In the last post we discussed that lifting of corporate veil would not affect criminal liability of a director for offences committed by the company itself. This post summarizes the judgement of Supreme Court in Sunil Bharti v. CBI.
I. Facts, Charges and Journey to Supreme Court:
In the 2G Spectrum scam, CBI named four persons as accused in the charge-sheet viz. Mr. Shyamal Ghosh and three companies (Bharti Cellualar Ltd., Hutchison Max Telecom (P) Ltd. and Sterling Cellular Ltd.). The Trial Court Judge[1] found that there is enough incriminating material to proceed against them on the charges made under Section 120B IPC r/w Sections 13(2) and 13(1)(d) of Prevention of Corruption Act, 1988.
At the same time, the Trial Court Judge found that Mr. Sunil Bharti (Chairman-cum-managing Director of Bharti Cellualar Ltd.), Mr. Asim Ghosh (Managing Director of Hutchison Max Telecom (P) Ltd.) and Mr. Ravi Ruia (Director in Sterling Cellular Ltd.) are “alter ego”[2] [see footnote for definition of "alter ego"] of their respective companies. According to the Trial Court Judge, the acts of the accused companies could be attributed and imputed on their respective “alter ego”.
On this premise, the Trial Court Judge felt that there was enough material on record to proceed against these three persons as well. Accordingly, apart from the four accused named in charge-sheet, these three persons were also put at trial and were proceeded against offences under Section 120B of IPC, and under Sections 13(2) and 13(1)(d) of Prevention of Corruption Act, 1988.
Two of the above two directors appealed in the Supreme Court against the order of Trial Court Judge implicating them as accused.
II. Issue: Whether in the instant case the Director can be held liable for the offence committed by the company itself.
III. Ratio:
A. Company liable for acts of alter ego
While discussing the liability of company for acts of its alter ego, Supreme Court heavily relied on Iridium Motorola case. It discussed that as per Iridium Motorola case a company can be held liable for offences involving mens rea as necessary ingredient. And, to know the mental state of the company, the mental state of the person in control of affairs is attributed on the company.
Then, the Apex Court distinguished the present case from the Iridium Motorola case. Present case relates to criminal liability of alter ego for offences committed by the company whereas Iridium relates to criminal liability of company for acts of alter ego. Thus, present case is exactly reverse scenario of Iridium Motorola. Then, Supreme Court discussed this reverse situation.
B. Alter ego liable for acts of the company
As per Supreme Court, an “alter ego” can be made held liable for the acts of the company only in two situations:
1. When there is a categorical provision in the statute making such a person vicariously liable,[3]or
2. When there is enough material to attribute the alleged acts of criminality to the said person.
Then Supreme Court determined whether any of these two situations is applicable in the instant case. The Court firstly discussed the second situation and held that second situation is completely inapplicable as the Trial Court Judge did not proceed against the directors on the basis of incriminating material. Rather, the judge proceeded on the basis of principle of “alter ego”. Further, Supreme Court ruled that even if he proceeded on the basis of incriminating material, his order does not state valid reasons for proceeding against the directors.
With this, the Supreme Court moved to the applicability of first situation in the instant case. With respect to first situation, it must be noted that the directors were charged under Section 12B IPC and Sections 13(2) and 13(1)(d) of Prevention of Corruption Act, 1988 for the offences committed by their respective companies. There is no provision in IPC and PC Act which states that whenever a company is proceeded against offences under PC Act its person in charge would also be proceeded. On this premise, the first situation is also inapplicable.
For these reasons, the charges against Appellant-Directors were ordered to be dropped and order of Trial Court Judge was dismissed accordingly.
[1] In 2G Spectrum, case, a Special Court was established to conduct trial. Throughout the judgement in Sunil Bharti case, the judge conducting trial was called Special Judge.
[2] “Alter ego” of a company is a person who controls the affairs of the company and represents its directing mind and will.
[3] Examples of such categorical provision: Section 141 of Negotiable instruments Act which stipulates that when a person which is a company commits an offence, then certain categories of persons in charge as well as the company would be deemed to be liable for the offences under Section 138. Section 32 of Industrial Disputes Act.
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