Supreme Court Clarifies Vicarious Liability of Accused Company Directors (Published in Taxmann's Journal: Corporate Professionals Today, January 16-31, 2016 Issue)

BY
DELEP GOSWAMI, FCS, ADVOCATE, SUPREME COURT OF INDIA, NEW DELHI

AND

ANIRRUD GOSWAMI, ADVOCATE, GOSWAMI & GOSWAMI, ADVOCATES, NEW DELHI


 
Special Court Summons Accused in 2G Scam Case
 
The famous 2G spectrum scam case being investigated by the Central Bureau of Investigation (CBI) generated lot of expectations by the corporate analysts that all the accused booked for the scam would be brought to justice and this case would set the trend of things to come in future in respect of economic fraud perpetrated by the corporate sector in cornering the scarce economic resources of the country in connivance with the responsible Government officials.  The reports appearing in newspapers about the resignation of the then telecom minister of the Central Government and the arrest of a reputed member of the Parliament supposedly involved in the 2G scam and the arrest of certain top executives of the telecom companies created an impression that justice would be done and will then prevent repetitions of such types of corporate generated frauds.  The question being asked was: “why did the CBI not book the Promoters/Chairman-cum-Managing Director of the companies involved in the 2G scam?”  Therefore, when it was reported that the Judge of the Special CBI Court summoned two of the well-known industrialists of the country viz. Sunil Bharti Mittal and Ravi Ruia for prosecution, it was largely felt that at long last instead of catching hold of the “scapegoats”, the Court has correctly summoned the said owner/promoter industrialists to face the charge.  However, this summoning of the promoter industrialists led them to approach the Supreme Court of India for their “discharge”, being wrongly summoned and the Supreme Court of India’s judgement dated 9th January, 2015 in the case Sunil Bharti Mittal –vs- Central Bureau of Investigation (2015-61-taxmann.com 220-SC) (in short “Sunil Mittal judgement”) resulted in a brilliant judgement on “vicarious liability” of company directors for offences by companies and will be a trend setter in relieving many promoter/industrialists from the dragnet of prosecution by the regulatory authorities.
 
Sunil Mittal vs. Central Bureau of Investigation –Accused Approach Supreme Court
The aforesaid Sunil Mittal judgement analysed the duties of the Company Directors. The Special Court which was set up for trying persons involved in the 2G spectrum scam involving telecom bigwigs and ministers alike, issued summons to chairpersons and managing directors of the accused companies by stating that they represent the “alter-ego” of companies and hence the acts of the companies could be attributed to them.  The said judgement (“supra”) also analysed as to whether the application of the principle of “vicarious liability” would make the directors of a company liable for an offence committed by the company can  be done only if the Statute provides for it and it cannot be applied in reverse order.
 
Principle of Vicarious Liability – Directors are ‘Alter Ego’ of Company
Brief facts leading to the filing of the petition in the aforementioned Sunil Mittal Judgement are that during monitoring of the investigation of CBI Case in respect of the well known infamous 2G spectrum case, the Hon’ble Supreme Court vide its order dated 16.12.2010 directed CBI to conduct investigation into various irregularities in grant of licences and allocation of spectrum in the 2G band and file charge sheet before the Special Judge.  CBI named the then Telecom Secretary and three companies, namely, Bharti Cellular Limited; Hachison Max Telecom (P) Limited and Sterling Cellular Limited as the accused persons in respect of offences under section 13(2) read with section 13(1)(d) of the Prevention of Corruption Act, 1988 and allied offences.  The Special Judge passed orders dated 19.3.2013 recording his satisfaction that there was enough incriminating material on record to proceed against the accused persons and thus directed the summons be issued to the three companies.  At the same time, the Special Judge also directed that summons be issued to Chairman-cum-Managing Director of the above named three companies who used to chair the meetings of its Board of Directors.  The Special Judge held that in light of the capacity in which these directors acted, they could be considered as the persons controlling the affairs of the company and the ‘directing mind and will” of the respective companies.  The Special Judge observed that these persons could be considered to be the “alter ego” of their respective companies and the acts of the companies could be attributed and imputed to them.  Against the said summoning order of the Special CBI Judge, the Chairman-cum-Managing Directors of the companies, namely, Shri Sunil Bharti Mittal and Shri Ravi Ruia filed appeals in the Supreme Court for quashing of the summoning orders.

