The issue of vicarious criminal liability for the directors and other key personnel of companies takes
a somewhat alarming turn when it comes to the provisions of the Companies Act, 2013 (The
Companies Act). The Companies Act approaches the issue of criminal liability in an all-embracing
fashion when compared to the statutes noticed above. Much like the other legislation concerned with
economic crime, the Companies Act also criminalises various kinds of activities in the course of the
economic life of the company, chief among them being fraudulent activities committed by the
company (through its employees). For all offences committed by the company, the Companies Act
imposes special vicarious liability on officers (of the company) who are ‘in default’.
Section 2(60) of the Companies Act specified the persons who would be considered as officers who
are ‘in default’. The specifications closely follow the descriptions of the personnel considered in the
predecessor legislation (Companies Act, 1956) as persons responsible to the company for the conduct
of the business of the company. Four categories of personnel come within the ambit of officer ‘in
default’. The first category encompasses what the Companies Act helpfully terms as ‘key managerial
personnel’ (KMP). KMP includes the managing director, whole time directors, Chief Executive
Officers (CEO), Chief Financial Officers (CFO) and Company Secretaries (CS). 11 The second
category comprises those personnel who, while reporting to the KMP, are responsible for
maintaining, filing or distributing accounts and records, and actively participate in, knowingly permit
or knowingly fail to take active steps to prevent any default. The third category is extraordinarily
wide in its amplitude. It covers anyone who is responsible for ‘maintaining accounts and records’. It
certainly looks like the compliance officers of banks would be covered, for example.
Provisions regarding the third category can be contrasted with comparable provisions in section 5(f)
of the predecessor legislation, the Companies Act, 1956, which made officers of the company liable
under similar circumstances provided two conditions were fulfilled. The Board ought to have given
the officer the relevant responsibility, for example, the responsibility of filing certain records for
regulatory purposes. Further, the officer in question must have consented to taking on such a
responsibility. On the face of it, the predecessor legislation looks slightly less onerous as it includes
the consent requirement. However, in practice such a consent would probably be obtained from the
officers in question. In one sense the predecessor legislative provisions were more onerous as they
did not require, at least on the face of it, any particular mental state or affirmative action by the
responsible officer. On the other hand, the current version requires the responsible director to
authorise, actively participate, knowingly permit or knowingly fail with respect to his duties.
The fourth category is concerned with directors who were aware of the contraventions (that led to or
constitute the offence committed by the company) either because they participated (without
objecting) in the board proceedings that led to such contraventions or they were in receipt of such
board proceedings, even if it is the case that they were not present during these board proceedings.
Since whole time directors are already covered under the first category, this category, on the face of
it, might be construed as applying to independent directors. The potential liability involved here
appears to be disproportional to the duties and functions of independent directors. However, the
Companies Act mitigates the potential liability of independent directors by providing that two
circumstances need to combine for an independent director to be held liable for offences committed
11 Section 2(51), Companies Act.
by his company. First, he must have knowledge of the offence attributable through board
proceedings. Second, (note this is an additional requirement) the offence must have been committed
either with his consent or because of his lack of diligence.12
Given that the managing director and whole time directors are covered under the first category and
independent directors have a different liability regime because of an express provision in the
Companies Act, who exactly is the fourth category intended to cover? Some guidance on this matter
can be found in section 149(6) of the Companies Act, which defines an independent director. An
independent director is any director other than the managing director, whole time director or a
nominee director of the company. It follows from this definition that a nominee director is not an
independent director. Therefore nominee directors are the kind of directors that are liable to be
included in the fourth category.
The fifth category consists of people who don’t run the company on a day to day basis but are instead
associated with the issue or the transfer of a company’s shares. Section 2(60) states that with regard
to any offences associated with the issue or transfer of the shares of the company, the officers in
default would be deemed to be the share transfer agents, registrars and the merchant bankers to the
issue or transfer of the shares.
A criminal prosecution might result in significant and punitive financial damages for the officers of
a company. The predecessor legislation restricted the ability of companies to indemnify their officers
against the deleterious financial consequences of a criminal prosecution. Section 201 of the
Companies Act 1956 voided any attempt by a company (either in its articles or through a separate
agreement with the concerned officer) to indemnify its officers for any legal liability arising out of
criminal proceedings. However there was a limited exception provided for by the same section under
which a company could indemnity an officer for the legal expenses incurred by him in defending
criminal proceedings provided he was successful in his defence. There is no provision comparable to
section 201 in the current Companies Act giving rise to the speculation that directors and officers
under the current corporate regime can avail indemnification for any pecuniary liability arising out
of criminal proceedings.
