mangalore Special Economic Zone Limited and Others (2022) 15 SCC 430, the Supreme Court emphatically held that there cannot be vicarious liability unless the statute specifically provides so as per the cardinal principle of criminal jurisprudence. In the said case, the Magistrate had issued summons to the Managing Director, the Company Secretary and the directors alleging a conspiracy with the common intention to lay a pipeline beneath scheduled properties belonging to the complainant, without any lawful authority and right. The Supreme Court laid down two possibilities of attributing liability to individuals on behalf of the company (a) an individual who has perpetrated commission of offence on behalf of the company can be accused along with the company or (b) an individual can be implicated wherein statutory regime itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision.
The aforestated possibilities were reiterated by the Supreme Court again in the case of Shiv Kumar Jatia v. State of NCT of Delhi [2019] 17 SCC 193. In the context of the order issuing summons, the Supreme Court in Ravindranath Bajpe (supra) reiterated an important pre-requisite that in the said order, the Magistrate has to record his satisfaction about a prima facie case against the Managing Director, the Company Secretary and the directors and role played by them in their respective capacities for initiating criminal proceedings against them.
In a landmark judgment on the subject, the Supreme Court in case of Sunil Bharti Mittal v. Central Bureau of Investigation (2015) 4 SCC 609 has extensively discussed the circumstances when the director/person in charge of the affairs of the company can also be prosecuted, when the company is an accused person. The case arose from an appeal against an order of a Special Judge, who, upon being satisfied with the existence of prima facie material, took cognizance of alleged offenses concerning the grant of telecom licenses, an issue that has been the subject of extensive legal scrutiny in recent years. The Special Judge had issued summons after recording satisfaction that at the relevant time, Chairman-cum-Managing Director of Bharti Cellular Limited, the Managing Director of Hutchinson Max Telecom (P) Ltd. and the director of Sterling Cellular Limited, controlled the affairs of the respective companies and represented the directing mind and will of their respective corporations. The District Judge applied the doctrine of “alter ego” holding that these officials were alter ego of their respective companies, and the acts of the companies could be attributed to them. The Supreme Court laid down the ratio holding that in the absence of a statutory provision establishing vicarious liability, an individual acting on behalf of the corporation could only be implicated in criminal proceedings alongside the corporation where there existed cogent evidence substantiating both an active role in the alleged unlawful conduct and the requisite mens rea. The Supreme Court further scrutinised the applicability of the “alter ego” doctrine and held that the doctrine cannot be applied in reverse as done by the Special Judge by implicating the persons in control of the affairs of the company since the company is an accused person. Placing reliance on Iridium India Telecom Ltd. v. Motorola Inc. [2011]1 SCC 74 and cases like Bolton v. Graham and Sons [1956] 3 All ER 624 and Tesco Supermarkets Limited v. Nattrass, [1971] UKHL 1, [1972] AC 153, the Court held that summoning of appearance based solely on their positions, without clear evidence of personal criminal intent, is an incorrect application of the principles of vicarious liability. The Court noted that a company itself is an artificial entity, and operates through individuals. If a crime is committed by a company that involves mens rea, it is often due to the actions and decisions of the individuals representing the company. However, criminal law generally does not impose vicarious liability, holding one person responsible for another's action unless a statute specifically says so. Thus, the directors can be prosecuted alongside the company if evidence shows they played an active role with mens rea. For instance, Section 141 of the Negotiable Instruments Act, 1881, expressly extends liability to company officials by statute. In the absence of such legislative provisions, individual liability for a company's criminal conduct requires direct involvement or personal knowledge.
The Supreme Court further placed reliance on Jethsur Surangbhai v. State of Gujarat (1984) Supp. SCC 207, where the Court held that mere positional authority, in the absence of proven conspiracy, does not establish criminal liability for a Chairman. In such cases, the onus is on the prosecution to show that not just they were in the position of authority or power, but more than that. Substantial evidence of active involvement is required for them to be made vicariously liable in criminal liability. In light of the absence of any vicarious liability provisions within the IPC, liability for offences can only arise if the director personally commits the act with the requisite mens rea. However, investigative agencies often disregard this principle and prosecute directors merely due to their positions. To safeguard directors from wrongful prosecution and lengthy criminal proceedings, investigative agencies must be properly sensitized.
Thus, the Supreme Court has time and again, reaffirmed that directors of a company can be held criminally liable upon the establishment of their active involvement and requisite criminal intent and not otherwise. The Supreme Court has emphasized importance of statutory provisions for imposing vicarious liability on the Directors. Further, even in case of a director/Chairman being vicariously liable, the Court, which issues summons, must record satisfaction in the order issuing summons about the role attributed to the concerned Chairman/directors for initiating a valid prosecution, the absence of which will vitiate the process.
About the authors: Nisarg M Desai is a Partner and Shivani Gupta is an Associate at Gandhi Law Associates.
Disclaimer: The opinions expressed in this article are those of the author. The opinions presented do not necessarily reflect the views of Bar & Bench.
If you would like your Deals, Columns, Press Releases to be published on Bar & Bench, please fill in the form available here.