Directors Liability when Firm Violates Law

Directors can’t be booked just because firm violated law: SC

Recently, The supreme court asked investigating and prosecuting agencies not to proceed mechanically against directors of erring companies merely because of the post held and said such avoidable prosecution leads to humiliation and loss of reputation in the society in reference to section 22C of the Minimum Wages Act, 1948. Justices Reddy and Khanna said that arresting directors and officers of a company, without them having even any remote role in the perpetration of the alleged violation of law by the company, is fraught with serious consequences and must be avoided at all costs.

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FACTS:

Dayle De ’Souza (appellant) and Vinod Singh, who are the director and Madhya Pradesh head respectively of M/s. Writer Safeguard Pvt. Ltd.. A criminal complaint before the Court of the Chief Judicial Magistrate, Sagar, Madhya Pradesh, under Section 22A of the Minimum Wages Act, 1948 (referred to as “Act”.) was filed by the Labor Enforcement Officer. A bailable warrant was filled against the appellant and Vinod Singh. Further, a petition was filed under Section 482 of the Code of Criminal Procedure, 1973 before the High Court of Madhya Pradesh by the appellant for quashing the complaint in the previous case. the High Court dismissed the petition as sans merit. Hence, the present appeal filed before the supreme court. The supreme court asked investigating and prosecuting agencies not to proceed mechanically against directors of erring companies merely because of the post held and said such avoidable prosecution leads to humiliation and loss of reputation in the society in reference to section 22C of the Minimum Wages Act, 1948.

Also Read- Directors & Their Liabilities – Legal Services India

SECTION/ACT/PROVISION/SETTLED LAW

Section 22 A of the minimum wages act, 1948:

22A General provision for punishment of other offences. Any employer who contravenes any provision of this Act or of any rule or order made thereunder shall, if no other penalty is provided for such contravention by this Act, be punishable with fine which may extend to five hundred rupees.

Section 22 C of the minimum wages act, 1948: 22C Offences by companies.

(1) If the person committing any offence under this Act 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 such person liable to any punishment provided in this Act if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section, 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 of the company 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 anybody corporate and includes a firm or other association of individuals; and

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

Article 21, Indian Constitution:

Protection of life and personal liberty No person shall be deprived of his life or personal liberty except according to procedure established by law.

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LEGAL OPINION

In the complaint filed by the Labor Enforcement Officer ,only  the appellant and Vinod Singh had been enlisted as the accused and not the company. The complaint was filed under section 22 A of the act which talks about ‘General provision for punishment of other offences’.

However, in the present appeal, the issue was relevant to section 22(C) . Sub- section 1, states,  where an offence is 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, as well as the company itself shall be deemed to be guilty of the offence. Acc to The exception to this section, if a person is liable under sub- section 1, he or she shall not be held liable if he proves that the offence was committed without his knowledge.

The proviso is to give immunity to a person who is vicariously liable under sub-section (1) to section 22C of the Act. a company includes a body corporate, a firm or an association of individuals. A director in relation to a firm means a partner in that firm. Therefore, even in the case of partners, when a firm commits an offence, the requirement of either sub-section (1) or sub-section (2) to Section 22C must be satisfied.

Also, Right to reputation which is enshrined under article 21 of the Indian constitution would have been violated for the appellant and Vinod Singh if this appeal too would have been dismissed. The requirement and need to balance the law enforcement power and protection of citizens from injustice and harassment must be maintained.

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JUDGEMENT

Quashing prosecution and summons issued to a director of a company which allegedly failed to pay minimum wages to some workmen, a bench of Justices R S Reddy and Sanjiv Khanna said, “A person cannot be prosecuted and punished merely because of their status or position as a director, manager, secretary or any other officer, in a company unless the offence in question was committed with their consent or connivance or is attributable to any neglect on their part.”

Section 22C of the Minimum Wages Act said the exact role of the officer proceeded against must be delineated by the prosecution. The SC said vicarious liability would be attracted only when the offence was committed with the consent, connivance, or is attributable to the neglect on the part of a director, manager, secretary, or other officer of the company and not merely because the person holds a responsible post in the company.

Justices Reddy and Khanna said that arresting directors and officers of a company, without them having even any remote role in the perpetration of the alleged violation of law by the company, is fraught with serious consequences and must be avoided at all costs.

Also Read- Vicarious Liability of Non-Executive Directors – India 

“Initiation of prosecution and summoning of an accused to stand trial has serious consequences. They extend from monetary loss to humiliation and disrepute in society, sacrifice of time and effort to prepare defense and anxiety of uncertain times. Criminal law should not be set into motion as a matter of course or without adequate and necessary investigation of facts on mere suspicion, or when the violation of law is doubtful,” the bench said.

“It is the duty and responsibility of the public officer to proceed responsibly and ascertain the true and correct facts. Execution of law without appropriate acquaintance with legal provisions and comprehensive sense of their application may result in an innocent being prosecuted,” it said.

Also Read- Director’s liability in a private limited company in India.

For case specific advice please contact criminal lawyers advocates in Chandigarh Panchkula Mohali Kharar Derabassi Zirakpur

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