Imagine this: You’re a director at a Company, attending occasional board meetings, providing strategic insights to the Board, and staying far removed from the day-to-day operations of the Company. Then one day, you are blindsided by legal papers, accusing you of being responsible for a Company’s cheque that bounced.
It sounds like a nightmare for anyone in a leadership role, doesn’t it?
This raises a critical question: Can a non-operational director, someone with little to no involvement in the daily workings of a company, be held liable for the company’s actions solely due to their title? Does the determination of director’s liability of non-operational directors require careful examination of their actual role and involvement rather than merely their position of being a director in the Company?
The Supreme Court of India recently addressed this pivotal issue in the case of Susela Padmavathy Amma vs. Bharti Airtel Limited. Delivered on March 15, 2024, the judgment sheds light on the liability of non-operational directors under the Negotiable Instruments Act, 1881 and brings clarity to their accountability.
The story starts with Fibtel Telecom Solutions, that owed ₹2.55 crore to Bharti Airtel Limited for telecom services. To settle the debt, Fibtel issued five post-dated cheques. But when Airtel deposited these cheques, four of them bounced, marked with the reason: “Payment stopped by drawer.”
Airtel pursued legal action under the Negotiable Instruments Act, 1881 and named two directors of Fibtel, as co-accused.
The allegation was clear and straightforward: As a director of the Fibtel, they should be held accountable for the dishonoured cheques.
One of the Directors filed an appeal in the High Court under Section 482 of the Criminal Procedure Code (CrPC) which empowers courts to quash legal proceedings to prevent abuse of process or secure justice, for quashing of the criminal complaints against her. The appellant argued:
Despite her defence, the High Court dismissed her plea to quash the case, prompting her to take the matter to the Supreme Court.
The Supreme Court examined the complaints filed by Bharti Airtel closely and heard the defence presented by the appellant. It also referred to several landmark judgments to arrive at its decision.
The Court observed the provisions of Section 34 (1) of the Act which reads as under:
“Where an offence under this Act 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 exercised all due diligence to prevent the commission of such offence.”
The Court held that the vicarious liability of a person for being prosecuted for an offence committed under the Act by a company arises:
In this case, the Court considered the definition of the word “director” as defined in Section 2(13) of the Companies Act, 1956 and the Court observed that there is nothing which suggests that simply by being a director in a company, one is supposed to discharge particular functions on behalf of a company. It happens that a person may be a director in a company but he may not know anything about the day-to-day functioning of the company. As a director he may be usually involved making policies and guide the course of business of a company.
It was held that merely because a person is a director of a company, it is not necessary that he is aware about the day-to-day functioning of the company.
However, the Court clarified managing director or a joint managing director in a company, as the designation of their office suggests, are in charge of a company and are responsible for the conduct of the business of the company. To escape liability, they will have to prove that when the offence was committed, they had no knowledge of the offence or that they exercised all due diligence to prevent the commission of the offence.
Every person connected with the Company will not fall into the ambit of the provision. As asserted by this Court that only those persons who were in charge of and responsible for the conduct of the business of the Company at the time of commission of an offence will be liable for criminal action. A Director, who was not in charge of and was not responsible for the conduct of the business of the Company at the relevant time, will not be liable for an offence under Section 141 of the NI Act.
What stood out was the lack of any specific allegations against the appellant director. While the complaints mentioned that she was a director, Airtel was unable to provide evidence showing any involvement of the appellant in the Company’s financial affairs or day-to-day business operations and Ms. Amma was also not a signatory to the cheques in question unlike the other co-accused director.
The Court made an important observation: under the NI Act, the vicarious liability isn’t automatic for directors under Section 141 of NI Act. To hold a director vicariously liable, there must be clear evidence that they were actively responsible for the company’s actions at the time of the occurrence of the alleged offense.
Simply put, being a director of the Company isn’t enough to hold him/her responsible for the acts of the Company. There needs to be a direct connection between the director’s role and the alleged wrongdoing.
As a result, the Court quashed the complaints against the appellant director after considering various judgements of different cases and sets out a significant precedent.
This judgment is significant not just for Ms. Amma but for directors across industries. It strikes a balance between accountability and fairness:
This case naturally raises a question: Aren’t directors expected to take responsibility for their company’s actions as they are the minds behind the decisions taken by the Company?
The Companies Act, 2013, lays out clear scenarios where directors can be held liable, including breach of trust, misuse of power, fraudulent trading, negligence and breach of fiduciary duty.
Under the Companies Act, directors shall maintain a standard of integrity and diligence while performing their duties. However, even in this scenario, liability of directors is not vicarious- it completely depends on the evidence showing the director’s specific actions or omissions in particular.
The Supreme Court in Sunil Bharti Mittal vs. Central Bureau of Investigation (2015), held that a director cannot be held criminally liable for the all the acts of the company unless there is proof of his active participation in the alleged offense. The Court emphasized that mens rea (guilty mind) is mandatory for the evaluation of criminal liability, which cannot be pinned on a director solely based on their designation of being a director.
Liability Under the Factories Act
The Factories Act imposes strict obligations on factories to ensure the health, safety, and welfare of workers. However, courts have consistently held that the vicarious liability will fall only on those directors who are actively involved in managing the operations of the factory.
In J.K. Industries Ltd. vs. Chief Inspector of Factories (1996), the Supreme Court held that a director who is not responsible for the day-to-day operations of a factory cannot be held liable for violations under the Factories Act. The Court firmly stated that liability must be tied to the individual’s functional role, not just to their designation.
Environmental Laws and Director Liability
Environmental laws, such as the Water (Prevention and Control of Pollution) Act, 1974 and the Air (Prevention and Control of Pollution) Act, 1981, impose strict liability on companies for environmental violations. However, courts have consistently provided an exception to the non-operational directors from the liability.
In M/s. Rajasthan Spinning & Weaving Mills vs. Water Pollution Control Board (1995), the Supreme Court held that only directors having active participation in the company’s operations can be held liable for the violation of environmental laws. The Court emphasized that liability must be based on evidence of direct involvement, not mere designation.
The Negotiable Instrument Act takes a similar approach. Directors can’t be held liable unless there’s proof that they were in charge of the company’s operations or directly involved in the offense. Courts have consistently ruled that liability cannot be imposed in a blanket manner without proof of individual involvement.
For directors, clarity in roles and responsibilities is key. Document your involvement—or lack thereof—in company operations to safeguard against unnecessary legal disputes.
Courts consistently hold that non-operational directors aren’t vicariously liable unless they actively participate in company operations or decision-making. Proactive documentation of your role can protect you from unnecessary litigation.
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