Chandigarh: In a significant decision, the Punjab and Haryana High Court ruled that company directors, who are also employees, cannot be held liable for the recovery of defaulted payments unless they were directly involved in the company’s management at the time of the offense.
Criminal Liability for Offenses Clarified
Justice Jagmohan Bansal, delivering the verdict, emphasized that criminal liability extends only to individuals responsible for the company’s operations when the offense occurred. The court ruled that liability applies if an offense was committed due to the person’s consent, negligence, or active involvement in the company’s actions.
“If it is proven that the offense occurred with the consent or negligence of any director, manager, or officer, they will be deemed guilty of the offense,” Justice Bansal stated.
Directors Not Automatically Liable for Financial Defaults
The court made an important distinction between civil and criminal liability. Justice Bansal clarified that directors who do not meet the definition of an ‘employer’ cannot be held responsible for the recovery of defaulted amounts. This was a crucial point in the ruling, as it protected individuals who were directors in name but not in charge of the company’s day-to-day operations.
Case Details: Petitioner Argued They Were an Employee
The case arose when the petitioner, represented by advocates R.S. Bajaj, Sidakit Singh Bajaj, and Sachin Kalia, challenged recovery proceedings initiated by the Regional Provident Fund Commissioner. The petitioner argued that they were only an employee of the company, made a director after three of the five company directors retired. Despite being listed as a director, they had no control over company operations and contributed to provident fund and ESI like other employees.
Recovery Proceedings Initiated Despite Employee Status
The respondent had initiated recovery proceedings against the company, which included attaching its assets and pursuing recovery from all the directors, including the petitioner. However, the petitioner’s defense pointed out that they were never in charge of the company’s affairs, as they were only an employee receiving a regular salary.
Company Ownership Clarified: Shareholders Hold Limited Liability
Justice Bansal further clarified that the shoe manufacturing company was a private limited entity owned by its shareholders. He emphasized that the company’s shareholders, not its directors, were its actual owners, carrying limited liability for the company’s financial obligations.
“The company is owned by its shareholders, who carry limited liability,” Justice Bansal stated in his judgment.
Implications of the Judgment
This ruling sets an important precedent, protecting employees who are named as directors but have no real involvement in managing the company. The court highlighted the need to differentiate between those truly responsible for a company’s operations and those who hold director titles without decision-making authority. Click here to read more court cases.
