The Supremes’ On Director’s Liability & Corporate Criminality

The Supreme Court recently, in Shiv Kumar Jatia v. State of NCT of Delhi  [1] addressed the question of whether a managing director of a company could be held liable for a crime purely on account of him being an executive director.

Shiv Kumar Jatia v. State of NCT of Delhi
Brief facts
A guest’s fall from the terrace of the Hyatt Regency hotel, and consequent finger-pointing towards the management and hotel staff that appropriate safety measures were not made for ensuring the utilisation of the terrace as a smoking zone – found Mr. Shiv Jatia, the managing director of M/s AsianHotels (North) Limited (the “Company”), which runs the Hotel Hyatt Regency, Delhi being dragged to court for “alleged” negligence. These allegations of negligence of the hotel management led to the initiation of criminal action against the managing director, and other management and staff of the Hyatt Regency hotel, under Sections 336 [2] and 338 [3] of the Indian Penal Code, 1860 (“IPC”) read with Section 32 [4] of the IPC.

Mr. Shiv Jatia was sought to be made liable as he was the only non-independent and executive director of the Company. His presence at all the board meetings of the Company as the chairperson and as the leading decision-maker led to the imputation of responsibility for all the omissions and commissions of the Company’s officials.

Apart from Mr. Shiv Jatia, the (a) lodging license holder; (b) general manager; (c) director of security; (d) front office manager; (e) assistant manager, food and beverages; and (f) the food and beverages trainee; were also named in the charge sheet.

The Delhi High Court’s refusal to quash the proceedings led to the managing director’s appeal to the Supreme Court.

The argument put forth by the managing director’s legal counsel

The managing director argued that the ingredients necessary to attract penalty under Sections 336 and 338 of the IPC were absent and thus he ought not to be prosecuted against. Under Section 336 of the IPC, an act must be done rashly and negligently leading to human life or personal safety being endangered, and under Section 338 of the IPC, the additional ingredient of grievous hurt must be alleged and proven. Merely holding the position of the managing director, and a complete absence of specific allegations of negligence with criminal intent clearly did not warrant prosecution.

What did the Supremes say?
The Supreme Court duly noted that on the date on which the incident took place, the managing director was not present in the country and the license of the hotel was not taken in the name of the managing director. Thus, the Supreme Court pointed out that the rationale behind naming Mr. Shiv Jatia in the charge sheet seems to be purely due to Mr. Shiv Jatia being the only non-independent and executive director of the Company, who chairs the meetings and signs off on various decisions made by the Company. The Court held that this does not bear any direct linkage with the allegation of negligence and criminal intent.

The Supreme Court relied on the decision in Sunil Bharti Mittal v. the Central Bureau of Investigation [5], and stated that an individual, being a director, managing director or chairman of a company, can be made an accused only:

a) If there is sufficient material to prove his active role coupled with criminal intent; and
b) the criminal intent must have a direct nexus with the accused.

The Supreme Court also placed reliance on Maksud Saiyed v. State of Gujarat and Others [6], where it was observed that the IPC did not contain any provision for attaching vicarious liability on the part of the managing director or the directors of a company when the accused was a company.

The counsel for the respondents placed reliance on Sushil Ansal v. State through the Central Bureau of Investigation [7], where the directors were held liable as there was a direct nexus between the acts and omissions of the directors and the death of the victims. The Supreme Court did not apply the ratio of Sushil Ansal v. State through the Central Bureau of Investigation [8], as Shiv Kumar Jatia v. State of NCT of Delhi was premised on different facts and circumstances (enumerated above).

Thus, while setting aside the order passed by the Delhi High Court in relation to the criminal liability of the managing director, the Supreme Court stated that the allegations made against the managing the director is vague in nature and this constitutes a ground for quashing the proceeding under Section 482 of the Criminal Procedure Code, 1973, as was held in Sharad Kumar Sanghi v. Sangita Rane [9].

Conclusion
The decision of the Supreme Court in Shiv Kumar Jatia v. State of NCT of Delhi recognises that criminal liability requires consideration of ‘mens rea’. By necessitating a determination of actual negligence on the part of the managing director as one of the pre-conditions for liability, the Supreme Court has attempted to afford protection to executive directors.

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Footnotes:

[1] Criminal Appeal No. 1264 of 2019 (Arising out of S.L.P. Crl. No. 8008 of 2018), August 23, 2019.

[2] Section 336 of the IPC: Act endangering life or personal safety of others —Whoever does any act so rashly or negligently as to endanger human life or the personal safety of others, shall be punished with imprisonment of either description for a term which may extend to three months, or with fine which may extend to two hundred and fifty rupees, or with both.

[3] Section 338 of the IPC: Causing grievous hurt by act endangering life or personal safety of others —Whoever causes grievous hurt to any person by doing any act so rashly or negligently as to endanger human life, or the personal safety of others, shall be punished with imprisonment of either description for a term which may extend to two years, or with fine which may extend to one thousand rupees, or with both.

[4] Section 32 of the IPC: Words referring to acts include illegal omission —In every part of this Code, except where a contrary intention appears from the context, words which refer to acts done extend also to illegal omissions.

[5] Criminal Appeal No. 34 of 2015 (arising out of Special Leave Petition (Crl.) No. 2961 of 2013).

[6] Criminal Appeal No. 1248 of 2007 (Arising out of SLP (Crl.) No. 923 of 2006).

[7] Criminal Appeal No. 597 Of 2010.

[8] Ibid.

[9] Criminal Appeal no. 1584 of 2007.

 

 

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