M J Antony: Directors in the dock

Separating the liability of the company and its managers for offences is a tricky judicial task.

The liability of directors for the fault of their companies has been set out in various statutes. Though there are special provisions dealing with this aspect, this is one of the most litigated issues. Delhi is still watching the forensic embers which enveloped the Ansals who ran the Uphaar cinema that was gutted due to the negligence of the employees. It took more than a decade to decide their vicarious liability. Last month, there were three significant judgements dealing with this question. Two of them took more than two decades to reach the Supreme Court, indicating how complex the issue could become, or could be made so by legal professionals.

The Supreme Court took a tough stand against Modi Carpets Ltd for discharging noxious effluents into the Sai river in Uttar Pradesh. In 1985, the Allahabad high court had stayed the prosecution of the company, its chairman and other top officers. In 2004, the high court quashed the complaint so far as it related to the joint managing director, B K Modi. In the appeal, UP Pollution Control Board vs B K Modi, the Supreme Court ruled that Modi should appear before the special magistrate (pollution) and that court will decide whether the joint MD was personally liable or not. It chastised the high court for exercising its inherent power in a casual manner. Such power should not be exercised to “stifle a legitimate prosecution”, the Supreme Court said.

It recalled an earlier judgement in the case of Mohan Meakins Ltd, which faced similar charges. The directors were arraigned for discharging pollutants into the Gomti river. The legal wrangle over the role of the honchos dragged on from 1985 till 2000 when the Supreme Court cleared their prosecution. The courts below had quashed the complaints against them. Both these cases started in 1985 and the Supreme Court asserted that “the lapse of such long period cannot be a reason to absolve them from the trial.”

In matters affecting public health, the Modi judgement explained, the court cannot afford to deal with cases lightly. “The message must go to all concerned persons, whether small or big, that the courts will share the parliamentary concern to check the escalating pollution levels and restore the balance in our environment…Those who discharge noxious polluting effluents into water bodies should be dealt with strictly, irrespective of technical objections,” the court emphasised.

Another judgement of recent weeks, Tamil Nadu Electricity Board vs Rasipuram Textiles Ltd, dealt with theft of power in which top men of the company were implicated under the Indian Electricity Act. During the two decades of litigation, the managing director and one director had expired. The trial court held that if the surviving directors were not in charge of and responsible for the day-to-day functioning of the mills, it was for them to prove it, and it was not done by them. Therefore they should stand trial. On appeal, the district judge and the Madras high court ruled that the burden of proving that the directors were personally responsible was on the electricity board. The Supreme Court supported this view. Thus the directors were spared in this case.

The Consumer Protection Act also has a provision which makes the directors liable for the fault of the company. The National Consumer Commission delivered a judgement in the case of Ashish Birla vs Murlidhar Patil in which a cooperative bank failed to repay a depositor the amount with interest. The depositor sued the bank as well as its directors. The consumer forum, the Maharashtra state forum and the National Commission agreed with the depositor and ordered the directors “jointly and severally” to pay the amount with interest. “We would like to remove the corporate veil and hold that the directors are responsible for the deficiency in service of the bank,” the commission said.

The question of the director’s liability arises more frequently in the case of cheques issued by companies and later dishonoured by the banks for want of sufficient funds. Three years ago, the Supreme Court had laid down the principles to be followed in deciding the liability of directors under the Negotiable Instruments Act (SMS Pharmaceuticals vs Neeta Bhalla). However, this has not reduced the flow of appeals before the court. In one recent case, BSNL prosecuted the honorary chairman of a company who pleaded that he was not drawing any remuneration. However, the Supreme Court stated that he should prove his status before the trial court.

The position of the directors who stand guarantee for the company’s loan is even more complex; and if the company goes under, it would be murkier still, according to the decisions delivered by different courts.