INTRODUCTION

Directors of a company can incur criminal liability
other than the civil liability under the Companies Act or Common law. A Director
may be held criminally liable for any act committed by company where he has
aided, abetted or procured the commission of such act. Investigations may also
be done and Directors may be prosecuted or fined by criminal or regulatory
authorities for such acts or omission to do an act.

A liability of a Director arises due to the fiduciary
position he holds with the company and its shareholders. Only a Director who
was in charge of and responsible for conduct of the business of the company at
the time of commission of an offence can be held criminally liable.

ANALYSIS

MIS-STATEMENTS IN A PROSPECTUS

The Companies Act contains various provisions for
prosecution of Directors. If a prospectus contains an untrue or misleading
statement based on which a person has subscribed to the shares of a company,
the Directors are liable to compensate such persons.1 Further,
a Director can also be held criminally liable and punishable with imprisonment
for a term which shall not be less than six months but which may extend to ten
years and shall also be liable to a fine which shall

As per Section 34(1) of the Companies Act, 2013, a
statement included in a prospectus shall be deemed to be untrue if the
statement is misleading in the form or context in which it is included or where
any inclusion or omission from a prospectus of any matter is likely to mislead.

Thus, in regard to considering a prospectus as fraudulent,
it is not necessary that there should be a false representation in it, even if
every word included in the prospectus is true, the suppression of material
facts may render it fraudulent.2 To
judge its effect, it should be read as a whole. It is not necessarily enough if
the prospectus refers to the contracts and pus the intending shareholder upon
enquiry as to their contents. Sometimes half a truth is no better than a
downright falsehood.3
The withholding of facts should be such that if not stated it makes that which
is stated absolutely false.4

FRAUDULENTLY INDUCING PERSONS TO INVEST MONEY

Section 36 of the Companies Act, 2013 provides that
any person who either knowingly or recklessly makes any statement, promise or
forecast which is false, deceptive or misleading or deliberately conceals any
material facts to include another person to enter into, or to offer to enter
into specified agreements. A person doing such an act shall be punishable with
imprisonment for w term which shall not be less than six months but which may
extend to ten years and shall also be liable to fine which shall not be less
than the amount involved in the fraud.

Agreements covered under this section:

(a)    Any
agreement for, or with a view to acquiring, disposing of, subscribing for, or
underwriting securities.

(b)   Any
agreement, the purpose or the pretended purpose of which is to secure a profit
to any of the parties from the yield of securities or by reference to
fluctuations in the value of securities.

(c)    Any
agreement for, or with a view to obtaining credit facilities from any bank or
financial institution.

 

 

 

 

 

 

 

 

 

a corporation can be
convicted of offences involving mens rea by applying the
doctrine of attribution1. Thus, the corporation can be held responsible for
offences committed in relation to the business of the corporation by the
persons in control of its affairs. 

VICARIOUS LIABILITY

An employer is liable for the torts committed by his
employee within the course of his employment. Likewise, a principal is liable
for the torts committed by his agent within the scope of the agency.

In Sunil Bharti
Mittal v. Central
Bureau of Investigation,5 the  Court in no uncertain terms held that an
individual who has perpetrated the commission of an offence on behalf of a
company can be made accused, along with the company. However, to make an
individual liable, there must be sufficient evidence of his active role coupled
with criminal intent and/or a provision must be specifically incorporated into
the statutory regime that attracts the doctrine of vicarious liability. Further,
when the company is the offender, vicarious liability of the directors cannot
be imputed automatically, in the absence of any statutory provision to this
effect.

Certain legislations
have a provision titled as ‘Offences by Companies’, which makes the person in
charge of and responsible at the time of commission of the offence liable for
that offence along with the company unless the person proves that the offence
was committed without his knowledge or that he exercised all due diligence to
prevent the commissioning of such offence. Under the said provision, the
director, manager, secretary or any other official of the company may also be
held liable if it is shown that the offence was committed with his consent or
connivance.

 

 

1
Section 62, Companies Act, 1956.

2
Rex v. Kylsant 1932 1 K.B. 422

3 M.K.
Sreenivasan, In re 1994 14 Comp. Cas. 193 (Mad), Gluckstein v. Barnes 1900
AC 240 (HL)

4
Peek v. Gurney 1873 LR 6 (HL) 377

5 Sunil Bharti Mittal v. Central
Bureau of Investigation, (2015)
4 SCC 609)