Author – Aditi Goel, 4th Year student at Symbiosis Law School, NOIDA.
Citation – 2019 SCC OnLine Mad 38922
Bench– ANAND VENKATESH
Original Copy– N/A
Issue in Question:
- Whether a petitioner who is a Non-Executive Director and a Chartered Accountant be liable for an offence by the company?
Background of the Case:
- The present case is a criminal original petition that has been filed to quash the proceedings of a 2006 case pending on file of the learned Chief Metropolitan Magistrate of Egmore.
- Upon investigation, it was found that there was a fraud of Rs. 118 crores on 46,000 depositors and there were 14 accused people against whom a final report was filed, the cognizance of which was taken in 2006. Three accused had absconded to a foreign country due to which the case made no progress in 13 years. Another accused was a Director of the company from 1997 to 1999.
- Petitioner is a chartered accountant by profession and was made an accused in the case on the ground that he was one of the directors of the company, as contended by the counsel of the petitioner. There was no act on behalf of the petitioner and the only reason why he was arrested was because of the principle of vicarious liability, which would not apply to offences under the Indian Penal Code.
- The counsel concluded the contentions by stating that the main accused had fled years ago and the criminal proceedings are happening against the petitioner who was just a non executive director of the company and a chartered accountant by profession. There had been an abuse of powers given that there is no material evidence against the petitioner.
- Respondent in this case is the police officer who stated that the time during which the petitioner acted as a director, he attended all the meetings, signed on the Minutes and continued as a direction tll 1999. Articles of the company state that the management shall be vested with the Board and they have the discretion regarding the utilization of company funds. They have the power to frame the rules regarding loans and advances of the company and other aspects regarding the same. They also have powers to frame rules governing schemes or deposit accounts.
- Counsel of the respondent also submitted that the petitioner attended the meeting of the Board and signed the balance sheets during 1997-1999 and hence was involved in the management of affairs of the company. By not interfering with illegal acts, the petitioner committed breach of his obligation and thereby committed a crime by abetting the first three accused who fled.
- Finally, the counsel submitted that there are materials that prima facie point offences committed by the petitioner in order to frame changes.
Court considered both the submissions and laid the following:
- Several properties of the company were sold and several depositors were settled. The accused in the case who absconded India were declared as proclaimed offenders who have not been brought back to India till date.
- The petitioner was not accused for an original offence, but for criminal conspiracy under Section 120B of Indian Penal Code and abetment under Section 109 of the Penal Code. The actual offence for which he was roped is mentioned in the Final Report.
- Court made a reference to the case of Sunil Bharti Mittal v Central Bureau of Investigation. In that case, it was held that: The company acts via its managers. The Director of a company or its employee can not be held vicariously liable for an offence committed by the company. Where there is adequate proof combined with criminal intent, an individual who has committed an offense on behalf of a company may be charged together with the company.
- Court then took an analysis of the petitioner’s profession. For thia, the court relied on the judgement of Chintalapati Srinivasa Raju and Others v Securities and Exchange Board of India: The person who is accountable for the conduct of its business at the time that person is substantively responsible for strengthening the deputy liability. Non-Executive directors are not involved in day to day affairs of the company and are not in charge of the conduct of the company, nor is he responsible for the same.
- Keeping in mind the above judgements, the court said that it cannot be presumed that a Non-Executive Director is involved in day to day affairs of running of the company and cannot be made liable only for the sole cause that they attended the meetings and signed balance sheets.
- To rope the petitioner in the case and make him liable under Section 109 of the Indian Penal Code, it is necessary for the prosecution to pin-point mens rea and an act on the mens rea by the petitioner. Negligence cannot result in abetment.
- There are no materials available against the petitioner to proceed further against him. Having a strong suspicion can be the basis of a case, but it cannot be the only reason when there is an absence of the material that would incriminate the person.
- The petition was hence allowed, dismissing the miscellaneous petitions.
- Satyam Scam, 2G Scam are some of the famous scams of India. These scams bring nothing but the distrust that lies within the greed to print more green money. Many legal and business facilities teach that the Satyam Scam is an example of how the investors, especially foreign investors, worry about investing their hard earned money in a country like India, where there are companies scamming their investors every day.
- Even though it is evident that the petitioner was not directly involved in the said scam, it is also important to understand that simple negligence on part of the petitioner has led to such severe damage to the people who were cheated. When someone is elected to such a high post in a company, they become the agents, trustees or even the torch holders for the stakeholders, but they manage to do something that affects the fiduciary relationship they have to obey.
- It is the directors who have the duty to protect the company and its stakeholders from such fraud. Being a chartered accountant himself, it is nothing but shocking to learn that he signed the balance sheets without looking into discrepancies. This could, as per the author, be a suspicion that could incriminate him. However, the court relied on absence of material to allow the petition.