Stories Of India Inc.'s Scared Directors
On Nov. 30, 2019, Bundl Technologies Pvt., which operates e-commerce platform Swiggy, had to pay Rs 15 crore at 4 a.m. to the Goods and Services Tax department. Reason: the Hyderabad GST Intelligence Unit threatened to arrest the company’s executive directors for alleged wrongful availment of tax credit. A month later, the directors had to show up at the Director General’s office in response to a summons. They showed up at 11 a.m., were locked in the DG’s office and not allowed to leave till 1 a.m. until a further tax payment of over Rs 12 crore was made to secure their release. Recently, while documenting all this in its order, the Karnataka High Court directed the GST department to refund these amounts.
In September, managing director of Mangalore Special Economic Zone Ltd. and executive director of its contractor heaved a sigh of relief after a summons by a judicial magistrate against them was dismissed by the Supreme Court. Criminal charges against them had been registered for trespassing after Mangalore SEZ and the company executing the contract laid a pipeline under the complainant’s property.
For the last eight years, Dayle De’Souza, managing director at Writer Safeguard Pvt., had been fighting a bailable warrant issued against him by the judicial magistrate of the Sagar district in Madhya Pradesh, which was later confirmed by the state high court. Both forums upheld the criminal complaint filed against him by the Labour Enforcement Officer alleging non-compliance with the Minimum Wages Act, 1948. The labour inspector had found certain procedural lapses at a State Bank of India ATM in Sagar which Writer Safeguard was allegedly in charge of maintaining, namely failure to keep and display Fine Register Form-1 and 2, the notice of minimum wages, Rule, and abstract of the Act, name of Inspectors with address in Hindi and English at the worksite, overtime register, wages payment register and attendance register at the worksite, the Supreme Court's order detailed. Last month, the apex court quashed the criminal proceedings against De’Souza.
And most recently, Amazon.com Inc.’s executives have been reportedly charged under narcotics laws by the Madhya Pradesh police in a case of alleged selling of marijuana on the e-commerce platform.
These aren't isolated incidents of criminal proceedings against India Inc.’s directors for alleged offences by companies they run. They are illustrations of how, despite repeated rulings by the apex court, enforcement agencies and lower courts take a contrary view on directorial liability.
Investigation agencies have remained oblivious to the law laid down by the Supreme Court on liability of directors, Vyapak Desai, dispute resolution and investigations practice head at Nishith Desai Associates, said.
They mechanically affix liability on the directors in reference to prosecutions against the company, many a times without even establishing the ingredients required to affix vicarious liability on such directors and officers of company, he pointed out.
It is a well-established principle that company may act as an alter ego based on actions of officers and directors but vice versa may not always be true unless proved.Vyapak Desai, Leader- Dispute Resolution, Nishith Desai Associates
A principle laid down by the apex court in Sunil Bharti Mittal and Maksud Saiyed’s cases.
The court has repeatedly held that there is no concept of vicarious liability in criminal jurisprudence except where a statute specifically provides for it, senior advocate Amit Desai told BloombergQuint. Yet lower courts keep blurring the lines and not just in the case of executive directors.
Given the pendency of cases in our courts, the lower courts must follow these precedents. We continue to rope in non-executive directors despite the way in which the law has been settled.Amit Desai, Senior Advocate
For instance, just last year, the Supreme Court overturned the Delhi High Court order which had upheld criminal liability of Shailendra Swarup, non-executive director of Modi Xerox Ltd., for alleged exchange control violations by the company. The Enforcement Directorate's order, the Supreme Court concluded, was erroneously affirmed both by the appellate tribunal and the high court. Swarup was a part-time, non-executive director not in charge of the conduct of business of the company and there's no finding to the contrary by any of the authorities, the apex court had noted.
The Law That’s Been Settled….
Through various rulings, the apex court has laid down that directors can be held liable in of two ways—vicarious liability or liability under the Indian Penal Code.
Companies Act, 2013, holds an "officer in default" accountable if the corporate entity is in violation of specified provisions. Under statutes like the Securities and Exchange Board of India Act, 1992; Negotiable Instruments Act, 1881; or the Minimum Wages Act, 1948; directors can be held liable for an offence by the company only if their consent, connivance, knowledge, or neglect can be proved.
