CORPORATE CRIMINAL LIABILITY

DIRECTOR LIABILITY IN CORPORATE CRIMES –

Academic year – 2024-25

Submitted By
Vaishnavi M. Chore

ABSTRACT
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 The present paper deals with one of the important aspects of corporate criminal liability i.e.

criminal liability of director. Directors are often regarded as the brain of the company. It is

the director who conducts, manage and regulate the affairs of the company. Therefore it is

necessary to regulate the power and functions of director so that they cannot act ultra virus.

The present paper will try to bring in light the liability of director for every wrong committed

by him while exercising his power and function. The paper will also discuss various

provisions of company law dealing with criminal liability of director.

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 INTRODUCTION

Almost 25 years have passed since India ushered in a new era of commercial liberalization

and reform. This continuous the gradual opening up of the economy, driven by a robust

growth in domestic consumer demand, has resulted in an influx foreign investment, which

in turn has strengthened private Indian companies. This impressive story of economic

growth, however, also has its dark side. Like most jurisdictions, India is no stranger to

corporate fraud and scams. Because of significant cultural differences in how Indian

companies function vis-à-vis their international counter parts, Indian companies are often

seen as less professional. Though the scenario may be changing, the “family business”

outlook of many Indian enterprises and an occasionally lackadaisical approach to various

compliance and disclosure requirements continue to prevail. Siphoning of funds through

related-party transactions,

Accounting irregularities and corruption are just a few of the common, unfortunate trends

that are prevalent in Indian companies. Be it Satyam, Lilliput, or NSEL, numerous

instances of management and promoter-driven fraud have come to light. The concern

surrounding director liability has also been highlighted by the arrests of Stefan Schlipf, the

managing director of BMW India Financial Services, and William Pinckney, managing

director and chief executive officer of Amway India, along with two other directors. A

critical failure of Indian corporate

Law was further highlighted during various corporate and financial scams, such as the

Harshad Mehta episode or the Satyam fiasco. Various investors also discovered that money

had been siphoned off by promoters through related-party or customer-vendor transactions.

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 To address this issue, the 2013 Act now specifically defines “fraud” and states that a person

who is guilty of it may be punished by imprisonment for up to 10 years, and where fraud

involves the public interest, the minimum sentence prescribed is three years. Fraud, as

defined

Under section 447 of the 2013 Act, includes any act or abuse of position committed with

intent to deceive, to gain undue advantage from, or to injure the interests of a person,

company, shareholders, or creditors, whether or not there is wrongful gain or loss.

The term 'director' is defined under Section 2(34) of the Companies Act, 2013 (hereinafter

referred to as the 2013 Act). It states that a 'director', "means a director appointed to the

board of a company." The definition provided under the 2013 Act is not an exhaustive one.

This section corresponds to Section 2(13) of the Companies Act, 1956. It defines a director

as "any person occupying the position of director by whatever name called” We can say

that this definition is purely based on the function; a person is a director if he does

whatever a director normally does. But the Act gives no further guidance on the function,

duties and position of a director. In reality, directors are the persons who direct, conduct,

manage or superintend a company’s affairs. Section 291 has entrusted the management of

the company in the hands of director. They chalk out the general policy of the company

within the framework of the memorandum of the company. They appoint the company’s

officers and recommend the rate of dividend. The directors of company are collectively

referred to as the Board of Directors1.

A corporation is an artificial being existing only in contemplation of law. It has neither a

mind nor a body of its own which it requires to carry out its operations and so here

Directors come into the picture and company’s business is entrusted to them as human
1
Sec.2(6) of Companies Act 1956

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 agents. Directors are often treated as mind and will of the company. This paper will further

discuss about the role, responsibility and the liabilities of directors of company.

IMPORTANCE OF DIRECTORS IN COMPANIES

The Company is an artificial person having no mind or body of its own; it can act only

through human agents. Because of its artificial nature, its business is required to be

entrusted to certain human agents. These agents are known as directors. Thus, the directors

are the persons through whom the company, acts and does its business. Therefore, without

the directors the companies cannot maintain their existence the directors serve as a source

of advice and counsel, serve as some sort of discipline, and act in crisis situations. Board of

directors is difficult institutions to study. Boards play a central role in corporate control and

decision-making. The board of directors is fair representative of shareholder and company

management. A company director’s role is the most crucial for the smooth operation of the

company. He is perhaps the busiest person in the entire organization with several decisions

to be made and director also has a great deal of pressure from the competitors. The role of

the Board of directors is to conform that they will be managing best interests of all

stakeholders , board of directors consist of the people who are responsible for directing the

company towards success keeping in mind various factors such as financial and human

resources, share holder values, risk management, business ethics. The board take decision

on behalf of shareholders and too many indoors decisions that will tend more positive for

management. In this whole scenario, the director of the company is hiding behind the

corporate walls. Because the Corporate are made free from criminal liabilities, the

