Vicarious liability catch
tion that a chairman of a compa-
Courts presume collective responsibility of all directors for
a company’s wrongs; it is for the executives to rebut it
OUT OF
COURT
M J ANTONY
his must be a bad season for
T company directors, if one goes
by the judgments delivered in
recent weeks by the Supreme Court
and three major high courts in the
country. They had to face criminal
charges for the wrongs done by their
subordinates, and their denial of
vicarious liability has met with in-
different results. Some got away and
others did not, depending on the facts
of the case, luck or perhaps faith.
The Supreme Court was stern in
its view that the managing director
and other directors should face pros-
ecution in a drug adulteration case.
“In our opinion,” said the judgment
in the criminal appeal, Dinesh B
Patel vs State of Gujarat, “this was a
case of manufacture of a drug for hu-
man consumption and, after being
tested in laboratory, it was found
to be defective since there was growth
of fungus, which is a very serious
matter related to public health”. The
appeals of the top executives raising
technical arguments were dismissed
because of the seriousness of the al-
legations.
In another case, Maharashtra
State Electricity Distribution Co vs
Datar Switchgear Ltd, the chairman
at the time when some forged doc-
uments were presented to an arbi-
trator by the company was absolved
from prosecution and trial. The com-
pany will face the music on its own.
Allowing the appeal of the power
distributor, the Supreme Court stat-
ed: “It is a settled proposition of law
that one cannot draw a presump-
ny is responsible for all acts com-
mitted by or on behalf of the com-
pany. In the entire body of the com-
plaint, there is no allegation that he
had personally participated in the
arbitration proceedings or was mon-
itoring them in his capacity as the
chairman of the board and it was at
his instance the alleged interpola-
tion was made in documents before
the arbitrator.” Earlier, the Bombay
High Court had declined to quash
the prosecution.
The Madras High Court last week
quashed the complaint against the
chairman of Indo Biotech Foods Ltd,
which issued cheques to India Equip-
ment Leasing Ltd that were dishon-
oured by the bank. The payee com-
pany issued notices to the company,
but not to the chairman personally.
However, it filed a criminal case
against the company as well as the
chairman for issuing the cheques.
The payee company asserted that the
chairman would be liable along with
the company though the notice un-
der the Negotiable Instruments Act
was not sent specially to the chair-
man. The high court rejected this ar-
gument and stated: “In the absence
of statutory notice addressed to the
chairman individually the notice sent
to the company will not amount to
the individual notice to the chair-
man.” The high court clarified that
the company will continue to face
prosecution under the Negotiable In-
struments Act.
Most cases arise under this Act.
In a large batch of cases, the Delhi
High Court traversed the law and
asked the directors to face trial and
prove that they were not responsible
for issuing cheques that bounced. In
the case, Shree Raj Travels & Tours
vs Destination of the World, the high
court stated that the behaviour of the
directors led to harassment of the
payees, who had to spend time and
money to get their money.
The court made certain caus-
tic remarks about the directors’ role:
“It is a matter of common knowl-
edge that when companies are float-
ed and public issues are brought,
big advertisements are issued giv-
ing big names as directors and pro-
moters of the company. These names
are those of successful chief ex-
ecutive officers or directors who
have achieved success in other fields.
Owing to these names at the very
inception and formation of com-
pany, when there is no wealth or
property of the company, the share
of the company is sold at a premi-
um promising big business and suc-
cess. Once money is mopped up
from the public, in all those cases
in which the companies were cre-
ated only for the purpose of mop-
ping up hard-earned money of pub-
lic or to befool them, it is found that
those big names disappear. In al-
most every litigation, those direc-
tors who formed part of the core of
the company and gave promises
that the company would do roaring
business quietly disappear from the
scene or take the plea that they were
not responsible for the business
of the company. While the public
stands cheated, the persons who
had mopped up wealth and pock-
eted the public wealth are not pre-
pared to take responsibility.”
The general trend of the court
judgments is that the directors must
show to the court that they were not
responsible for the alleged wrong.
The burden is on them. This is be-
cause the public is not aware of the
internal distribution of power and
duties in the board of directors of
large corporations. So the court pre-
sumes collective responsibility of all
the directors.