In a significant development, the Bombay high Court has held that independent, non-executive directors cannot be held vicariously liable for the acts of the company if they are not involved in the daily affairs of the company.
In two separate orders, one by a single judge bench and another by a division bench comprising two judges, the high court has said that independent and/or non-executive directors cannot be held liable for acts of the company if they are not involved in the daily affairs of the company.
A division bench of justices KR Shriram and Milind Jadhav, on July 8, quashed multiple orders of Joint Director General of Foreign Trade (Joint DGFT) which had imposed penalty on a company and all its directors, ex-directors including a non-executive director, Anand Bhatt, who passed away in the terrorist attacks in Hotel Oberoi in the city on November 26, 2008.
Bhatt’s wife had approached the HC in 2009 seeking quashing of the case against him.
After going through the orders of the Joint DGFT, the HC noted that it was the company that was accused. Apart from that, there was no evidence to show the role each director had in the company.
The court said: “Where there are allegations of vicarious liability, then there has to be sufficient evidence of the active role of each director. There has to be a specific act attributed to a director or the person allegedly in control of management of the company, to the effect that such a person was responsible for the acts committed by or on behalf of the company.”
There was no material to show that the applicant was in control and management of the company or that he was personally responsible for its acts, said the court adding that prejudice has been caused against him by the notices.
Hence , the HC quashed the order of Joint DGFT against Bhatt.
Justice PD Naik, on July 2, had quashed a case against two non-executive directors of a company - Satvinder Sodhi and Sakti Banerjee - in a cheque bounce case under the Negotiable Instruments (NI) Act.
The prosecution had contended that there was sufficient evidence to indicate their role in the alleged offence.
However, the duo contended that they were never at the helm of the affairs of the company or actively participating in the same.
Disagreeing with the prosecution, Justice Naik held that every person connected with the company could not be held to be vicariously liable for the acts of the company.
“Simply because a person is a director of a company does not make him liable under the NI Act. Only those persons who are incharge and responsible for the conduct of business of the company at the time of commission of the offence will be liable for criminal action,” said Justice Naik.
While quashing the complaint, the court further held: “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 offence by invoking Section 141 of NI Act.”