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 Directors seem relieved from any burden about the same. The director of a company is

responsible for smooth carrying out the business and managing the day-to-day affairs of the

company. They are appointed by the shareholders for the efficient and effective running of

the company as professionals. The relationship existing between a director and the

shareholder is that of a fiduciary’ one (i.e., based on trust). Therefore, directors are exposed

to liabilities whether it may be civil ‘or criminal ‘in nature in case of breach of duties by

them. In cases of civil liabilities, the liability is set off by making payment or compensating

the affected party whereas criminal liabilities, mentioned under various statutes, attract

punishments for the person responsible for such breach. In this article, the discussion is

based on the criminal liability of directors under the Companies Act, 2013.

CRIMINAL LIABILITY OF DIRECTORS UNDER THE COMPANIES ACT, 2013

"A company can only act through human beings and a human being who commits an offence

on account of or for the benefit of a company will be responsible for that offence himself”.

-Glanville Williams.

Criminal Liability can be defined as illegal act of omission or commission, punishable

by criminal sanction committed by individual or group of individual in course of their

occupation.2

The role of a director in a company is very significant. He is the one who has the

responsibility to ensure that the business is carried out smoothly also he has the obligations

of managing the routine work which the company performs. Appointment of directors is
2
K.S. Williams, Text Book On Criminology

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 done by the shareholders and hence, owes a fiduciary duty towards them. This makes the

directors open to liabilities whether Civil, requiring the director to compensate the victim or

Criminal liability resulting in fines and imprisonment.

Directors are liable for violation of the provisions of the Companies Act and other Acts

which may expose them to punishment with fine or imprisonment or with both. The Hon'ble

Supreme Court of India held in the case of Maksud Saiyed Vs State of Gujarat and

Others3that if there is any provision in the legislation for vicarious liability, the Managing

Director and Director would be liable. If directors are guilty of carelessness or discovered to

be misusing their position, they will be responsible for civil as well as criminal penalties.

For example, if directors make any false assertions in the prospectus, fail to keep books of

account as required by Section 209, or fabricate accounts, criminal culpability may result. If

a director can establish that he was not in command or control of the company's day-to-day

operations, or that the act was done without his consent/knowledge/connivance, and that he

was not negligent in ensuring that laws were followed, he may be exonerated.4

S. 217 (2AA) of Companies Act, 1956 requires directors to give Directors responsibility

statement confirming that: accounting policies adopted reflect the true nature of financial

statements and Accounting records are maintained for safeguarding assets and preventing

frauds. Directors have to confirm that Proper and sufficient care has been taken for the

maintenance of adequate accounting records for safeguarding the assets of the company and

for preventing and detecting fraud and other irregularities.

3
(2008) 5 SCC 668
4
Rights, Duties and Liabilities of a Director, available at http://www.caclubindia.com/articles/all-about-rightsduties-
and-liabilities-of-a-director.

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 It is important to understand that no one can be held responsible merely on the ground of his

position in the company. No presumption can be legally made against a person by virtue of

the fact that he holds a key managerial position in the company. In order to hold a person

liable, it is necessary for that person to fulfill the legal requirements of being a personal who

is responsible under law to the company for carrying out its operations, at the time of

commitment of the offence.

The Supreme Court of India in the cases Nat'l Small Indus. Corp. Ltd. v. Harmeet Singh

Paintal & Anr5 and K.K. Ahuja v. V.K. Vora6 , has held that a managing director can be

held liable for the wrongs committed by the company as is prima facie responsible for the

company's business. But only those officers of the company who fall under the ambit of the

meaning of the phrase "officer who is in default" will be covered.

Under Indian Law, there are various provisions that put vicarious liability of directors or

key managerial personnel. But in order to protect these key managerial personnel of a

company from any kind of malicious prosecution and to protect the interest of the managers,

these provisions come with an exception which states that no director shall be held

vicariously liable for the acts of the company if he can prove that the given act was

committed without his knowledge and negligence and that he exercised due diligence to do

everything to prevent the commission of the offence. Therefore, a balance is maintained to

make directors liable when they commit an offence and protects them from malicious

charges.

