Exploring Vicarious Liability Of Office Bearers In Criminal Matters
Stuti Nayak
15 March 2025 7:14 AM
A company, no doubt, is a separate legal entity from its members distinguished by the corporate veil. Being an artificial person, however, it does not have a mind or a will of its own, and it cannot function on its own. The state of the mind of a company is derived from the state of the mind of the office bearers of the company, mainly directors. For attribution of the criminal liability, the two primary essentials of a criminal offense must be seen, i.e., mens rea and actus reus. A corporation cannot form a mens rea, as it can only be known or formed through its human agents, therefore posing unique challenges in the realm of vicarious liability.
Equilibrium between corporate autonomy and accountability
The doctrine of attribution allows for mens rea, i.e., the guilty mind of the individuals who are in the control of the corporation to be assigned to the corporation itself, unlike a living person who has a mind that can have knowledge or intention and has hands to perform his intentions. Nonetheless, a corporation is devoid of these, and it must act through living persons. The doctrine of Alter ego works on the presumption that the company and its members are the same entity and is based on the principle of lifting the corporate veil between the company and its members. So, the members are held personally liable for their actions when they have acted in a fraudulent or unjust manner. In a nutshell, the doctrine of attribution seeks to assign liability to the corporation, whereas the doctrine of alter ego seeks to blame the human agents for their acts, disregarding the concept of a separate entity.
In the case of Iridium India Telecom Ltd. v. Motorola Inc.[1] by adopting the doctrine of attribution and imputation, it was held that the criminal intention of the alter ego, that is, the persons guiding the business of the company, would be imputed to the corporation. Moreover, In Standard Chartered Bank v. Directorate of Enforcement [2], It was settled by the court that the company can be liable to be prosecuted and punished for criminal offences.
Thus, if an office bearer commits an act with criminal intent while acting in relation to the business of the corporation, that intent can be attributed to the corporation, making it liable for criminal acts. However, this presents a probable risk of over-penalizing the corporate entity without dealing with the individual liability. If the office bearers are engaged in the wrongdoings but are shielded by the corporate personality, the punishment of the corporation in the form of fines and penalties will not serve as a deterrent for the individual's misconduct. These fines may affect the other stakeholders in a company, such as shareholders and employees, ultimately diminishing the purpose of the criminal liability.
Even though the doctrine of attribution brings the corporation within the scope of the criminal law, it leads to the dilution of individual accountability and liability. It also places the burden solely on the corporate entity, and the courts might lose the chance to address the personal liability of the office bearers, therefore creating a gap in the regulatory regime.
Evolving standards of vicarious liability: Statutory gaps and Evidentiary burden
The Judiciary has historically struggled with the application of criminal liability to the corporate officials of the company. The apex court in the case of Sunil Bharti Mittal v. Central Bureau of Investigation [3] held that the doctrine of alter ego could be applied to make a company liable for acts of persons who exercise control over the affairs of the company as they are the “alter ego.” Nevertheless, the same could not be applied in the reverse. Further, the court laid down that to hold the directors liable, the statutory regime must explicitly attract the doctrine of vicarious liability by mandating such a provision. A person who has committed the offense can be accused along with the company only if there is sufficient evidence of his role and criminal intention. Thus, the Directors of the Company cannot be said to have committed an offense merely because they are holders of offices. This judgment depicts a limitation of the courts of law in the approach of imputing vicarious liability, which leads to statutory ambiguity. Unlike foreign jurisdictions, India lacks a well-defined statute specifically mentioning the circumstances under which the directors and managers can be held criminally liable. The provisions are scattered from the Companies Act 2013 to Bhartiya Nyaya Sanhita 2023, hence leading to uncertainty and ambiguity.
For instance, in Sharad Kumar Sangha v. Sangita Rane[4], the Supreme Court clearly laid down that when the company has not been arrayed as an accused, no criminal proceedings can be initiated against its managing director. It creates a procedural safeguard for the directors. However, it also creates inadequacy for the corporation, as the corporation will face prosecution without any actual liability of the individuals who are responsible for the misconduct. The court has reiterated from time and again that only if there are clear and specific allegations against the office bearers and the company is made as an accused then only criminal proceedings against its office bearers can be initiated. This suggests that the evidentiary threshold to establish personal liability remains high, and such heavy reliance on evidence could dissuade the authorities from pursuing charges against individuals, resulting in a lack of deterrence.
Essential conditions of vicarious liability
A company's mens rea would be attributed to the intent and action of that individual who would act on behalf of the company. Notwithstanding, it is the cardinal principle of criminal law that there is no vicarious liability unless the statute specifically provides so. In view of the above judgments, the following three essentials emerge for holding office bearers vicariously liable:
- Firstly, in those cases where the statute mandates the provision for the vicarious liability for the office bearers.
- Secondly, there must be sufficient evidence against the individual who has perpetrated the crime on behalf of the company, proving his intention and that the individual was directly involved in the wrongdoings.
- Thirdly, the company should also be accused along with the office bearers who have committed the crime.
Recent Developments
In Delhi Race Club (1940) Ltd v. The State of Uttar Pradesh [5] ruled that the office bearers can only be liable if the charges are directly levelled against them. It was observed that the vicarious liability could not be attributed to the office bearers if it was alleged that the company had committed the offense of a criminal breach of trust or cheating. Moreover, the bench added that it must be proved that office bearers have practiced criminal breach of trust or cheating or deception to impose liability. Recently, in Sanjay Dutt & Ors. v. The State of Haryana & Anr.[6] the apex court again has reiterated the aforesaid principles, emphasising on the active involvement, it held that the office bearers cannot be automatically held liable for the illegal actions of the company. Again, this decision has solidified the procedural protections for directors, but in doing so, it weakens corporate governance. The dependence on direct involvement and active role may inadvertently provide greater leeway for corporate officials to escape liability where established criminal intent becomes difficult. This poses a question whether this ruling has raised the bar high for corporate governance. It is argued that it subverts the efforts to enforce the liability on those in charge of the corporation, consequently diluting the deterrence against corporate wrongdoings.
The contemporary approach taken by the Judiciary posits a balance between guaranteeing accountability for corporate malfeasance and safeguarding the corporate officers through the doctrines of vicarious liability, attribution, and alter ego. Undoubtedly, this has offered crucial measures of protection for officials against groundless liability. Nevertheless, the lack of the extent of the attribution of the liability needs to be specified. These legal precedents portray the cautious approach of the courts, i.e., they are reluctant to hold the officers liable unless there are explicit statutory provisions along with solid evidence. Regardless, this approach of the Judiciary may create gaps in personal liability and accountability, specifically in circumstances where it is not an easy task to prove the direct intent and role. Legislative reforms are needed to specify the extent of vicarious liability and provide a more stable framework for prosecuting corporate officials. These reforms would better balance the requirement of individual accountability from baseless accusations.