CRIMINAL LIABILITY OF NON-EXECUTIVE DIRECTORS

A. GENERAL OVERVIEW
Non-Executive Directors (NEDs) of a company can be made criminally liable under:
1. S. 149(12) of the Companies Act, 2013
2. S. 447 of the Companies Act, 2013
3. S. 138 and S. 141 of the Negotiable Instruments Act
S. 149(12) of the Companies provides for fixing liability on the NEDs “ only in respect of such
acts of omission or commission by a company which had occurred with his knowledge,
attributable through Board processes, and with his consent or connivance or where he had not
acted diligently”
The definition of ‘officer who is in default’ u/s 2(60) of the Companies Act is pretty wide-
ranging so as to include even the NEDs and Independent Directors if they commit such an act or
an omission that results in an activity in contravention with the provisions of the Companies Act,
2013.
Section 447 of the Companies Act, 2013 is also a wide-ranging provision and fixes liability for
fraud on any or all of those persons who are found guilty of fraud. Hence, if an NED commits an
intentional act or omission that results in fraud as defined under the Explanation of Section 447,
they can be made criminally liable.
Section 179 of the Companies Act, 2013 does not distinguish between the powers of MD/ EDs
and NEDs/ IDs. However, in practice, the Boards always delegate their powers to MD/ EDs/
CEOs. As a result of this broad-brush approach, Section 179 of the Act has been often mis-
construed by law enforcement agencies/ trial courts to fasten the liability on the entire Board for
any legal infractions of the company.
An example of the vicarious liability provision can be seen under Section 141 of the Negotiable
Instruments Act, 1881, which provides that “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”.
Similarly, Section 42 of Foreign Exchange Management Act, 1999, provides that “where a
person committing a contravention of any of the provisions of this Act or of any rule, direction
or order made thereunder is a company, every person who, at the time the contravention 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
contravention and shall be liable to be proceeded against and punished accordingly.”
In both the instances, there is no distinction between EDs and NEDs in imposing the liability.
B. CASE LAWS
Summary--The case laws mentioned below suggest that whenever an NED is made a party to
criminal proceedings, the courts do not immediately quash the proceedings against them just
because they are not actively involved in the transactions of a corporation. The Courts have been
of the view that NEDs can be made liable only and only when an offence can be attributed to
their acts or omissions in relation to the corporation in question.
a. N. Magesh v. State of Tamil Nadu & Ors., MANU/TN/5075/2019--
‘17. In case of a Non-Executive Director, they cannot be presumed to be involved in the day-to-
day affairs of the running of the Company and they cannot be made liable just because they have
attended Board Meetings or signed Balance Sheets.’
b. Gunmala Sales Private Ltd. vs. Anu Mehta (17.10.2014 - SC)
MANU/SC/0959/2014--
‘In Anita Malhotra v. Apparel Export Promotion Council and Anr. MANU/SC/1323/2011, the
High Court had dismissed the petition filed praying for quashing of the criminal complaint
instituted against the Appellant Under Section 138 of the NI Act. The Appellant claimed to be a
non-executive Director of the company which had issued the cheques. The Appellant claimed
that she had resigned from the company on 20/11/1998 while the cheques were issued in the year
2004. A two-Judge Bench of this Court held that though it is not proper for the High Court to
make a roving enquiry and consider the defence of the accused at the stage of a petition filed for
quashing the complaint, if any documents, which are beyond suspicion or doubt, are placed, it
can take them into account. This Court looked into the certified copy of the annual return, which
was a public document as per the Companies Act read with Section 74(2) of the Evidence Act
and held that the Appellant had resigned from the Directorship of the company much prior to the
issuance of the cheques. While setting aside the High Court's order, this Court reiterated that in
case of a Director, the complaint should specifically spell out how and in what manner the
Director was in charge of or was responsible to the company for conduct of its business and mere
bald statement that he or she was in charge of and was responsible to the company for conduct of
its business is not sufficient. This Court further observed that in the case before it except the
mere bald and cursory statement with regard to the Appellant, the complainant had not specified
her role in the day-to-day affairs of the company and on this ground alone, the Appellant was
entitled to succeed.’
c. Purushothaman Jambukesan vs. Patel Engineering Limited and Ors. (15.02.2016 -
BOMHC) : MANU/MH/3017/2016
‘20. In this case, however the only ground on which the petitioners are seeking quashing of
issuance of process order is that they were appointed as independent and non executive directors,
in view of their expertise in particular field. However, the ROC record which is produced along
with the complaint at Annexure B does not make any such distinction. It no where says that these
petitioners were appointed only as non executive directors or nominated directors and they are
not full time directors and as such not in charge of the day to day affairs of the company. As
rightly pointed out by respondent No. 1, Section 141 of N.I. Act also does not make any
distinction between the Directors and non executive directors. It only exempts from its purview
the director who is nominated by virtue of his office or employment in central Government or
State Government etc. But Section 141 of N.I. Act does not make distinction between the
directors and executive directors. It will be an internal affair of the company as to whether a
particular director is an executive director or otherwise. General Public or complainant is not
supposed to be aware of the same, especially in view of the information which was published on
the website also does not make such distinction. Therefore, on this ground, it cannot be said that
process issued against these petitioners who claim to be non executive directors is liable to be
quashed. After all it is a matter of leading evidence, to be proved and disproved, at the time
of trial. It is too early a stage to quash the proceedings simply on the ground that they are non
executive directors, when the law does not make any such distinction between the Director and
non executive director. No unimpeachable or incontrovertible evidence is produced on record to
show that issuance of process against them is abuse of the process of law or of court.’
d. Pooja Ravinder Devidasani v. State of Maharashtra CRIMINAL APPEAL
NOS.2604-2610 OF 2014--
‘17. A Non-Executive Director is no doubt a custodian of the governance of the company but is
not involved in the day-to-day affairs of the running of its business and only monitors the
executive activity. To fasten vicarious liability under Section 141 of the Act on a person, at the
material time that person shall have been at the helm of affairs of the company, one who actively
looks after the day-to-day activities of the company and is particularly responsible for the
conduct of its business. Simply because a person is a Director of a company, does not make him
liable under the NI Act. Every person connected with the Company will not fall into the ambit of
the provision. Time and again, it has been 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.
21. In Sabitha Ramamurthy & Anr. Vs. R.B.S. Channbasavaradhya (2006) 10 SCC 581, it was
held by this Court that it is not necessary for the complainant to specifically reproduce the
wordings of the section but what is required is a clear statement of fact so as to enable the court
to arrive at a prima facie opinion that the accused is vicariously liable. Section 141 raises a legal
fiction. By reason of the said provision, a person although is not personally liable for
commission of such an offence would be vicariously liable therefor. Such vicarious liability can
be inferred so far as a company registered or incorporated under the Companies Act, 1956 is
concerned only if the requisite statements, which are required to be averred in the complaint
petition, are made so as to make the accused therein vicariously liable for the offence committed
by the company. By verbatim reproducing the wording of the Section without a clear statement
of fact supported by proper evidence, so as to make the accused vicariously liable, is a ground
for quashing proceedings initiated against such person under Section 141 of the N.I. Act.’

