Independent Non-Executive Directors Liable Only When Involved In Company's Daily Affairs: Bombay HC

The Bombay High Court recently held vide two separate verdicts that liability for the acts of the company cannot be fastened upon independent, non-executive directors if they are not involved in the daily affairs of such company.

On 2nd July, the first order was passed by Justice PD Naik which quashed criminal proceedings emanating out of a cheque bounce case under Section 138 of the Negotiable Instruments Act against the two applicants, who happened to be independent non-executive directors.

The prosecution argued that there was ample proof to demonstrate the involvement of the accused in the case. On the other hand, the applicants agitated that they were never in a position of leadership and control in the company or actively participating in the same.

The Court observed that every individual who has connection to the company could not be held vicariously liable for the acts performed by the company.

“Simply because a person is director of company does not make him liable under the NI Act. Only those persons who are incharge and responsible for the conduct of business of the company at the time of commission of the 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 offence by invoking Section 141 of NI Act,” Justice Naik observed.

To buttress his conclusion Justice Naik also cited Supreme Court’s judgment in Chitalapati Srinivasa Raju Vs. Securities and Exchange Board of India (2018) 7 SCC 443, wherein it was held as follows: “Non executive directors are, therefore, persons who are not involved in the day to day affairs of the running of the company and are not in charge and not responsible for the conduct of the business of the company.” 

After observing the afore-mentioned propositions, judge quashed the criminal proceedings launched by the area Metropolitan Magistrate arraying the two applicants as accused.

The second decision was handed down on July 8 by a division bench of Justices KR Shriram and Milind Jadhav wherein several orders passed by Joint Director General of Foreign Trade (Joint DGFT) which had the effect of imposition penalty on a company along with all its directors, ex-directors including the non-executive director, Anand Bhatt who was a practicing advocate as well associated with law firm, Wadia Ghandy & Co.

Bhatt's wife approached the Court in 2009, an year after he had passed away in a terrorist attack in Hotel Oberoi which happened on November 26, 2008.

The division bench contemplated from the orders that the accused person was the company itself and there was no further material to portray the role that each director played in the functioning of the company.

“Where there are allegations of vicarious liability, then there has to be sufficient evidence of the active role of each director. There has to be a specific act attributed to a director or the person allegedly in control of management of the company, to the effect that such a person was responsible for the acts committed by or on behalf of the company,” the bench observed.

Court enunciated that as there was not even a smidgen to exhibit that the applicant had control and management of the company or that personal responsibility for the acts of the company could be attributed to him, prejudice was caused to his detriment him by way of the notices.

In the light of the above, the Bench quashed and set aside the various orders given by the Joint DGFT against the applicant.