12 December, 2019
The Bombay High Court in its recent judgment dated September 23, 2019 in a batch of criminal writ petitions led by Criminal Writ Petition No. 4069 of 2016, Mr. Om Prakash Bhatt vs State of Maharashtra and Anr. has held that the directors of a company cannot be held vicariously liable for the company unless the statute specifically provides for the same.
The facts of the case are that Hindustan Unilever Limited has its registered office in Mumbai. The said company intended to acquire an additional place of business and somewhere in the end of December, 2013 obtained the second premises and got itself registered under the Maharashtra Shops and Establishments Act, 1948 (“Act”). A certificate dated 15 January 2014 was issued to the company. On 19 January 2015, the Inspector, Shops and Establishments visited the second premises and recorded certain alleged discrepancies noted by him at the premises, allegedly amounting to non-compliances of the Act and the Rules thereunder. The company was found in violation of the sections 8, 51, and 2A of the Act. The Municipal Corporation of Greater Mumbai filed a complaint against the company and its directors. The Metropolitan Magistrate was pleased to pass an order dated 16 March 2016 for issuance of summons.
Against the said order passed by the Metropolitan Magistrate, the company and its directors filed a batch of writ petitions before the Bombay High Court.
After due consideration of the arguments of both the parties, the High Court relied on the judgment of Sunil Bharti Mittal vs C.B.I. (2015) 4 SCC 609 wherein the Supreme Court laid down the principle of 'alter ego' and it ruled that when the company is the accused, its directors can be roped only if (a) there is sufficient incriminating evidence against them coupled with criminal intent (b) the statutory regime attracts the doctrine of vicarious liability. The Supreme Court had further held that the principle of alter ego can only be applied to make a company liable for an act committed by a person or group of person who control the affairs of the company. However, it cannot be applied in the reverse direction to make directors liable for the act of the company. The application of principles of vicarious liability to make the directors of the company liable for an offence committed can only be done if the statute provides for it.
Thereafter,theHighCourtproceededtoobservethatthere was no provision in the Act which holds the directors of any company liable for violation purportedly committed by the company. The High Court explained that the statutory scheme of the Act discloses that it is the 'employer' as defined under section 2(7) of the Act who is cast with the duty to ensure compliance including the registration of the establishment and the duty to produce the relevant registers etc. Failure to comply with the provisions of the Act by the employer attracts penal provisions and amounts to an offence and it is the 'employer' and the 'manager' who are liable for conviction for the offences contemplated under section 52.
The High Court further observed that the by virtue of section 58 of the Act, the owner of the establishment of a company or anyone of the directors thereof may be prosecuted and punished under the Act for any offence in which the 'employer' in the establishment is punishable. The proviso appended to sub-section (2) of the Section 58 provides that the company may give notice to the Inspector that it has nominated a director to be the 'employer' in the establishment for the purposes of this Act and such director shall be then deemed to be the 'employer' in the establishment for the purposes of this Act until further notice cancelling his nomination is received or until he ceased to be a director or shareholder. Apart from Section 58, there is no provision in the Act making every director of the company to be brought within the sweep of the term 'employer' and, therefore, unless and until it is specifically averred in the complaint that the person in the capacity of director was having ultimate control over the affairs of the establishment, he is not liable to be prosecuted for the offences under the Act.
In relation to a company, the High Court opined that the company which is a separate legal entity, yet, it does not possess the ability to think and act for itself, for a company to enter into any transaction, it cannot be held liable for any crime, tort – the law must determine which thoughts and actions of its directors, employers and agents may be attributed to it.
In light of the aforementioned principle of law, the High Court held that the Petitioner Company and its directors were not liable to the prosecuted under the Act and the order of issuance of summons by the Magistrate was accordingly quashed.
For further information, please contact:
Vineet Aneja, Partner, Clasis Law
vineet.aneja@clasislaw.com