If a statute doesn’t have a vicarious liability provision, a director’s active role in committing the offence coupled with criminal intent needs to be established for initiating proceedings under the Indian Penal Code.
Kunal Gupta, while collar investigations partner at Trilegal, pointed out three broad areas where overzealousness by the enforcement agencies is most visible.
First, white-collar cases led by agencies such as the Enforcement Directorate involving broad interpretation of executive liability under section 70 of the Prevention of Money-Laundering Act, 2002.
The provision allows agencies to make the person “in charge” of the business of the company liable. But no liability can be affixed if the director is able to prove that the contravention took place without his knowledge or that he exercised all due diligence to prevent it.
Yet, often trial courts continue to proceed against directors as soon as an offence against the company is established.
The provision affixes the liability but the rubber meets the road in the second part where you have to establish mens rea (criminal intent). Not in all cases are the trial courts able to appreciate this nuance. Their inquiry stops at whether there is an offence of money laundering and whether the law provides for executive liability if the company has committed an offence.Kunal Gupta, Partner, Trilegal
You very rarely see the courts appreciating the facts against this requirement, he said.
Second, is a more recent phenomena of criminal proceedings under labour legislations. There are cases where multinationals have got queries from labour commissioners on details of directors, their place of residence, etc., Gupta said. "That’s usually the first sign of trouble for directors."
And last, is your typical cheque bouncing cases under the Negotiable Instruments Act, 1881, he said.
Incidentally, earlier this year, the last one prompted a five-judge Constitution Bench of the Supreme Court to take suo motu cognisance of delays in cheque default matters. Noting that magistrate courts were converting summary trials into summons trials in a “mechanical manner”, the apex court laid down strict guidelines for them.
For instance, record reasons for summons trial, conduct inquiry to arrive at sufficient grounds to proceed against the accused who resides beyond the territorial jurisdiction of the court, etc.
Long Fight For Relief…
Typically, before initiating an investigation on any criminal matter, the enforcement agency files a complaint before a magistrate.
Often, the lower courts fail to apply their mind on allegations in the complaint and the supporting evidence placed on record, Vyapak Desai said.
And once a summons is issued by a magistrate, basis a criminal complaint, the accused director has to appear before the court, Amit Desai pointed out.
The director can be anywhere in the country. He is duty-bound to appear before the magistrate and then required to apply for bail and execute bail bonds for continuing appearance.Amit Desai, Senior Advocate
It's only after that the applications are filed to drop the said director from the proceedings, he said.
Delays in proceedings combined with disrepute is why the Supreme Court or high court orders granting relief often come with stern directions to enforcement agencies and lower courts.
For instance, in Swiggy’s case, the Karnataka High Court directed the GST department to install CCTV cameras in interrogation rooms and noted that filing of return and payment of substantial taxes by the company would clearly warrant for treating such taxpayers with certain element of dignity.
In De’Souza and Mangalore SEZ cases, the apex court noted that it’s the magistrate’s duty to apply his mind to see whether, on the basis of the allegations made and the evidence, a prima facie case for taking cognizance and summoning the accused is made out or not.
Even as higher courts continue to deal with legacy issues, new areas of directorial liability are cropping up, Vyapak Desai pointed out.
We have seen directors come under the scanner in respect of past structures for investments into India, including those named in the Panama Papers; for alleged data breach and even non-compliance of commercial agreements.Vyapak Desai, Leader- Dispute Resolution, Nishith Desai Associates
There are also a rising number of investigations and inquiries being initiated against directors in fintech and cryptocurrency space, he said.
The government, in limited quarters, isn't oblivious to this malaise. Perhaps why, just last year, the Ministry of Corporate Affairs directed the Registrar of Companies to ensure criminal and civil proceedings are not unnecessarily initiated against non-executive directors or independent directors unless sufficient evidence of their involvement exists. Such prudence has yet to trickle down to the investigation agencies.
ABOUT THE AUTHOR(S)