6. Special vicarious criminal liability under the Prevention of Corruption Bill, 2013
The most recent legislative measure with respect to which the issue of vicarious criminal liability has
arisen concerns the flagship measure for tackling economic corruption in India: The Prevention of
Corruption Act, 1988 (POCA). Currently the POCA does not contain provisions for vicarious
criminal liability because its focus has been on the personal liability of public officials for acts of
corruption. The POCA has been used to punish bribe takers and not bribe givers. The current
government has introduced, through the Prevention of Corruption Bill, 2013 (POCA Bill), certain
amendments to POCA in order to make bribe givers including corporates punishable under POCA13
A ‘commercial organisation’14 is guilty of an offence under the POCA Bill if a person ‘associated’15
with the commercial organisation bribes a public official.16
12 Section 149(12), Companies Act.
13 Section 9, POCA Bill.
14 A commercial organisation has been defined widely In section 9 (3)(a) of the POCA Bill to include companies
(Indian and foreign), partnerships (Indian and foreign)
15 According to Section 9(3)(c) of the POCA Bill, a person is associated with a commercial organisation if the person
performs services for an on behalf of the commercial organisation. This is a very wide definition and would cover
persons who would be employees of the commercial organisation. Explanation 3 to section 9 states that if a person is an
employee of the commercial organisation, it would be presumed that he provides services on behalf of the commercial
organisation, unless he proves to the contrary.
16 Section 9, POCA Bill. Technically, the bribe receivers have to be ‘public servants’.
The inclusion of corporate corruption meant that the issue of vicarious criminal liability of the
company and the special vicarious liability of the officers of the company had to be addressed. This
issue has been addressed in a manner identical to the corresponding sections in other economic
offence legislation, such as SEBI and the ITA, i.e. under the POCA Bill, if a company is held guilty
of an offence (because a person associated with the company bribed a public official), every person
in charge of and responsible to the company for the conduct of the business of the company would
also be criminally liable for the same offence.17
The POCA Bill was referred to the Indian Law Commission for their comments. The law commission
expressed some reservations regarding the wide amplitude of the vicarious liability provisions. The
commission was particularly concerned about the impact of section 10 of the POCA Bill that imposed
special vicarious criminal liability on the persons in charge of and responsible to the company. Here’s
what the commission had to say about this provision:
The effect of section 10 is that if an employee (P) of a company (C), sitting in Bangalore, bribes a local official (R) to get
its clearance on time, then the combined effect of the 2013 Bill is that P will be liable under section 8
, R under section
, and C under section 9, unless it can prove it has adequate procedures in place designed to prevent such conduct.
However, section 10 will operate to deem every single person in charge of, or responsible to c, thus every Director on the
Board of Directors, who may be sitting in Delhi more than 2000 kms away-guilty, and the burden of proof would shift on
each of these directors to prove they had no knowledge or had exercised due diligence. The situation could be even worse
if for instance, P had the high level clearance of one of the sitting directors to bribe R, because of which every other
director would be faced with the difficult task of discharging their high burden of proof.
There are two interesting aspects to the Commissions’ concerns about the absurdity of vicarious
criminal liability provisions. First, the Commission laid great stress on the POCA Bill’s provisions
ability to make innocent directors liable for the crimes of guilty directors. However, after the Satyam
scandal, the issue of collective responsibility of directors has gained prominence. One of the reasons
for the Satyam scandal was that the directors on the Satyam board failed to voice their concerns when
some of their fellow directors were in the process of committing a major accounting fraud. The POCA
Bill can be plausibly defended on the point that directors have a responsibility to each other in taking
positive steps towards avoiding corporate misfeasance. However, in order to fix this responsibility,
there is no need to rely on the special vicarious liability provisions. The provisions that make
corporate officers liable if they consent or connive in the commission of corporate offences or are
negligent in performing their duties are sufficient to address the corporate governance concerns
arising out of the Satyam scam.
Second, the Commission, in making its remarks on the deleterious features of special vicarious
liability, appears to have ignored the long history of identical provisions in a host of other statutes
mentioned above. The example quoted above applies mutatis mutandis to the provisions in many
other statutes that regulate economic offences. If the criminal vicarious liability provisions have
passed muster before, one wonders why the proposed provisions in the POCA Bill are particularly
onerous for the corporate directors in India. After all, the same officers of the company identified are
faced with similar risks in respect of most of the other legislation dealing with economic offences.
The real problem here is the unfair and onerous burden inherent in the special vicarious liability
provisions. The Commission, in rejecting these provisions in the POCA Bill, has opened the doors to
a more urgent debate on whether such provisions ought to be repealed in other statutes as well.