Supreme Court: No Vicarious Liability on Directors

Introduction

The liability of directors in Indian law, particularly in criminal matters, is a complex issue. While directors can be held liable for the wrongful acts committed by companies, such criminal liability has been fastened by the courts when there is direct involvement of the Director having criminal intention.[1] The recent Supreme Court judgment decided on 2 January 2025 in the case of Sanjay Dutt & Anr. v. State of Haryana & Anr. (“Sanjay Dutt Judgment”) is a significant safeguard for directors as it underscores the importance of limiting such liability, ensuring directors are not unfairly held accountable for actions without personal involvement or enabling provision in the statute.

In this article, we have discussed the brief facts of the case, the ruling of the Supreme Court and our views on the same.

Facts

The case arose from a complaint under the Punjab Land Preservation Act, 1900 (“the Act”) for violation of the provisions of the Act where over 250 trees were allegedly uprooted, causing environmental harm. The act prohibits cutting of trees or timber except for the due procedure prescribed therein, and provides the penalty for contraventions which may be fine and/ or imprisonment. The complaint named three senior officials of TATA Realty and Infrastructure Limited and Tata Housing Development Co. Ltd. (“the Company”), including Mr. Sanjay Dutt (being the Managing Director), alleging their involvement. However, no direct accusations were made against the said officers, with respect to the act of cutting trees. The Presiding Officer-cum-JMIC, Special Environment Court Faridabad took cognizance of the complaint. The accused approached the High Court of Punjab and Haryana for quashing of the complaint, however the High Court turned down their petition. Hence, an appeal was filed before the Supreme Court against the order of the High Court of Punjab and Haryana and to quash the complaint.

Ruling of the Supreme Court

• The Supreme Court observed that the scheme of the Act does not provide for affixing vicarious liability against directors. Rather, the Act provides for an express provision for individual liability for prosecution for offences committed under the Act. It was further observed that neither the persons found at the site where the trees were cut nor the Company has been made an accused in the complaint.
• It was held that a company may be held liable for the wrongful acts of its employees, however the liability of its directors is not automatic. A mere authorization or a supervisory role is not enough to hold the directors vicariously liable. For directors to be vicariously liable, the company itself must be liable and the director must have acted in a manner that directly connects his conduct to the company’s liability.
• Lastly, the Supreme Court laid down that an essential prerequisite to hold directors vicariously liable, is that there must be an express provision in the concerned statute providing for vicarious liability. Accordingly, the Supreme Court quashed the complaint and the criminal proceedings against the directors of the company stating that the allegations lacked substance and did not justify prosecution against the directors.

Our Thoughts

While the judgment is a welcome clarification on vicarious liability of directors, it raises concerns about the fact that the courts below were not able to appreciate the settled law in Maharashtra State Electricity Distribution Company Limited and Anr., v. Datar Switchgear Limited and Ors., which was reported in the year 2010. Further, as India accelerates its growth engines, and develops its infrastructure, there should be clarity and certainty in approval processes and liability on persons for breaching such approvals. As the Supreme Court indicated in the aforesaid judgement that complainants and law enforcement officers must make specific averments against individual directors to fasten any sort of liability on them. Any uncertainty with respect to regulatory actions will result in more harm than benefits in attracting long term institutional capital for timely completion of such projects!

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause. 

[1] Sunil Bharti Mittal v. Central Bureau of Investigation AIR 2015 SC 923