Important Question: Can the Company be Prosecuted for an Offence Requiring ‘Mens Rea’?
During the course of argument in the above mentioned Sunil Mittal’s case, the Supreme Court noted that as to the question whether a company could be prosecuted for an offence which requires “mens-rea”, the Constitution Bench of the Supreme Court in its judgement in the case of Standard Chartered Bank –vs- Directorate of Enforcement (2005-60-SCL 217-SC) had held that a company can be prosecuted and convicted for an offence which requires a minimum sentence of imprisonment.  In the said judgement, the Supreme Court clarified that it was not expressing any opinion on the question whether a corporation could be attributed with requisite “mens-rea” to prove the guilt. However, the aforesaid question fell directly for consideration of the Supreme Court in the case of Iridium India Telecom Limited –vs- Motorola Inc (2011-9-Taxmann.com 157/106 –SCL-28-SC) and the Court noted the law that prevails in America and England on this issue.  After considering the legal propositions, the Supreme Court held that if the person or group of persons who control the affairs of the company commit an offence with a criminal intent (“mens-rea”), their criminality can be imputed to the company as well, as they are “alter-ego” of the company.  The Supreme Court noted that an individual who has perpetrated the commission of an offence on behalf of a company can be made accused, along with the company, if there is sufficient direct evidence of his active role coupled with criminal intent and further he can be implicated in those cases where the statutory regime itself attracts the doctrine of “vicarious liability” by specifically incorporating such a provision.  However, the Supreme Court held that when the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect. 

Facts of the Case: Appellant was not named in CBI’s Chargesheet!
In the Sunil Mittal’s case, it was argued on behalf of the appellant Sunil Mittal that the CBI investigated into the role of the appellant and an opinion was formed that there was no material to implicate him and hence his name was omitted from the charge sheet filed in the court.  In the case of appellant Ravi Ruia, it was argued that he was not even called for investigation by the CBI which would show that there was no material against him at all and his name was not mentioned in the charge-sheet.  However, it was submitted before the  Supreme Court that even at a later stage, if any evidence surfaces against the appellant, the Court is not powerless, as any person can be summoned as accused under section 319 of the Criminal Procedure Code at any stage of the trial.  On behalf of the CBI, it was argued that there was evidence of meetings between the then Telecom Secretary and the Appellant for the same purpose during the same period which would constitute the circumstantial evidence to implicate these persons.  The thrust of the submission of CBI senior counsel was that it is the “human agency” in the accused companies who was responsible as it was a “mens-rea” offence and such an agency/person has to be the top person, going by the circumstantial evidence.  Therefore, even if in the charge-sheet, names of these appellants were not included, the Special Judge was within his powers to look into the matter in its entirety as the charge-sheet along with documents spanning over 25000 pages was submitted to him. 
The Supreme Court in Sunil Mittal’s case noted that in another judgement of the Supreme Court in the case of Kishan Singh-vs-State of Bihar (1993-2 SCC 16), it was held that the Sessions Court has jurisdiction on committal of a case to it, to take cognizance of the offences of the persons not named as offenders, but whose complicity in the case would be evident from the materials available on record and hence, even without recording evidence, upon committal under section 209, the Sessions Judge may summon those persons shown in column 2 of the police report to stand trial along with those already named therein. 

