Author: Anish Tandi
College: Centurion University, Bhubaneswar
LinkedIn Profile Link: www.linkedin.com/in/anish-tandi-668a7b2a1
ABSTRACT
The Companies Ac, 2013 heralded a new beginning in the corporate governance paradigm of the country with an unprecedented expansion of scope of director liability for corporate fraud and misconduct. By insertion of the provisions like section 447 (fraud), 166 (duty of directors), definition of officer in default under section 2(60) in the statute, the law makers aimed to hold aimed to hold even the senior most personnel in the corporate hierarchy, accountable to the highest extreme. However, recent trends in judicial pronouncements have established that courts have consistently refused to rope-in director liability as an inflexible absolute unless true allegations of active participation and knowledge or consent are not established. This writer explores the tests laid down by courts for establishing director liability by analyzing the landmark judicial pronouncements viz. Sunil Bharti Mittal v. CBI, Chintalapati Srinivasa Raju v. SEBI and Susela Padmavathy Amma v. Bharti Airtel Ltd. The writer concludes that the legislature intends to keep a check on the potential abuse of prosecution and the courts intends to prevent directors from litigating under the pretext of holding them accountable.
TO THE POINT
The Companies Act, 2013, now stands as a modern legislative framework which has replaced the Companies Act, 1956, which was about 60 years old. The act has experimented with more contemporary language of corporate governance to improve upon the system. An important feature of the Act is the increased focus on the responsibility of directors for their acts/omissions. Section 447 defines ‘fraud’ as any act whether of commission or omission with intent to deceive, concealment or abuse of position etc punishable by a fine or imprisonment of between 6 months to 10 years or both.
Section 2(60) broaden the scope of “officer who is in a default” to managing director, whole-time director, keymanagerial personnel, director who consent to, connive in or negligently allow the contravention, in certain cases. The director’s fiduciary duties are laid down in section 166 and requires the directors to act honestly, exercising his powers with due care and diligence and in the best interests of the company.
It is true that the statutory scheme is very comprehensive, but since the interpretation of the court, has added certain elaborations. The court has stressed again and again that a person cannot be held liable under this act just by virtue of his being a director. The allegations against him should reveal that he was one actively involved knowing or consenting. This conclusion reveals the constitutional importance of personal liberty, under Article 21 of the Constitution.
USE OF LEGAL JARGON
The statutory liability framework for directors under the Companies Act, 2013, is based on several legal principles for instance, the doctrine of vicarious liability, where one person can be liable for the acts of another, will only apply where the legislation specifically states so. Section 447 states that ‘fraud’ means any act, omission or concealment of any fact which is material to the case. It gives rise to civil and criminal liability, with maximum imprisonment of 2 years and fine proportionate to the amount involved.
Section 2(60) describes a wide range of persons who are in default of an officer-in default, encompassing all those who agree to, connive in or negligently permit a contravention. The provision therefor embodies the doctrine of constructive knowledge, an area of liability that can extend to new directors who “should have known” the irregularity. Section 166 enforces the fiduciary duty of directors to exercise “reasonable care, skill, and diligence”. It is a crucial provision for non-executive directors without executive functions.
Sections 149(12) seems to be a new and key sword in the safeguards placed upon a director. It states that the non-executive and independent directors shall not be held liable unless the acts are performed to the knowledge of such director and can be imputed to the directors by or through their board, or such acts are performed with the consent or connivance of such director or such directors had failed to exercise due diligence. In this, we see is one element of the safe harbour.
Piercing the corporate veil allows the court to reach beyond the company to impose liability on individuals where the company’s corporation is a front for fraud. However, the Supreme Court in the case of Sunil Bharti Mittal v. CBIconfirmed that reverse attribution by holding directors personally liable where the company is liable was not allowed unless there were particular allegations of participation.
This judicial emphasis on particulars is, in turn, also an application of the constitutional mandate of due process under article 21 and the requirement that assumption of penal sanction must await proof of criminal intention. The liability must be proportionate to the extent of culpability.
THE PROOF
Data and courts records are revealing about the yawning gulf between statutory intent and enforcement practice. The 2021-22 report by the Serious Fraud Investigation Office (SFIO) speaks of conviction rates sub-10% in serious frauds. The demonetization scam (5000 crore loss to bills) was delayed in its trail. The financial irregularities at Satyam (2009: 7000 crore inflated assets and provision for fictitious liabilities) took time to be brought to book and the independent directors as well as the statutory auditors faced non-intensive consequences. The IL&FS collapse (2018) brough to fore the web of multi-party transactions and circulation of fictitious drafts across global institutions in efficient networks. Enforcement agencies remain hog-tied in building up the prerequisite personal liability given layered corporatised structures. These are primarily not anomalies but indicators of regulatory complacency as well as enforcement inertia.
The recent decision of the Delhi High Court in Nita Puri v. Union of India (2025) demonstrates how the judiciary monitors the use of investigatory authority. It held that the SFIO investigation order under Section 212(1)(c) was made on non-existent circumstances, and did not fulfil the criteria specified in statute. The court noted an order for investigation to be made by SFIO is not a routine administrative action which can be taken as an administrative action with the swipe of an administrative pen. It has to be issued only after due application of mind, after examining all relevant circumstances.
CASE LAWS
1. Sunil Bharti Mittal v. Central Bureau of Investigation(2015) 4 SCC 609
The Supreme Court stated that it is permissible to attribute the guilty mind of the individuals controlling a company to the corporate body under the ‘alter ego’ doctrine. However, the lateral step, imputing the liability of the corporation to the ’directors’ of the corporation, was not permissible. Such attribution to directors will only be conceded if (a) the accused persons are specifically proved to have played the exclusive role with criminal intent, or (b) the law specifically authorises such involvement.
