Breach of Trust by a company - SC Ruling

Top honchos, including managing directors and directors, or any other employee cannot be held guilty for an offence of breach of trust attributed to a company, the Supreme court has ruled. Upholding an appeal led by the managing director of the popular biscuit manufacturer Britannia Industries, a bench of Justices S B Sinha and V S Sirpurkar said that they can be held vicariously responsible for the offence only if the statute provides for their liability. 

In other words even if a cheque or draft issued in favour of a company is allegedly misappropriated, the managing director or other employees cannot be held liable for the offence. S K Alagh, managing director of Britannia Industries had led the appeal challenging the rulings passed by a trial court that he was liable for prosecution over alleged misappropriation of a cheque worth Rs 1.68 lakh issued in favour of the company by a wholesale dealer. 

The wholesale dealer Akash Trader had led a case of criminal breach of trust against Alagh and other ofcial after the draft issued by him in the name of Britannia Industries was not returned to him in time even though its dealership was terminated by the company. 

According to the apex court, as the draft is drawn in favour of the company, the managing director/employee cannot be held for breach of trust stipulated under section 406 of IPC. 

As per section 406 IPC, a "person" commits criminal breach of trust, if he or she dishonestly misappropriates any property entrusted to him/her by another person. In this case the apex court pointed out that the draft was issued in favour of the company and not any individuals as such the managing director, general manager or other employees cannot be held responsible for alleged misappropriation. "If and when a statute contemplates creation of such a legal action, it provides specially therefor. In the absence of any provision laid down under the statute, a director of a company or an employee cannot be held to be vicariously liable for an offence committed by the company itself," the apex court observed. The bench explained that under certain special Act like Essential Commodities Act, Negotiable Instruments Act, Employees Provident Fund Act, provisions had been made for fixing vagarious liability on individuals and employers. 

For instance it pointed out that under section 14A of the Employees Provident Fund Act, the employer is held for vicarious responsibility and criminal breach of trust under section 406 in the event of the amount deducted from the employees is misappropriate. "But even in a case falling under section 406 of the Indian Penal Code vicarious liability has been to be not extendable to the directors or ofcers of the company," the apex court said while imposing a cost of Rs 1 lakh on Akash Traders for "harassing" the managing director.