SC: High Court  Should Interfere Very Cautiously Only Where Non-Interference Would Lead to Injustice
With regard to the proposition of law on the question of exercise of jurisdiction under section 482 of the Criminal Procedure Code, the Supreme Court noted the submission that interference by the High Court in exercise of its jurisdiction under Section 482 of the Cr PC can only be where a clear case for such interference is made out.  Frequent and uncalled for interference even at the preliminary stage by the High Court may result in causing obstruction in the progress of the inquiry in a criminal case, which may not be in the public interest.  But, at the same time, the High Court cannot refuse to exercise its jurisdiction if the interest of justice so required, where the allegations made in the FIR or complaint are so absurd and inherently improbable on the basis of which no fair-minded and informed observer can ever reach a just and proper conclusion as to the existence of sufficient grounds for proceeding. In such cases, refusal to exercise the jurisdiction may equally result in injustice, more particularly, in cases where the complainant sets the criminal law in motion with a view to exert pressure and harass the persons arrayed as accused in the complaint. 

CBI Argues that Enough Circumstantial Evidence Lay Against Accused Company’s Chairman-cum-Managing Director- Hence Summons Are Justly Issued
On behalf of CBI, it was reiterated before the Supreme Court in the Sunil Mittal’s case that when it was a case of circumstantial evidence which appeared on record in abundance, the trial court was right in summoning the appellants and in fact, the judgement of Keshav Mahindra-vs- State of MP (1996-6-SCC 129) fully supported the impugned order.  On behalf of the Intervenor, the role of the appellant Sunil Mittal was highlighted from the records, particularly the extract of file noting which inter-alia, contained the views of the Superintendent of Police and this constituted sufficient material to proceed against him and since it was only a summoning order, the appellants were free to seek discharge before the trial court. 

SC: Magistrate Must Express In Its Order That Sufficient Incriminating Material is On Record Before Summoning The Accused
In the aforesaid Sunil Mittal’s case, the Supreme Court noted that the fulcrum of the issue before it was the validity of the impugned order vide which the two appellants who were not named by the CBI in the charge sheet have been summoned by the Special Judge.  The Supreme Court noted in the present case, the question is not as to whether there is sufficient material against the appellants filed in the trial court to proceed against them and that whether such a material is there or not, is not reflected from the impugned order as that aspect is not even gone into.  The learned Special Judge has not stated in the impugned order that after examining the relevant documents, including statement of witnesses, he is satisfied that there is sufficient incriminating material on record to proceed against the appellant as well.  On reading of the impugned order, it is very clear that in para 2 of the impugned order, the Special Judge discusses the submissions of the Public Prosecutor in respect of the persons who were made accused in the charge-sheet.  Insofar as charge sheet is concerned, it had named the Telecom Secretary Shyamal Ghosh, who was the public servant and other three accused persons are the corporate entities.  Submission of the learned Public Prosecutor is recorded in this para that there is enough incriminating material on record against them and they be proceeded against, as per law.  Immediately thereafter in para 3 of the impugned order, the learned Special Judge records his satisfaction on the perusal of the records, namely FIR, charge-sheet, statement of witnesses and documents and states that he is satisfied that there is enough incriminating material on record to proceed against the “accused persons”.  Para 3 is clearly relatable to para 2.  Here, the “accused persons” referred to are those four persons whose names are mentioned in para 2.  Obviously, till that stage, appellants were not accused persons, as they are not named as such in the charge-sheet.    After recording his satisfaction qua the four said accused persons, discussion about other three individuals (including the two appellants before the Supreme Court) starts from para 4 where the Special Judge “also” finds and refers to the positions which these three persons hold/held in the three companies respectively.  In para 4, the learned Special Judge does not mention about any incriminating material against them in the statement of witnesses or documents etc. On the other hand, the reason for summoning these persons and proceeding against them are specifically ascribed in the para which, prima facie, are:-

1. These persons were/are in the control of affairs of the respective companies.
2. Because of their controlling position, they represent the directing mind and will of each company.
3. State of mind of these persons is the state of mind of the companies. Thus, they are described as ‘alter ego’ of their respective companies.

