SUPREME COURT HOLDS DIRECTORS ARE VICARIOUSLY LIABLE FOR COMPANY ACTIONS ONLY WHEN PLEADINGS SPECIFICALLY AVER THE SAME

A two-Judge Bench of the Supreme Court comprising of Justice Abhay S. Oka and Augustine George Masih passed a Judgement dated 01-08-2024 in the matter of National Housing Bank vs. Bherudan Dugar Housing Finance Ltd. & Ors. Etc Criminal Appeal Nos. 3176-3177 of 2024 and held that a Complaint against a Company’s Directors for an offence under the National Housing Bank Act, 1987 (1987 Act) must specifically allege that the Directors were responsible for the Company’s business at the time of the offence.

FACTS:

1)  That the aforesaid Appeal filed before the Supreme Court by the National Housing Bank (Appellant) against the Bherudan Dugar Housing Finance Ltd. & Ors (Respondents), challenged the impugned Judgment dated 12.07.2017 of the High Court of Tamil Nadu (High Court) whereby, the Court quashed the Complaint in its entirety. Further, the High Court noted that the Complainant did not comply with the requirements of sub-Section (1) of Section 50 of the 1987 Act[i] (Offences by Companies), which are similar to those in Section 141 of the Negotiable Instruments Act, 1881 (NI Act)[ii] (Offences by Companies).

2) The Appellant, National Housing Bank, filed a Complaint C. No. 4331 of 2010 before Judicial Magistrate, Egmore at Chennai under Section 200 of the Code of Criminal Procedure, 1973 (Cr.P.C.) (Examination of complainant), alleging that Respondents violated the provisions of Section 29A of the 1987 Act (Requirement of registration and net owned fund). When Respondent No. 2 was the Director of the Company, and Respondent No. 3 to 7 were the Managing Directors.

3) The Ld. Magistrate took ccognizance of the Complaint for the Offence under Section 29A(i) read with Section 50, punishable under Section 49(2A) of the 1987 Act (Penalties). Section 49(2A) of the 1987 Act stipulates a minimum sentence of one year, which may extend to five years.

TRIAL COURT:

a) The Trial Court observed that the Complaint filed by the Appellant, under Section 200 of the Code of Cr. P.C.,1973, sufficiently alleged the commission of an Offence by the Respondents under Section 29A of the National Housing Bank Act, 1987 (1987 Act).

b) The Court noted that the offence was taken Cognizance of under Section 29A(i) read with Section 50, which is punishable under Section 49(2A) of the 1987 Act.

c) The Court highlighted that Section 49(2A) prescribes a minimum sentence of one year, which can be extended up to five years, emphasizing the seriousness of the alleged violation.

HIGH COURT:

i) The High Court of Tamil Nadu quashed the complaint against Bherudan Dugar Housing Finance Ltd. & Ors. in its entirety.

ii) The High Court noted that the requirements under sub-Section (1) of Section 50 of the National Housing Bank Act, 1987 (1987 Act) are similar to those under Section 141 of the Negotiable Instruments Act, 1881 (NI Act).

iii) The High Court observed that the Complainant failed to comply with these requirements, leading to the decision to quash the Complaint.

SUPREME COURT:

Aggrieved by the Order dated 12.07.2017 of the High Court, the Appellant filed Criminal Appeal Nos. 3176-3177 / 2024 before the Hon’ble Supreme Court, which was filed on 16.01.2018. The Apex Court, vide Order dated 01.08.2024, made the following observations:

ISSUE:

The primary issue before the Supreme Court was whether the Complaint filed by the National Housing Bank met the statutory requirements under sub-Section (1) of Section 50 of the National Housing Bank Act, 1987, for holding directors vicariously liable for the alleged violation of Section 29A of the Act, similar to the requirements under Section 141 of the Negotiable Instruments Act, 1881 (NI Act).

OBSERVATION

a) The Supreme Court noted that the High Court had quashed the Complaint due to non-compliance with the requirements of sub-Section (1) of Section 50 of the National Housing Bank Act, 1987, which are similar to the requirements under Section 141 of the Negotiable Instruments Act, 1881 (NI Act).

b) The Apex Court observed that the specific pleadings regarding the responsibility of the Directors for the conduct of the Company’s business at the time of the alleged offence were missing in the Complaint.

c) Further, the absence of assertions that the second to seventh Respondents were in charge of and responsible for the conduct of the Company’s business at the time of the offence. The Bench also mentioned that in order for the directors of the Company to be held vicariously liable, assertions as required by sub-Section (1) of Section 50 need to be made.

d) Thereafter, in the absence of the averments required by sub-section (1) of Section 50 of the 1984 Act in the Complaint, the Trial Court ought not to have taken cognizance of the Offence against the third to seventh Respondents, who were allegedly directors of the first Respondent Company. However, the Bench held that since the second Respondent, the Managing Director, would be responsible for overseeing the Company’s business, there was no justification for quashing the Complaint against him. However, no such reasons were given to justify the quashing of the Complaint against the first Respondent Company.

e) Consequently, the Supreme Court partly upheld the High Court’s decision to quash the Complaint against Respondent Nos. 3-7, reinforcing the importance of adhering to statutory requirements for vicarious liability.

CONCLUSION:

Based on the aforementioned facts, the Supreme Court concluded that the High Court was correct in quashing the Complaint. The Court held that the Complaint did not meet the specific pleading requirements against the Respondent No 3 to 7, under sub-Section (1) of Section 50 of the National Housing Bank Act, 1987, which are similar to those under Section 141 of the Negotiable Instruments Act, 1881. The absence of specific averments regarding the directors’ responsibility for the Company’s business at the time of the alleged offence was crucial.

As a result, the Supreme Court upheld the High Court’s decision, reinforcing the necessity of fulfilling statutory requirements to establish vicarious liability.

 

Sakshi Raghuvanshi

Senior Legal Associate

The Indian Lawyer

[i] Section 50. Offences by companies.

i) Where an offence has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

ii) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Explanation.–For the purposes of this section—

(a) “company” means any body corporate and includes a firm or other association of individuals; and

(b) “director”, in relation to a firm, means a partner in the firm.

[ii]  141. Offences by companies.—

(1)  If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence:

[Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.]

Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Explanation.—For the purposes of this section, —

(a) “company” means any body corporate and includes a firm or other association of individuals; and

(b) “director”, in relation to a firm, means a partner in the firm.