In its landmark judgment in National Small Industries Corp. Ltd v. Harmeet Singh Paintal [2010], the Supreme Court has held that the persons, who are sought to be made vicariously liable for a criminal offence under section 141 should be, at the time the offence was committed, in charge of, and responsible to, the company for the conduct of the business of the company. Every person connected with the company shall not fall within the ambit of the provision. Only those persons, who were in charge of and responsible for the conduct of the business of the company at the time of commission of an offence, will be liable for criminal action. A director of a company, who was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable for a criminal offence under the provisions. The liability arises from being in charge of and responsible for the conduct of the business of the company

at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company. The Supreme Court pointed out as follows :

"A company may have a number of directors and to implead any or all the directors as accused in a complaint merely on the basis of a statement that they are in charge of and responsible for the conduct of the business of the company without anything more is not a sufficient or ade­quate fulfilment of the requirements under section 141. For making directors liable for the offences committed by the company under section 141 of the Act, there must be specific averments against the directors, showing as to how and in what manner the directors were responsible for the conduct of the business of the company."

Significant aspect of the ruling of the Supreme Court

The most significant aspect of the ruling is that emphasis laid on sections 5 and 291 of the Companies Act. Section 5 identifies the persons who are to be treated as officers who in default for the purpose of offences under the Act and they are the persons who are closely connected with the management of affairs of a company (especially the managing director and whole-time director). The settled position is that a managing director is prima facie in-charge of and responsible for the company's business and affairs and can be prosecuted for offences by the company. But so far as other directors are concerned, they can be prosecuted only if they were in-charge of and responsible for the conduct of the business of the company.

For making a person liable the mechanical repetition of the requirement of sub-section (2) of section 141 will be of assistance

Finally, the Supreme Court has cautioned that if the accused is not one of the persons who falls under the category of 'persons who are responsible to the company for the conduct of the business of the company', then merely by stating that "he was in-charge of the business of the company" or by stating that "he was in-charge of the day-to-day management of the company" or by stating that "he was in-charge of, and was responsible to, the company for the conduct of the business of the company", he cannot be made vicariously liable under sub-section (1) of section 141. To put it clear that for making a person liable under sub-section (2) of section 141, the mechanical repetition of the requirements under sub-section (1) of section 141 will be of no assistance, but there should be necessary averments in the complaint as to how and in what manner the accused was guilty of consent and connivance or negligence and, therefore, responsible under sub-section (2) of section 141.

This decision should check the general tendency to arraign all directors (including those who were not directors on the date of signing the cheque and non-executive directors who are not concerned with nor do they have powers of management of day-to-day affairs of the company.

Excerpts from an article from Corporate Law Adviser - a fortnightly journal for Corporate and Business Laws which:

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