Is The Principle of Attribution or Imputation Backed By Law?
The moot question before the Supreme Court was whether the aforesaid proposition to proceed against the Appellants is backed by law. The Supreme Court analysed its earlier judgements in Iridium India Telecom Ltd.’s case  and in Standard Chartered Bank vs. Directorate of Enforcement (supra) and noted that it is abundantly clear that the principle which is laid down, is to the effect that the criminal intent of the “Alter Ego” of the company, i.e., the personal group of persons that guide the business of the company, would be imputed to the company/corporation. The legal proposition that is laid down in the aforesaid judgement is that if the person or group of persons who control the affairs of the company, commit an offence, with a criminal intent, their criminality can be imputed to the company as well, as they are “Alter Ego” of the  company.
Principle of ‘Attribution’ and Imputation Applicable in Reverse Order in Sunil Mittal’s Case
However,  in Sunil Mittal’s case, the Supreme Court noted that in Sunil Mittal’s case, this principle is applied in an exactly reverse scenario. Here, the company is an accused person and the learned Special Magistrate has observed in the impugned order that since the Appellants represent the directing mind and will of each company, their state of mind is the state of mind of the company and, therefore, on this premise, acts of the company are attributed and imputed to the appellants.  The Supreme Court felt that it is difficult to accept it as the correct principle of law to be applied in the appellant’s case as it would run contrary to the principle of vicarious liability, detailing the circumstances under which a director of a company can be held liable.  The Supreme Court further noted that no doubt a corporate entity is an artificial person, which acts through its officers, directors, managing director, chairman, etc. and if such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. It would be more so, when the criminal act is that of conspiracy.  However, at the same time, it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so. Thus, an individual who has perpetrated the commission of an offence on behalf of a company, can be made accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent. Also, the situation in which he can be implicated is in those cases where the statutory regime itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision.
In this regard, the Supreme Court analysed its earlier decisions in the following cases: Aneeta Hada (2012-21Taxmann.com-43/113-SCL-564-SC); Mahashtra State Electricity Distribution Company Ltd.(2010-8Taxmann.com-223/2011-105SCL-253-SC); and S.K.Alagh’s case (2008-5SCC-662).  It further noted that in a criminal case of a serious nature, ‘mens rea’, cannot be excluded and once the charge of conspiracy failed, the onus lay on the prosecution to prove affirmatively that the appellant was directly and personally connected with acts or omissions pertaining to the offence.  
The Supreme Court was unable to agree with the broad statement of law that the chairman of a company, who used to sign various papers and approve various tenders, even as a matter of routine, should have acted with care and caution and his negligence would be a positive proof of his intention to commit the offence. The Court also noted that the chairman of a company had to deal with a large variety of matters and it would not be humanly possible for him to analyse and go into the details of every small matter in order to find out whether there has been any criminal breach of trust.

SC: There is No Vicarious Liability Under Criminal Law Unless the Statute Also Takes That In Its Fold
The Supreme Court also referred to its earlier judgement in Shyam Sunder vs. State of Haryana (1989-4SCC-630) wherein it was stated that “but we are concerned with a criminal liability under penal provision and not a civil liability. The penal provision must be strictly construed in the first place. Secondly, there is no vicarious liability in criminal law, unless the statute also takes that within its fold. Section 10 does not provide for such liability. It does not make all the partners liable for the offence, whether they do business or not.” The Supreme Court then referred to another judgement in Maksud Saiyed vs. State of Gujarat (2008-5SCC-68) wherein it was held that “where a jurisdiction is exercised on a complaint petition filed in terms of Section 156(3) or Section 200 of Cr.PC, the Magistrate is required to apply his mind. The penal code does not contain any provision for attaching vicarious liability on the part of the managing director or the directors of the company, when the accused is the company… The Bank is a body corporate. Vicarious liability of the managing director and director would arise, provided any proposition exists in that behalf in the statute. Statute indisputably must contain provision fixing such vicarious liabilities. Even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability.”
Managing Director or Directors Cannot be Said To Have Committed Offence Merely Because of Their Holding Such Offices.
Yet in another judgement, namely, Keki Hormusji Gharda vs. Mehervan Rustom Irani (2009-4SCC-475), the Supreme Court held that “…the Penal Code, 1860, save and except in some matters, does not contemplate any vicarious liability on the part of a person. Commission of an offence by raising a legal fiction or by creating a vicarious liability in terms of the provisions of a statute must be expressly stated. The managing director or the directors of the company, thus, cannot be said to have committed an offence only because they are holders of offices. The learned Additional Chief Metropolitan Magistrate, therefore, in our opinion, was not correct in issuing summons without taking into consideration this aspect of the matter. The managing director and the directors of the company should not have been summoned only because some allegations were made against the company.”
In Sunil Mittal’s case, the Supreme Court noted that while issuing summons against the Appellants, the Special Magistrate has taken shelter under a so-called legal principle, which has turned out to be incorrect in law. He has not recorded his satisfaction by mentioning the role played by the Appellants which would bring them within criminal net.
​
Once Prima Facie Case Has Been Made Out, Magistrate is Empowered to Issue Process
The Supreme Court also noted that even if the CBI did not implicate the Appellants, if there was/is sufficient material on record to proceed against these persons as well, the Special Judge is duly empowered to take cognizance against these persons as well. A wide discretion has been given as to grant or refusal of process and it must be judiciously exercised. A person ought not be dragged into Court merely because a complaint has been filed. If a prima facie case has been made out, the Magistrate ought to issue process and it cannot be refused merely because he thinks that it is unlikely to result in a conviction. 

