Who’s to blame?

With corporate criminal liability cases, courts are faced with the responsibility of balancing accountability and fairness, writes Katherine Abraham

The subject of corporate criminal liability keeps finding its way, time and again, before the courts. The court had to once again render its decision on this matter in the case of Sanjay Dutt v State of Haryana.

The criminal liability of company directors in India has been a hot topic issue that has garnered significant media and legal attention, particularly in light of recent rulings by the Supreme Court.

The court’s recent decision in the above-mentioned case set the foundation and sharpened the contours of corporate criminal liability, specifically for company directors.

In the case, the Supreme Court division bench, comprising JB Pardiwala and R Mahadevan, clarified the extent of vicarious liability for company directors. The court observed: “While a company may be held liable for the wrongful acts of its employees, the liability of its directors is not automatic.”

It stated that a director may attract vicarious liability if: (1) the company was liable in the first place; and (2) if such director personally acted in a manner that directly connects their conduct to the company’s liability. Mere authorisation of an act at the company’s behest, or exercising a supervisory role within the company, was not enough to render a director vicariously liable.

Ashish Deep Verma, managing partner of the litigation-focused firm, Vidhisastras, in New Delhi, says: “The burden is on the complainant to make specific and substantiated allegations rather than relying on the director’s position in the company.

“A crucial inference from this ruling is that courts must exercise caution in taking cognisance of complaints against directors.”

Guilty mind

In global legal history, companies were able to evade liability due to a lack of mens rea (guilty mind). The situation changed in 1915, with the UK case Lennard’s Carrying Co Ltd v Asiatic Petroleum, where Lord Haldane, one of five judges presiding over the case and influenced by German company law, identified the corporation’s “directing mind and will” as liable.

In the matter, Asiatic Petroleum contracted Lennard’s Carrying to transport oil, but the ship, the Edward Dawson, which was carrying the oil, sank due to its unseaworthiness. It was claimed that the managing director, Lennard, was aware of the ship’s defective condition and had failed to act.

The House of Lords, which at the time exercised judicial function, ruled that Lennard’s knowledge was attributable to the company because he was its “directing mind and will”. The court established the “identification doctrine”, or the “alter ego” theory, which holds that a company can be liable for the actions of individuals who represent its controlling mind. This landmark case redefined corporate liability law, clarifying when a company can be deemed responsible for wrongful acts committed by its key officers.

With the evolving corporate landscape, the question is whether the legal framework in India governing corporate leaders and their roles, responsibilities and potential accountability is enough.

Various Supreme Court judgments in India have aimed to clarify the extent to which directors can be held liable for criminal offences.

Verma says: “The [Dutt] judgment also signals a strong stance against frivolous prosecutions that fail to differentiate between corporate governance and criminal liability. By setting a clear threshold for imputing liability, the court ensures that only those who are directly involved in, or have actively facilitated, an offence are held accountable.”

Case origins

In Sanjay Dutt v State of Haryana, the appellants – Dutt, managing director and CEO of Tata Realty and Infrastructure; Tata Housing Development’s vice president, Kamal Sehgal; and former project head, Satpal Singh – were implicated in a complaint alleging the illegal uprooting of 256 trees and 62 small plants in Gurugram, Haryana.