Is a Company Vicariously Liable for Tortious Actions of its Directors?

ANUKRITI JAWANDHIA, B.B.A LL.B-4th YEAR., 

MODY UNIVERSITY, RAJASTHAN.

The Corporate personalities are engaged in the heat of Growth, Expansion, and Diversification, making it more vulnerable to commit such illegal acts. In the era of several corporate scams and the initiation of legal proceedings against company directors, including the independent Director, it becomes significant to understand the vicarious Liability of Directors. We all know that the Directors are appointed under the Companies Act, but their Liability is extended to several offences under several statutes. It is very common in corporate liability cases that agencies rope in Directors as they are considered responsible for the Company’s per diem affairs. It would be unfair if the Directors being the company’s alter egos, are held liable for the Company’s acts every time. This makes it indispensable to understand Why, When, & Which Directors are to be held liable. 

Vicarious Liability is an age-old concept of legal jurisprudence and has evolved with time. “Liability that a supervisory party bears for the actionable conduct of a subordinate or associate because of the relationship between the two parties.” The natural habitat of the concept was Tort law but has now been extended to other laws too. The applicability of this concept in the arena of corporate laws can be found in Indian Legislations where directors are held liable for the Company’s acts or/ and omissions. 

Why & when are directors held liable?

Board of Directors of a company are authorised to do acts of the Company as provided under sec. 179(1) of the Companies Act, 2013; hence they are held liable for every wrongful act or omission of the Company, and this is where piercing of Corporate veil comes into play. The Company has a separate legal entity dominated by its Directors while conducting affairs of the Company. Many a time, such distinct identity of Company is unseen by others. The Company transacts its directors’ businesses rather than its own, and the concept of the Company’s alter ego stems out of here. Directors are alter egos of the Company. They control what the Company does and are represent its will. Law even treats the state of mind of the Company as the state of mind of its managers who primarily act for the Company. In one of its landmark judgments, Hon’ble SC ruled that the men’s rea of persons controlling the Company is imputed as that of Company because they alter the Company’s egos.

In Sunil Bharti Mittal v. Central Bureau of Investigation and Others Court was faced with a question regarding the directors’ Liability. The Supreme Court held that reverse of the principle of alter ego could not be applied, i.e., to make director(s) liable for every act of Company. The said principle can only be applied to make a company liable for acts of persons who alter ego. Vicarious Liability of the Managing Director and Director only exists where and when specific provision exists in the statute. The provision must distinctly mention the vicarious Liability of Directors.

Certain provisions, namely Section 141 of the Negotiable Instruments Act, 1881, Section 27 of the SEBI Act, 1992, Section 14(A) of the Employees’ Provident Funds Miscellaneous Provisions Act, 1952, Section 69 of the Copyright Act, 1957, and Section 70 of the Prevention of Money Laundering Act, 2002 specifically deal with offences by the companies, imposing the Liability onto the person(s) responsible to the Company. It is not every time the directors can be held liable for the Company’s acts by virtue of these provisions. Instead, it arises only when Company is accused of committing such an act. Supreme Court in Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd reiterated with its judgment , which ruled that the Company’s charge is liable only when it is an infringement. This implies that the act committed must make the Company, liable and only then the Liability of the person in charge arises.

Is every director of a company vicariously liable?

The answer is not per se. If it were supposed to be, the law-makers would have clearly stated ‘every Director of the company instead of holding every person liable. This also clears the myth that every Director is in charge and responsible for the Company’s conduct. A person may not be a Director but can still be responsible for the conduct of the Company. Therefore, it is not every time the office is liable for corporate Liability, but instead the role person plays, which varies from fact to fact. The provision also does not distinguish which Directors be held liable, say, (no for) The Managing Director or the Independent Director! 

Supreme Court, in a catena of its judgments, has further pointed out that where there are Managing Directors or Joint Managing Directors, such Directors can only be held liable by virtue of their position. The rationale is that such an office is created to manage a company’s responsibilities; hence, the person in charge of managing the Company must be liable for such acts. 

Sec. 149(12) of the Companies Act, 2013 gives immunity to Independent and Non- Executive Directors from the Liability of Act that he had no knowledge of or did not involve its consent. Recently in the case of Sunita Palta & Ors v. Kit Marketing Pvt. The court held that Independent Directors are not liable as they are not involved in the Company’s daily affairs. It has also been welcomed by Apex Court Pooja Ravinder Devidasani v. the State of Maharashtra that though Non-Executive Directors have a role in the governance of the Company. Still, they are not involved in the Company’s day-to-day business, so, naturally, they do not regulate the Company’s executive activities. Since it is crystal clear from the plain text that only persons in charge of the Company are held vicariously liable, the same has been retreated by Courts in various judgments, Non- Executive Directors not being involved in overall control of Company on a routine basis cannot be held liable unless the misdoing was done within their knowledge or to which they had consented. 

Furthermore, for Liability of Independent Director, MCA issued Circular in March 2020. The Circular sought to set the standard of care to initiate proceedings against ID unless sufficient evidence exists. It also clarified that since they are not involved in day-to-day management and control of the Company, they cannot be held liable for any non -compliance by the Company of any order of the statutory authority. 

Conclusion

The abovementioned decisions of the Hon’ble Supreme Court and High Courts lay down that Directors, being the directing minds of Company and discharging complete control over it, are vicariously liable for the acts of the Company if the statutory provisions imply for it. However, IDs are to be liable in some instances, as mentioned above. The Companies Act, 2013 provides for duties of the Director (s). Additionally, it states that the onus of proof that the act is committed within the ambit of their duties is on them. Section 463 of the act would protect Director from Liability if the act were committed honestly and reasonably. Persons other than the Director can also be held liable if they are in control and responsible for the Company’s business conduct.

This outline of corporate Liability exposes Directors to the risk of the proceeding and mental hardships. The recent Circular of MCA lacks an action plan to implement it the right way, and numerous proceedings are pending against IDs in courts without any substantial evidence. Hence, a lot needs to be done for defining provisions of Vicarious Liability of Independent Directors.

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