Section 204 of Cr.PC - “Sufficient Grounds of Proceeding” – The Most Important Phrase To Consider
The Supreme Court further held that the words “sufficient grounds for proceeding” appearing in Section 204 of Cr.PC are of immense importance. It is these words which amply suggest that an opinion is to be formed only after due application of mind that there is sufficient basis for proceeding against the said accused and formation of such an opinion is to be stated in the Order itself. The Order is liable to be set aside if no reason is given therein while coming to the conclusion that there is prima facie case against accused, though the Order need not contain detailed reasons. A fortiori, the order would be bad in law if the reasons given turn out to be ex-facie incorrect.  There has to be a proper satisfaction in this behalf which would be duly recorded by the Special Judge on the basis of material on record. In the instant  Sunil Mittal’s Case, no such exercise was done and hence, the Supreme Court held that it was difficult to sustain the impugned Order dated 19.03.2013 in its present form insofar as it relates to implicating the Appellants and summoning them as accused persons and thus, the Supreme Court set aside the Impugned Order.

Supreme Court Reiterates Special Judge’s Power to Issue Summons at Later Stage of Trial
It is very interesting to note that as an epilogue, the Supreme Court stated that “while parting, we make it clear that since on an erroneous presumption in law, the Special Magistrate has issued the Summons to the Appellants, it will always be open to the Special Magistrate to undertake the exercise of going through the material on record and on that basis, if he is satisfied that there is enough incriminating material on record to proceed against the Appellants as well, he may pass appropriate orders in that behalf.”  The Supreme Court also made it clear that even if at the summoning  stage, no such prima facie material is found, but during the trial if sufficient incriminating material in the form of evidence surfaces against the Appellants, the Special Judge shall be at liberty to exercise his powers under Section 319 of the Cr.PC to rope in the Appellants by passing appropriate orders in accordance with law at that stage.

CONCLUSION
The whole country is watching and waiting as to how the accused in the infamous 2G Scam are booked, in which decisions were taken by the Central Government to help certain accused telecom companies, resulting in huge losses to the Government Exchequer. And since, the companies act through directors who are the actual beneficiaries of such illegal economic terrorism, these types of  cases are required to be dealt with diligently and strictly. In the  Sunil Mittal’s judgement, since the Supreme Court has given liberty to the Trial Magistrate to summon the Chairman-Cum-Managing Directors of the accused companies, this aspect needs serious consideration to correct the anomaly in the summoning order.  Further, what steps the Central Government takes to attach the properties of the accused, acquired through the ill-gotten money by putting the exchequer to a loss, needs serious consideration.  Some urgent steps are needed  if the economic benefit are to percolate down to the common masses and not be cornered by few individuals of the company through economic terrorism.
 
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