The Supreme Court (“SC”) in the case of Shiv Kumar Jatia v. State of NCT of Delhi laid down the tests to determine whether a director of a company can be held criminally liable for the acts committed by the company or its employees. The question before the SC was whether a director can be criminally held liable if he/she did not play an active role in a criminal act committed by the company and/or its employees.
A Criminal case for negligence was filed by a customer (“Customer”) of the Hotel Hyatt Regency in Delhi (“Hotel”) against: (i) M/s. Asian Hotels (North) Limited (“Entity” which operates the Hotel); (ii) the MD i.e., Mr. Shiv Kumar Jatia; and (iii) the officers of the Entity who were in-charge of the day-to-day affairs of the Hotel. A First Information Report (“F.I.R.”) was registered against the Company, the MD and the officers in charge of the daily affairs of the Entity. The Customer had injured himself after falling from the terrace of the Hotel and it was alleged that the Hotel did not place adequate safety precautions on its terrace.
In response to the F.I.R, the MD filed a petition before the Delhi High Court (“Delhi HC”) to quash the F.I.R stating that he was not involved in the alleged act of negligence. However, this petition was rejected by the Delhi HC, and subsequently a case was filed to challenge the decision of the Delhi HC.
The MD submitted that he was only chairing the meetings of the Entity and was not involved in the alleged negligence and there was no criminal intent on his part.
The SC held that the director, managing director or chairman of a company can only be accused of a crime committed by a company if there is: (a) sufficient material to prove his/her active role in the crime committed; (b) the same being coupled with a criminal intent on his/her part; and (c) there being a specific allegation against such person. The SC also held that there is no provision in law to hold a director vicariously liable under the Indian Penal Code, 1860 for crimes committed by the company or its employees. The SC applied the above tests and quashed the F.I.R. against the MD, stating that the allegations in the F.I.R. were only against the Entity and the officers in-charge of the daily affairs of the Hotel and there were no specific allegations against the MD.
Vicarious liability means liability to an individual who did not actually cause the harm, but who has a specific superior legal relationship to the person who did cause the harm. The SC has correctly held that there has to be a statute to impute vicarious liability to directors of a company. The Companies Act, 2013 makes the director criminally liable for certain contraventions, for example- failure to file ‘annual return’ of a company which may lead to imprisonment of the officer in-charge of the company. However, a director cannot be held liable under criminal statutes like the Indian Penal Code, 1860 without there being a specific provision to hold the director liable.
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Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.