5
Nat'l Small Indus. Corp. Ltd. v. Harmeet Singh Paintal&Anr, (2010)3 SCC 330
6
K.K Ahuja v. V.K Vora, (2009) 10 SCC 48

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 STATUTORY LIABILTIES OF DIRECTORS UNDER COMPANIES ACT

The new Company Act, 2013 lays down various liabilities on the directors which cannot be

deviated from under any circumstances. The penal provisions under the new act have been

made more stringent and provide for higher penalties compared to the old 1956 Act.66 as

Directors owe a duty towards the company which is laid under Section 16667 of the new

Companies Act. It lays down the fiduciary duties of a director towards his company such as

the duty to act in good faith, the duty to act in the best interest of the company, its

employees, its shareholders and the community. The Delhi High Court in the case of Rajeev

Saumitra v. Neetu Singh held that the director was liable to the company for any undue

gains made by him by virtue of his position in the company. Section 166(5) expressly

prohibits such activities and makes the director liable.

Certain provision under the act imposes only monetary fines on the defaulter whereas some

impose an additional provision for imprisonment. Some provisions attract penalties such as-

Section 34 - Untrue or misleading statements in Prospectus Every person who authorizes

untrue or misleading statements to be published in the prospectus, so as to induce any

person to invest in the company in good faith. Such person can be subjected to

imprisonment for a minimum period of 6 months which can go up to 10 years.

Section 53 - Issue of shares at a discount by a Company This section bars any company to

issue shares at a price lower than the par value i.e. at a discount. If a company violates this

provision, it will be liable for a fine which could vary between 1 lakh to 5 Lakh and the

person in-charge can be criminally held liable for imprisonment up to 6 months or fine of 1

Lakh to 5 Lakhs.

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 Section 68 - Purchase of its own Shares by the company (Buyback)- The section lays down

some rules and regulations that to kept in mind by the company during the process of buying

back its own shares. Section 68(11) states the penalty for non-compliance with the section

or with the guidelines laid down by SEBI, which is, imprisonment that can go up to 3

months or fine of at least 1 Lakh rupees or both for the person in-charge.

Section 71 - Issue of Debentures this provision lays down regulations to be followed by the

company when issuing debentures. As per the provisions of the Companies Act, the

company is required to appoint a debenture trustee to look over the rights of debenture

holders. In case the company is not able to redeem the debentures when the debentures have

matured, the debenture holder or its trustee has a right to file a petition before the Company

Law Tribunal, praying for an order to the company asking them to repay the principle

amount along with the interest. Petition can also be filed by a debenture trustee in case he

has reasons to believe that the company is not in a state to return the principle amount when

required, requesting for an order to bar the company from incurring any more liabilities.

Failure to comply with such an order by the tribunal would make the person in-charge liable

for an imprisonment up to 3 year or a fine of 2 Lakhs to 5 Lakhs or both.

These are the numerous provisions of the Companies Act, 2013 under which officer of the

company or a director can be criminally held responsible for his wrongful acts. Apart from

these provisions, Companies Act, 2013 under section 245, has introduced the concept of

"class action suits". Under this concept, a group of shareholder (minimum 100 shareholders

or a percentage as prescribed from time to time) can bring in action against the company

and/or the director on behalf of all the affected parties for the wrongful or fraudulent act on

their part.

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 CONCLUSION

Thus, this shows that director occupies a very significant position in a company and has

the power to make or break it. One wrong act of the director can have a huge impact on the

company, which might take the company years to recover from. Therefore, accountability is

an important element in the working of the company. The current legislation framework

confers a lot of duties and liabilities on the directors. Enhanced punishment under the new

Companies Act shows how important regulating the functions of a director is, The

framework is set right and it is the continues duty of the court now to ensure that these

provisions are applied in a way so as to reduce and eventually stop the malpractices

undertaken by the directors. In applying the general equitable principles to company

directors four separate rules have emerged. They are director must act in good faith and do

what they believe to be in the best interest of the company. They should refrain from using

the powers conferred on them for any purpose other than for which they were conferred, that

they should not place themselves in such a position where there are changes of a conflict

between their personal interest and their duties towards the company, without the express

consent of the company. With the increasing global interest in Indian Companies, new

players will enter the market on regular basis unaware of the possible consequences. In the

light of which, director indemnification clause which is a part of the agreement between the

shareholder and the director should be vigilantly and meticulously read and negotiated.

Additionally, Directors and Officers liability insurance is also a mechanism that is becoming

immensely prevalent in India. Rapidly modernizing on director liability requires full

attention not only by lawyers and corporate directors but by the masses.

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