2. Chintalapati Srinivasa Raju v. Securities and Exchange Board of India (2018) 10 SCC 730
The Criminal mind of executives can also be imputed to a body corporate, in relation to allegations founded on later ego, the court held only that the directors of this criminal mind cannot go from the body corporate to the executives. Directors can be held liable only where (a) the Director’s illicit mind is established by compelling proof or (b) where the statute creates a relationship of vicarious liability.
3. Susela Padmavathy Amma v. Bharti Airtel Ltd. (2024 INSC 206)
The Supreme Court reaffirmed that a director cannot be vicariously liable for an act committed under Section 141 of the Negotiable Instruments Act unless there are particulars averred showing that the Director was in charge of and responsible for the day to day affirms of the Company and the director who was neither a signatory nor concerned with the day-to-day management of a company cannot be prosecuted.
4. Shiv Kumar Jatia v. State of NCT of Delhi (2019) 16 SCC 716
The Court decided that a person cannot be settled for simply being the officered as having (in this case “managing director”). The prosecution structure the active role that and the criminal intention and puts the criminal intent to the accused with the direct connection.
5. Nita Puri v. Union of India (2025 SCC Online Del 5941)
The Delhi High Court invalidated an SFIO investigation order under section 212(1)c of the Companies Act, 1994, stating that the centre is required to established there are “demonstrable circumstances” justifying investigation proceedings. It concluded that the challenged order was based on reports that were discredited in earlier proceedings, and was therefore invalid.
6. Ketan Parekh Scam (1998-2001)
Precedes Companies Act, 2023, this decision laid the groundwork for the principles of market manipulation and director’s liability embodied under the 2013 Act, though the order related to the manipulation of K-10 stocks through bank loans and circular trading.
CONCLUSION
The Companies Act, 2023 is a historic legislative step towards curbing corporate fraud and holding directors accountable. Yet recent judicial trends illustrate that courts will not allow the statute to be used as a ploy of extrajudicial excess. Unabated judicial insistence of particular charges, hands-on involvement, and ascertainable awareness encapsulate the constitutional right to personal liberty and due process.
Two broad principles arise from the jurisprudence, firstly, liability will follow on function as the exposures of each director will depend on his actual role and involvement and not merely his title, second, prosecutorial discretion has to be exercised with restraint one cannot launch into an investigation on a haphazard basis or for non-existent circumstances.
The removal of the state harbour for non-executive directors through the enactment of section 447, the codification of directors duties through the contents of section 166, and the extension of the meaning of officer in default by section 2(60) provides regulators with scope to prosecute reprehensible corporate defaulters. On the other hand, the safe harbour within section 149 (12) acknowledges the unique position of non-executive directors. It is this legislation that demonstrates wisdom on the part of parliament accountability must be ‘hard’ but fair.
The court function, in the end, is merely to prevent the quest for corporate accountability from turning into the persecution of persons who have done nothing wrong. The court has also noted, liability flows from the role one plays in the affairs of a company and not on designation or status, and this will be the rule followed by the courts when interpreting director liability under the Companies Act, 2013.
FAQs
Q1. Can a director be held automatically liable for fraud committed by the company?
No, directors will not be liable simply by dint of serving as directors. The prosecution will have to prove some fact by clear and cogent evidence that they had involvement, knowledge or consent.
Q2. What is the “safe harbour” protection for non-executive directors?
Section 149(12) states that non-executive and independent directors are liable where the contravention occurred with their knowledge and they have connived as it, or it is attributable through board processes to them, or it occurred with their consent or connivance, or they have failed to act diligently.
Q3. What constitutes “fraud” under the Companies Act, 2013?
Section 447 of the Companies Act, 2006 defines fraud as any of commission or omission, where this involves deception, concealment or abuse of position, where in doing so, the intention is to induce the delivery of property, to make a gain for any other person or to cause loss to the company. Fraud in a computer instance carries up to ten years imprisonment and a fine of three times the value of the property concerned.
Q4. Can a director be prosecuted for offences committed under the Companies Act, 1956, after the enactment of the 2013 Act?
In this case, the Karnataka High Court in Srividya C.G. v. SFIO (2024) asked to decide whether the offences under the 1956 Act could be prosecuted under the special court jurisdiction under the 2013 Act. The Court took the opinion that, the jurisdiction of the special courts cannot be extended in a retrospective manner when the legislature intentionally left out any article for the prosecution of offences under the former company law.
Q5. What must a complaint contain to make a director liable?
The complaint must contain specific averments showing how and in what manner the director was responsible for the conduct of the company’s business. Merely reproducing statutory language without supporting facts is insufficient to establish liability.
REFERENCES
• Companies Act, 2013 (India), Section 2(60), 149(12), 166, 212, 447.
• Supreme Court of India. (2015). Sunil Bharti Mittal v. Central Bureau of Investigation, (2015) 4 SCC 609.
• Supreme Court of India. (2018). Chintalapati Srinivasa Raju v. Securities and Exchange Board of India, (2018) 10 SCC 730.
• Supreme Court of India. (2024). Susela Padmavathy Amma v. Bharti Airtel Ltd, Neutral Citation: 2024 INSC 206.
• Delhi High Court. (2025). Nita Puri v. Union of India, 2025 SCC Online Del 5941.
• Supreme Court of India. (2019). Shiv Kumar Jatia v. State of NCT of Delhi, (2019) 16 SCC 716.
• Karnataka High Court. (2024). Srividya C.G v. Serious Fraud Investigation Office, WP No. 4381/2018.
• SFIO Annual Report 2021-22, Ministry of Corporate Affairs, Government of India.
