As a company is considered an Artificial Entity, it must be managed by
capable professionals. The term for this group of competent individuals is
Directors. A Director's role is to oversee the entire company's business, and as
such, they indirectly influence the company's aspects. With great authority
comes enormous duty. The authority placed on the Director to manage a firm
creates the way for fraud and improper gain. Hence, the investors become
After the LPG reforms, India's business structure transformed considerably. Due
to the inadequacy of the legislation to accommodate the transformation, many
directors and promoters were able to conduct fraud. This imposed strict
obligations through several Companies Act modifications and Appellate Court
rulings. The Indian Companies Act 2013 also enlarged the scope of the term officers in default. This paper examines the criminal liabilities of Directors
under the 2013 Companies Act and the extent of officers in default via the
prism of Judicial Proclamations.
The term 'company' is a broad term in itself. According to section 2(20) of the
Indian Companies Act 2013, 'a company means any company incorporated under the
Companies Act 2013 or any earlier companies act.' 1 This definition gives the
term 'company' a broad meaning, as a result of which numerous judicial
pronouncements have offered characteristics of a company.
Salomon v. A Salomon & Co. Ltd.2 was one such decision; it recognized that the
firm is a separate legal entity. Even if the firm is considered a distinct legal
entity, it is nonetheless an artificial entity. As a company is an artificial
entity that cannot function independently, it needs management and employees to
act as agents and operate on its behalf. This brings into the picture the
concept of Directors.
In accordance with section 2(34) of the 2013 Companies Act, a director is
defined as 'a director appointed to the Board of Directors of a Company.'
A director serves as the leader of a corporation and makes all significant
decisions on its behalf. In the case of Bath v. Standard Land Company Limited3,
it was determined that 'the board of directors is the firm's brain and that the
corporation operates exclusively in accordance with their instructions. While
the director is a prominent position, it comes with various rights to manage the
As directors are endowed with various powers, they can abuse different things.
Thus, the new Companies Act of 2013 establishes multiple responsibilities and
liabilities for directors. Compared to the former Companies Act of 1956, the
consequences for violating these obligations and responsibilities are more
severe under the new law. The Companies Act has several clauses that impose
duties on directors, such as the responsibility to disclose honest and accurate
statements in the prospectus, the obligation to file annual returns of the
business, and the duty to maintain the financial books in the prescribed format,
Directors are appointed by the shareholders and owe them a fiduciary duty. This
exposes the directors to civil and criminal culpability, which can result in
penalties and imprisonment. India, like other nations, is accustomed to
corporate fraud and cons. Several frauds perpetrated by management or promoters
have been uncovered in India, including the Satyam, NSEL, and Lilliput cases.
The paper aims to analyze the criminal liabilities of directors and the scope of
the term 'Officers in Default' in light of recent case laws. The author will
rely upon secondary sources to draw conclusions and comparisons for the said
The author aims to comprehend directors' criminal liability in corporate fraud
cases. In addition, the author seeks to trace the scope of the term 'officers in
The director's position in a corporation is crucial. He ensures the firm's
smooth operation and oversees the organization's normal tasks. Directors are
appointed by the shareholders and owe them a fiduciary duty.
This exposes the directors to civil and criminal culpability, which can result
in penalties and imprisonment.
The existing legal system imposes numerous responsibilities and liabilities on
directors. Increased penalties under the new Companies Act demonstrate the
significance of regulating a director's duties. The legal foundation has been
rectified, and it is now the court's responsibility to oversee that these rules
are used in such a way as to minimize and eventually end the directors'
In applying general ideas of equity to business directors, four distinct
regulations have evolved. They are:
- directors must act in good faith and do what they believe is in the best
interest of the company,
- they should not use the powers conferred on them for any purpose other
than that for which they were granted, and
- They should not place themselves in a position where there is a
possibility of a conflict between their interests and their duties to the
company without the company's express consent. 4
Fraud cases can have three sorts of culpability: contractual, tortious, and
criminal. Criminal Responsibility is an unlawful act of omission or commission,
punishable by criminal consequence, undertaken by an individual or group of
individuals during their employment.5
Directors are accountable for violations of the provisions of the Companies Act
and other statutes, which can result in a fine, imprisonment, or both. In the
case of Maksud Saiyed v. State of Gujarat and Others6 , the Supreme Court of
India ruled that if the law provides for vicarious responsibility, the Managing
Director and Director would be liable. If directors are found to be negligent or
have abused their position, they will be subject to civil and criminal
Criminal liability may ensue, for instance, if directors make false statements
in the prospectus, fail to maintain books of account as required by Section 209,
or fabricate reports. A director may be acquitted if he can demonstrate that he
was not in command or control of the company's day-to-day activities or that the
act was committed without his approval, knowledge, or connivance, and he was not
negligent in ensuring compliance with the law.7
Liability of Directors
As per the Companies Act 2013, a director has various liabilities.
