VICARIOUS LIABILITY

In ' The Asstt. Commissioner Assesment - Bangalore & Others v/s Velliappa Textiles Ltd., and Ors [ AIR 2004 SC 86] Justice B.N. Shrikrishna said corporate liablility cannot be imposed without making corresponding legislative changes. Pl go thro the judgment and see if it is of any help.

K.K. AHUJA Vs. V.K. VORA & ANR.

Negotiable Instruments Act, 1881: ss.141(1) and (2), 138 - Vicarious liability - Liability of Deputy General Manager of the Company which issued the dishonoured cheque - Held: A person is vicariously liable under sub- section (1) of s.141, if he is responsible to the company for the conduct of the business of the company and was also incharge of business of the company - Sub-section (2) of s.141 provides that Director, Manager, Secretary or other officer though not in charge of conduct of the company would be liable if offence was committed in connivance or consent or was a result of negligence on his part - Deputy General Manager is not a person responsible to the company for conduct of business of company -  Question whether he was incharge of the business of the company or not becomes irrelevant Thus, he cannot be made vicariously liable under s.141(1) - To make him liable under s.141(2), necessary averments relating to sent/connivance/negligence should be made - Since no such averments were made in the complaint, there was no error in the order quashing the summons against him - Companies Act, s.291 - Interpretation of statutes - Liability - Vicarious liability - Code of Criminal Procedure, 1973 - s.482.Interpretation of statutes: Strict interpretation - Penal statutes - Held:" To be construed strictly - Penal statutes providing constructive vicarious liability to be construed much more strictly - Negotiable Instruments Act, 1881 - s.138.

The appellant filed a complaint under s.138 of Negotiable Instruments Act, 1881 against a company and eight others including the first respondent. The Magistrate directed issue of summons against all the accused persons. The first respondent filed petitions for quashing the proceedings against him on the ground that he was only a Deputy General Manager who was not in- charge of the company.

The High Court quashed the orders summoning the  respondent holding that he was not a signatory to the cheques nor was a party to the decision to allow the cheques to be dishonoured. Aggrieved appellant filed these appeals.

This was posted by Mr Y Prakash.

Sir,

In KK Ahuja’s case, proceedings were quashed on the ground that the accused was a Dy.General Manager and therefore does not come within the meaning of “persons responsible to the company for the conduct of the business of the company” within the meaning of the companies Act. As per the decision in KK Abuja’s case, two conditions are required to be satisfied to make a person vicariously liable i.e. (1) He was person responsible for the conduct of the business of the company (2) He was a person in charge of the affairs of the company.  According to the said decision issue, no. 1 is a question of law and issue no. 2 is a question of fact.  Since in this case Dy.General Manager in law is not a person responsible the issue of process was quashed. 

In the query raised by me, the same was with reference to a Director.  Since as per KK Ahuja a Director in law is a person responsible for the conduct of the business of the company, according to me the complainant need not even aver about his responsibility.  However in case of a Director, the complainant has to aver that the accused was a person “in charge” for the conduct of the business of the Company to make him vicariously liable.

My question is, is it not sufficient to make the necessary averment that the person was in charge and responsible for the conduct of the business of the company? Does the complainant need to aver, as to how the director was in charge?

In this connection, I draw you attention to the following judgment of 3-bench judge of the Supreme Court in the case of SMS Pharmaceuticals v/s Neeta Bhalla the ratio of which is considered as valid even today.  The Hon’ble Supreme Court in the said case had inter alia framed the following issues and answered the same:-

Whether for purposes of Section 141 of the Negotiable Instruments Act 1881, it is sufficient if the substance of the allegation read as a whole fulfill the requirements of the said section and it is not necessary to specifically state in the complaint that the person accused was in charge of, or responsible for, the conduct of the business of the company?

Answer:- It is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of business of the company.  This averment is an essential requirement of Section 141 and has to be made in a complaint.  Without this averment, being made in a complaint the requirement of Section 141 cannot be said to be satisfied.

My question is - Complainant has made the averment as mentioned in SMS Pharmaceuticals.  Can his complaint be thrown out simply because he has not averred anything further? If so, why can it be thrown out?

If you notice, the Supreme Court has not answered fully the question framed by it in SMS case.  It only says specific averment has to be made.  It does not say that, in addition substance of the allegation should state how the director was in charge. It does not say that substance of the allegation read as a whole should fulfill the requirements of section 141 as well as there should be specific averment as to in charge and responsibility. The answer is silent as to the first part.

Do you consider that specific averment as well as the substance of the allegation as to how the Director was in charge has to be averred in the complaint?  Of course, if the specific averment is not made, complaint is liable to be thrown out in view of SMS Pharmaceuticals.  But what about, when specific averment exist in the complaint, but the substance of the allegation does not state how the director was in charge or what is the role played by him in the transaction, In such a case is the complaint liable to be thrown out?

kindly note that the company has distinct personalty and existance from its members directors etc.

therefore any of the matter arises should be proceeded against the company and its directors can not be held responsible just because he was in charge at that time.

what  your pointing out is that lifting of corporate veil which is not an easy task to prove.

Sam - What you are saying is a general proposition of law. But various statues like negotiable instruments act, essential commodities act, prevention of food adulteration etc has provided for exception to the general proposition of law and has made directors vicariously liable for the offences committed by the company.  The application of the doctrine of vicarious liability in criminal law is actuated by necessity rather then desirability. The message is in connection with one such statute i.e. Negotiable instruments act. These statutes provide that the directors are liable if they are incharge of or responsible for the conduct of the business of the company which has committed the offence.  Please therefore stand corrected.