2019 (8) TMI 1757 - HC - Indian Laws

Non-executive director cleared of vicarious liability in fraud case

The court quashed the proceedings in C.C. No. 4670 of 2006 against the petitioner, a non-executive director accused based on vicarious liability ... Dishonor of Cheque - principal accused persons have absconded and Non-Executive Director and a Chartered Accountant by profession, has been going through the ordeal of facing criminal proceedings - applicability of principle of vicarious liability for IPC offences - HELD THAT:- Even though the corporate entity is an artificial person which acts through its Officers, Directors, Chairman etc., if such a Company commits an offence involving mens rea, it would normally be the intent and action of that individual, who acted on behalf of the Company. A person, who has perpetrated the commission of an offence on behalf of a Company can be made as an accused, along with the Company, if there is sufficient evidence of his active role coupled with criminal intent [emphasis supplied]. This is the cardinal principle of criminal jurisprudence, unless the statute specifically provides for the applicability of the doctrine of vicarious liability like in the case of Negotiable Instruments Act, 1881, Employees Provident Fund Act, 1952, Food Safety and Standards Act, 2006, etc. In case of a Non-Executive Director, they cannot be presumed to be involved in the day-to-day affairs of the running of the Company and they cannot be made liable just because they have attended Board Meetings or signed Balance Sheets. In the instant case, the only allegation that is found against the petitioner in the Final Report and in the materials collected by the prosecution during the course of investigation, is that the petitioner did not interfere with the illegal act committed by A-1 to A-3, and thereby he has abetted the commission of crime under Section 109 of IPC. Therefore, the prosecution has proceeded against the petitioner more on an assumption and by applying the principle of vicarious liability, without there being any material to show that the petitioner had perpetrated the commission of the offence, by playing an active role coupled with criminal intent. Unless, this minimum requirement is satisfied, the petitioner cannot be made as an accused in this case. There are no materials available against the petitioner to proceed further against him before the Court below. It is true that even a strong suspicion is enough to frame charges against an accused person. If material is available, this Court cannot go into it and analyse such materials at this stage. However, such a suspicion must be based on some material and not on mere assumptions or surmises. In this case, no material is available against the petitioner - the continuation of the proceedings against the petitioner is an abuse of process of Court and in the considered view of this Court, the petitioner should not be made to face the ordeal of trial before the Court below. Petition allowed. Issues Involved:1. Quashing of proceedings.2. Vicarious liability under IPC.3. Role and liability of non-executive directors.4. Evidence required for abetment under IPC.Issue-Wise Detailed Analysis:1. Quashing of proceedings:The petitioner filed a Criminal Original Petition seeking to quash the proceedings in C.C. No. 4670 of 2006, pending before the Chief Metropolitan Magistrate, Egmore. The case involved Alwarpet Benefit Fund Limited, which failed to repay deposits, defrauding 46,000 depositors of Rs. 118 crores. The petitioner, a Chartered Accountant and non-executive director, was accused based on vicarious liability principles. The court examined whether there were sufficient materials against the petitioner to proceed with the trial.2. Vicarious liability under IPC:The petitioner argued that no overt act was attributed to him, and the prosecution added him as an accused by merely applying the principle of vicarious liability, which does not apply to IPC offences. The court referenced the Supreme Court judgment in Sunil Bharti Mittal Vs. Central Bureau of Investigation, stating that the Penal Code does not contemplate vicarious liability unless specifically provided under a statute. The court emphasized that vicarious liability is created by legal fiction only where explicitly stated in the statute.3. Role and liability of non-executive directors:The court highlighted that the petitioner was a non-executive director and a Chartered Accountant by profession. It referenced the Supreme Court judgment in Chintalapati Srinivasa Raju and Others Vs. Securities and Exchange Board of India, which clarified that non-executive directors are not involved in the day-to-day affairs of the company and cannot be held liable merely for attending board meetings or signing balance sheets. The court reiterated that non-executive directors are not responsible for the conduct of the company's business unless there is evidence of their active role coupled with criminal intent.4. Evidence required for abetment under IPC:The prosecution alleged that the petitioner abetted the crime by not interfering with the illegal acts of the main accused (A-1 to A-3). The court stated that to establish abetment under Section 109 IPC, the prosecution must prove mens rea and a positive act by the petitioner. Negligence or carelessness cannot be termed abetment. The court found no material evidence against the petitioner to show his active role or criminal intent in the commission of the offence. Consequently, the court concluded that the continuation of proceedings against the petitioner was an abuse of the process of the court.Conclusion:The court quashed the proceedings in C.C. No. 4670 of 2006 against the petitioner, stating that there were no materials to proceed against him. The petition was allowed, and the connected miscellaneous petitions were closed.