Contributed by Aryan Pandey

A division bench of Supreme Court comprising of J.B. Pardiwala and R. Mahadevan, JJ. on January 2, 2025 delivered a significant ruling in Sanjay Dutt and Ors.Vs. The State of Haryana and Ors, (“Sanjay Dutt”) elucidating the parameters of vicarious liability applicable to company directors. Two possible situations arise here:

• The actus reus and/or mens rea of a corporate officer may be attributed to the corporation itself (inviting application of the principle of attribution as mentioned by Prof. Varrotil here).
• Where the director/corporate officer is made liable for an act committed by the company.

For long Corporations could act without impunity for wrongs that were committed by them, the reasoning adopted was simple – that the company being an artificial person lacks the requisite mens rea. This was first undone by the UK Courts in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co ltd. by piercing the corporate veil. Lord Haldane identified the liability to lie on the person “who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.” Gower brings out an interesting fact about the German root’s behind Lord Haldane’s dictum where there is a clear distinction between agents and organs in Company law. Thus, Lennard essentially derived the company’s liability from the alter ego of the company.

The Indian judiciary recognized the concept of corporate attribution early on, notably in the case of State of Maharashtra v. Syndicate Transport Co. (P) Ltd. where the Bombay H.C.  ruled that the liability of a corporate entity for criminal acts committed by individuals depends on several factors: the nature of the alleged offense, the role of the officer or agent within the corporation, and other pertinent facts that indicate whether the corporation intended to commit the act in question. What followed Syndicate Transport was a series of conflicting opinion by various HCs which muddied the water. It was in Standard Chartered Bank  that the Supreme Court clarified that companies can be prosecuted for offences which are punishable for mandatory imprisonment but didn’t clear the air regarding punishment of companies for crimes requiring mens rea.

It was in this background that the Supreme Court gave its verdict in Iridium India Telecom Ltd. v. Motorola Incorporated & Ors. and held that corporations cannot evade criminal liability by claiming an inability to form the requisite mens rea for criminal offenses. The requisite mens rea of the company would be attributed to the person who is the directing mind. This approach is however critiqued to have accepted the rigid ‘directing mind and will’ test laid in Tesco Supermarkets Ltd. v. Nattrass (See Corporate Criminal Liability and Securities Offerings: Rationalizing the Iridium-Motorola Case). It is imperative to note before we depart that the principle of alter ego and attribution as propounded in Lennard’s and Iridium respectively can’t be applied in a reverse direction to make the directors of the company liable for an offence committed by the company (SeeSunil Bharti Mittal vs CBI). Justice Sikri’s opinion in Sunil Bharati Mittal v. CBI contributes significantly to the jurisprudence of reverse application of the principles of alter ego and attribution to delineate circumstances in which such corporate officials could be made liable.

In Sanjay Dutt, it was scenario (b) that was in discussion, the complaint arose from allegations that trees were illegally uprooted in a notified forest area in Gurugram by the appellantswho were the MD and CEO of Tata Realty and Infrastructure Limited and Tata Housing Development Co. Ltd. The Range Forest Officer lodged a complaint alleging that the appellants were liable for punishment under S. 19 of Punjab Land Preservation Act, 1900. The Court observed that the complainant for reasons best known to them did not array the Company and the  people who were actually found at the site felling the trees as accused. The Court clarified that a company can be liable for its employees’ wrongful acts, but directors’ liability is not automatic. It depends on specific circumstances, including whether the company is liable and if the director’s actions directly relate to that liability.

The Court then observed that it is trite law that vicarious liability can only be imposed when explicitly stipulated by statute, and even then, it does not automatically extend to all directors of a company. The court then analysed the Punjab Land Preservation Act, 1900, and found no provisions that would impose vicarious liability on directors or office bearers. Consequently, the court granted relief to the appellants, affirming that liability cannot be attributed without clear statutory support linking individual directors to the company’s obligations.

There are numerous instances where directors of a Company can be held liable for actions of the company. A beautiful example of this can be found in the interplay of S. 138 and 141 of the Negotiable Instruments Act, 1881. S. 141 (2) allows liability to be imposed on the director, manager, secretary or other officer of the company in cases where the company has committed any offence u/s 138 and it is proved that such offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company. This principle was used in S.M.S. Pharmaceuticals Ltd vs Neeta Bhalla And Anr where the Court propounded that a company, as a juristic entity, operates through the actions of individuals. Consequently, officers of a company who are accountable for actions taken in the company’s name may face personal liability when criminal charges are brought against the company.

The Negotiable Instruments Act is just one of many Indian laws that impose liability on directors. Indian laws impose liability on the directors for the company’s wrongful actions on almost every sector ranging from tax evasion to environmental degradation to money laundering or Competition law (For a detailed list of such provisions see, Annexure II of Vidhi’s The Liability Regime For Non-Executive and Independent Directors in India A Case for Reform) . These liabilities may be civil or criminal in nature. Take for instance S. 66 (2) of the IBC, 2016 which makes directors of the Corporate Debtor liable to make contributions to the assets of the corporate debtor as it may deem fit in case of fraudulent trading. Similarly, the Competition Act, 2002 via S. 48 (1) also provides for director’s liability if the contravention is attributable to neglect on their part. In such cases, as per S. 44 a penalty up to Rs. 1 crore may be imposed. The PMLA, 2002 imposes criminal liability on directors and they are made liable under S. 70 (2) of the act. The punishment in such cases might attract an imprisonment up to 2 years.

While the acts mentioned above, are accompanied by the safe harbour provisions where the liability absolves if directors or corporate officers prove that offence was committed without their knowledge and that due diligence was done from their end, the Vidhi report  recognises that there are numerous statutes which impose both civil and criminal liability on directors and officers for non-compliance with their provisions, without providing safe harbours or differentiating between executive and non-executive roles. Even though the safe harbour provision enshrined under S. 149 (12) of the Companies’ Act, 2013 gives protection to  independent and non-executive directors, the protection is available to them at a later stage and not at the summoning stage. This raises concerns about the adequacy of safeguards for directors facing potential liability under various statutes, emphasising the need for clearer guidelines to ensure fair treatment in corporate governance.The Supreme Court’s decision in Sanjay Dutt serves as a crucial reminder regarding the principles governing directors’ liability in corporate crime. By delineating the boundaries of vicarious liability, the court has reaffirmed that personal accountability must be demonstrated through explicit statutory provisions and direct involvement in the alleged misconduct. The judgment not only reinforces established legal doctrines but also advocates for a more rigorous approach to holding corporate officers accountable, ensuring that liability is appropriately assigned based on individual actions and statutory clarity.