e. N.K. Wahi vs Shekhar Singh And Ors, Dr. Arijit Pasayat, Lokeshwar Singh Panta,
Appeal (crl.) 83-85 of 2004

‘8. This provision clearly shows that so far as the companies are concerned if any offence is
committed by it then every person who is a Director or employee of the company is not liable.
Only such person would be held liable if at the time when offence is committed he was in charge
and was responsible to the company for the conduct of the business of the company as well as
the company. Merely being a Director of the company in the absence of above factors will not
make him liable.
9. To launch a prosecution, therefore, against the alleged Directors there must be a specific
allegation in the complaint as to the part played by them in the transaction. There should be clear
and unambiguous allegation as to how the Directors are incharge and responsible for the conduct
of the business of the company. The description should be clear. It is true that precise words
from the provisions of the Act need not be reproduced and the court can always come to a
conclusion in facts of each case. But still in the absence of any averment or specific evidence the
net result would be that complaint would not be entertainable.’

f. S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) 8 SCC 89:

‘10. While analysing Section 141 of the Act, it will be seen that it operates in cases where an
offence under Section 138 is committed by a company. The key words which occur in the
section are 'every person'. These are general words and take every person connected with a
company within their sweep. Therefore, these words have been rightly qualified by use of the
words:
'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, etc'
What is required is that the persons who are sought to be made criminally liable
under Section 141 should be, at the time the offence was committed, in charge of and
responsible to the company for the conduct of the business of the company.
Every person connected with the company shall not fall within the ambit of the provision.
It is only those persons who were in charge of and responsible for the conduct of business
of the company at the time of commission of an offence, who will be liable for criminal
action. It follows from this that if a director of a company 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 under the provision. The liability arises from being in charge of and
responsible for the conduct of business of the company at the relevant time when the
offence was committed and not on the basis of merely holding a designation or office
in a company. Conversely, a person not holding any office or designation in a
company may be liable if he satisfies the main requirement of being in charge of and
responsible for the conduct of business of a company at the relevant time. Liability
depends on the role one plays in the affairs of a company and not on designation or status.
If being a director or manager or secretary was enough to cast criminal liability, the
Section would have said so. Instead of 'every person' the section would have said
'every director, manager or secretary in a company is liable'..., etc. The legislature is
aware that it is a case of criminal liability which means serious consequences so far as
the person sought to be made liable is concerned. Therefore, only persons who can be
said to be connected with the commission of a crime at the relevant time have been
subjected to action.

18. To sum up, there is almost unanimous judicial opinion that necessary averments ought
to be contained in a complaint before a person can be subjected to criminal process. A
liability under Section 141 of the Act is sought to be fastened vicariously on a person
connected with a company, the principal accused being the company itself. It is a departure
from the rule in criminal law against vicarious liability. A clear case should be spelled out
in the complaint against the person sought to be made liable. Section 141 of the Act
contains the requirements for making a person liable under the said provision. That the
respondent falls within the parameters of Section 141 has to be spelt out. A complaint has
to be examined by the Magistrate in the first instance on the basis of averments contained
therein. If the Magistrate is satisfied that there are averments which bring the case within
Section 141, he would issue the process. We have seen that merely being described as a
director in a company is not sufficient to satisfy the requirement of Section 141. Even a
non-director can be liable under Section 141 of the Act. The averments in the complaint
would also serve the purpose that the person sought to be made liable would know what is
the case which is alleged against him. This will enable him to meet the case at the trial."