These liabilities can be divided into the following heads:
- Liability to the Company
- Liability to Third Party
- Liabilities for breach of statutory duties.
- Liability for the acts of Co-directors
- Criminal Liability
However, in this article, the author will explore the scope of the Criminal
Liabilities of Directors.
Criminal Liability of Directors
As stated above, a fiduciary relationship exists between a director and a
company, i.e., the directors have to act in the company's best interest.
However, if they fail to do so, liability is imposed. Liability can be civil or
criminal. This paper talks about the criminal liability of the directors.
Historically, corporate criminal liability was not identified because it was a
common notion that commissioning crime requires mens rea. Since a company does
not have a mind of its own, there cannot be mens rea, due to which the concept
of corporate criminal liability was not recognized. However, with time judiciary
started realizing the idea of corporate criminal liability. In Iridium India
Telecom Limited v. Motorola Incorporated & Ors.,8 the Supreme Court, for the
first time, said that a company could be a part of a criminal conspiracy and can
be held criminally liable.
After the Iridium case, Indian Companies Act 1956 was replaced by Indian
Companies Act 2013. Under the new act, there were increased monetary penalties
and imprisonment for criminal acts of the company. The new act recognized the
corporate criminal liability of the companies. Furthermore, Section 2(60) of the
Indian Companies Act 2013 defined 'Officers in default'. 'Officers in Default'
include key managerial personnel, whole-time directors, directors etc. Supreme
court, in the case of K.K. Ahuja v. V.K. Vora9, held that only those persons who
fall under the scope of officers in default will be held criminally liable.
In another case of Pritha Bag v. SEBI10, the difference between an
officer in default and other directors was established by the Securities
In the case of Pooja Ravinder Devidasani v. State of Maharashtra11, the apex
court held that just holding the director position would not make a person
liable for the company's actions. Certain factors must be considered to make a
person liable for the company's activities. These factors are provided under
Section 149(12) of the Indian Companies Act 2013. It states that a director can
be made liable for the company's acts if they occurred with their knowledge,
consent or attributed through board processes.
In another case of SEBI v. Gaurav Varshney12, it was held that criminal
liability arises when the director of the company is in charge of the conduct of
In conclusion, there are many cases in which the judiciary has talked about the
criminal liability of the directors and has cleared the scope of the term Officers in default. The Indian Courts have expanded the scope of corporate
criminal liability and officers in default.
- Companies Act 2013, No. 18, Acts of Parliament, 2013 (India)
- Salomon v. A Salomon & Co. Ltd.  AC 22
- Bath v. Standard Land Company Limited, (1910) 2 Ch. D. 408
- Ananya Jain, Criminal Liability of Directors: An Important Facet for Developing India, 10 Supremo Amicus 13 (2019).
- K.S. WILLIAMS, TEXT BOOK ON CRIMINOLOGY 64 (2001)
- Maksud Saiyed v. State of Gujarat and Others (2008) 5 SCC 668
- Smita Satapathy, Corporate Fraud and Criminal Liability of Directors, 5 INT'l J.L. MGMT. & HUMAN. 1148 (2022).
- Iridium India Telecom Limited v. Motorola Incorporated & Ors (2011) 1 SCC 74
- K.K. Ahuja v. V.K. Vora, (2009) 10 SCC 48
- Pritha Bag v. SEBI, 2019 SCC OnLine SAT 110
- Pooja Ravinder Devidasani v. State of Maharashtra, (2015) 3 SCC (Civ) 384
- SEBI v. Gaurav Varshney, (2016) 14 SCC 430