[IBC] Telangana HC Quashes Proceedings Against Ex-Director Of Company, Says IRP Had Already Taken Charge When Complaint Was Filed

The High Court of Telangana has delivered an important decision on the issue regarding criminal liability of Directors and corporate governance.

In quashing the proceedings initiated against the petitioner (former Director of a pharmaceutical company), Justice K Sujana held that the petitioner could not be held responsible for alleged violations by the accused-company since he had relinquished his position as Director at the time such offences were alleged to have occurred.

The ruling reaffirmed the principles laid down by the Supreme Court regarding vicarious liability of directors in corporate offenses. It elucidated that merely being a director does not automatically implicate an individual in criminal liability and the individual must have been “in charge of” and “responsible for” the company's business at the time the offense was committed.

In deciding the case, the High Court sketched an important distinction between the responsibilities of directors and the legal status of a company post-liquidation. It was noted that since the company was under liquidation, its complete control was transferred to a liquidator. Therefore, during a period where no control could be exercised by the former director by virtue of his decision to relinquish his position, it would not be justified to hold him responsible for actions of the accused company.

The court also briefly commented on the statutory limitations for filing criminal complaints, as set out under the Cr.P.C. Elucidating on the need for remaining within the bounds of limitation period, the court provided clarity on the interpretation of Cr.P.C. provisions read in conjunction with cases involving corporate offences.

Background

The case originated from a complaint accusing M/s. Gena Pharmaceuticals Limited (herein, the accused company) of manufacturing and marketing drugs with objectionable advertisements. The complaint alleged the accused company to be in violation of multiple provisions of the Drugs and Cosmetics Act, 1940, and the Drugs and Magic Remedies (Objectionable Advertisements) Act, 1954.

Counsel for the petitioner, Advocate Zubin JF Poovathinkal, contended that the petitioner had stepped down from the position of Director in 2019, and the company's complete control was transferred to a liquidator after the Corporate Insolvency Resolution Process (CIRP) failed. In light of the same, he argued that the petitioner could not be held liable for company's post-2019 actions and decisions since the company was no longer operational under his leadership.

Relying on the Supreme Court ruling in State of Haryana vs. Brij Lal Mittal and Others (1998), the petitioner asserted that mere directorial status did not automatically translate into liability for corporate actions unless it could be shown that the individual was “in charge of” and “responsible for the conduct” of the company's business at the material time.

“The vicarious liability of a person for being prosecuted for an offence committed under the Act by a company arises if at the material time he was in charge of and was also responsible to the company for the conduct of its business. Simply because a person is a director of the company it does not necessarily mean that he fulfils both the above requirements so as to make him liable. Conversely, without being a director a person can be in charge of and responsible to the company for the conduct of its business,” the petitioner quoted.

Moreover, it was Advocate Poovathinkal's contention that the complaint was barred by limitation. Basing reliance on Section 469 of the Cr.P.C., it was argued that the period of limitation for filing criminal complaints is three years from the date of the offence or its discovery. It was the petitioner's contention that the offence was 'detected' in 2015 and the complaint was subsequently filed in 2022. The same was thus argued to be outside the expiration of the limitation period as it was well beyond the prescribed statutory limit of three years.

On the other hand, Advocate D. Arun Kumar, learned Additional Public Prosecutor, representing the State, contended that the petitioner's liability and the ambit of his accountability as a representative of the company, continued to be within the trial court's jurisdiction to decide upon. The State, thus, prayed for the dismissal of present criminal petition.

Findings

Justice K. Sujana carefully examined the contentions of both parties and noted that the petitioner had relinquished his position of being a Director of the accused company by September 30, 2019, which was well before the filing of the complaint in November 2022. The above facts were supplemented by referencing the records procured from the Ministry of Corporate Affairs (MCA), which indicated that the petitioner's directorial tenure ended in 2019, and the company was under the control of a liquidator by the time the complaint was filed.

The Court also provided clarity on the interpretation of Section 305 of the Cr.P.C. - discussed in conjugation with the Andhra Pradesh High Court case of Mannam Venkata Krishna Rao vs. The State of Andhra Pradesh and Others.

Elucidating the procedural requirements for representation of corporations in criminal trials, the court observed that the Cr.P.C. provisions authorise appointment of a representative by a company for its legal proceedings.

The court further emphasized that while the accused company could avail the option of appointing a new representative, the petitioner, as a former Director with no control or involvement in the company's current operations and alleged offensive actions, was not the appropriate person to represent the company in court. The court subsequently concluded and acknowledged that a person, thus, cannot be held vicariously liable for a company's actions merely by virtue of their directorial position.

Thus the High Court allowed the criminal petition and quashed the proceedings against the petitioner. The court held that the petitioner could not be held liable for actions committed by the company after his tenure as Director had ended, especially considering that the “company was under liquidation” and an IRP had “assumed charge” and taken its “complete control” by the time the complaint was lodged.

Furthermore, the court directed the trial court to expunge the petitioner's name from its records, effectively removing him as the person representing the accused company.

Case title: Mr. Vijay Kumar Kanoria vs. The State of Telangana

Criminal Petition No. 147 of 2024

Advocate Zubin JF Poovathinkal, learned counsel for petitioner.

Advocate D.Arun Kumar, learned Additional Public Prosecutor, for respondent.

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