2008 (2) TMI 619 - SC - Companies Law

Managing director not liable for company's actions per Indian Penal Code; vicarious liability clarified.

SK. Alagh Versus State of UP.

The court ruled that the managing director could not be held vicariously liable for the company's actions under section 406 of the Indian Penal Code as ... Whether the complaint petition, even if given face value and taken to be correct in its entirety, disclosed an offence as against the appellant under section 406 of the Indian Penal Code, 1860? Held that:- Appeal allowed. In terms of the Explanations appended to section 405 of the Indian Penal Code, 1860, a legal fiction has been created to the effect that the employer shall be deemed to have committed an offence of criminal breach of trust. Whereas a person in charge of the affairs of the company and in control thereof has been made vicariously liable for the offence committed by the company along with the company but even in a case falling under section 406 of the Indian Penal Code, 1860, vicarious liability has been held to be not extendable to the directors or officers of the company. Issues:1. Termination of dealership and demand drafts sent post-termination.2. Criminal breach of trust under section 406 of the Indian Penal Code.3. Vicarious liability of a managing director for the company's actions.Issue 1: Termination of dealership and demand drafts sent post-termination:The case involved the termination of a dealership agreement between M/s. Akash Traders and a company, leading to a dispute over the delivery of goods and payment. The complainant sent demand drafts for goods even after the dealership had been terminated. The court examined the events surrounding the termination, the subsequent demand for goods, and the handling of the demand drafts.Issue 2: Criminal breach of trust under section 406 of the Indian Penal Code:The key legal issue revolved around whether the actions of the appellant constituted a criminal breach of trust under section 406 of the Indian Penal Code. The court analyzed the elements of the offense, which include entrustment of property, dishonest misappropriation, or conversion of property, and violation of legal directions or contracts. The court scrutinized the role of the appellant as the managing director and the company's liability in the context of the demand drafts issued in the company's name.Issue 3: Vicarious liability of a managing director for the company's actions:The court deliberated on the concept of vicarious liability concerning the managing director's role in the company's affairs. The appellant's liability for the company's alleged offense was contested, with the court emphasizing that Indian Penal Code does not generally impose vicarious liability on parties not directly charged with an offense. The court distinguished cases where statutes specifically create vicarious liability, such as the Essential Commodities Act, from the present scenario involving a managing director's alleged criminal breach of trust.The judgment clarified that the managing director could not be held vicariously liable for the company's actions under section 406 of the Indian Penal Code, as the drafts were issued in the company's name. The court highlighted that legal fictions creating vicarious liability exist in specific statutes but are not automatically applicable to directors or officers of a company. Consequently, the High Court's decision was overturned, and the appellant was awarded costs for the harassment caused.