Lakshmi Kumaran & Sridharan AttorneysAn ISO 9001 / 27001 certified law firm

Director’s liability – ‘Alter ego’ and attribution of acts of companies

20 January, 2015

The Supreme Court of India has, on 9-1-2015, held that when the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect. The Court in this regard set aside the Order of the special magistrate which had treated Managing Directors of specified companies as “alter ego” of their respective companies and had held that the acts of the companies are “to be attributed and imputed to them”. The court in the order impugned before the Apex court had found that the appellants (Directors) were prima facie, controlling the affairs of the said three companies and, therefore, represented the directing mind and will of each company. Noting that the principle of ‘alter ego’ was applied in number of earlier judgements to impute the criminal content to the body corporate and not vice versa, the court held that otherwise there has to be a specific act attributed to the Director or any other person allegedly in control and management of the company, to the effect that such a person was responsible for the acts committed by or on behalf of the company. It was observed that the impugned order had not recorded satisfaction of the magistrate, by mentioning the role played by the Directors which would bring them within criminal net.

Further, noting the importance of the words ‘sufficient grounds for proceeding’ appearing in the provisions, the court held that the order is liable to be set aside if no reasons, not necessarily detailed, are given therein while coming to the conclusion that there is prima facie case against the accused. It was observed that these words which amply suggest that an opinion is to be formed only after due application of mind, that there is sufficient basis for proceeding against the said accused, and formation of such an opinion is to be stated in the order itself. The court in this regard in this case of Sunil Bharti Mittal v. Central Bureau of Investigation also observed that a person ought not to be dragged into court merely because a complaint has been filed.
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