Day-to-Day Affairs and Corporate Liability in Indian Company Law

Day-to-Day Affairs and Corporate Liability in Indian Company Law

Introduction

The phrase “in charge of, and responsible for, the conduct of the business of the company” permeates diverse Indian statutes—from the Companies Act, 2013 to sector-specific enactments such as the Negotiable Instruments Act, 1881 (s. 141), the Foreign Exchange Regulation Act, 1973 (s. 29), and the Securities and Exchange Board of India Act, 1992 (s. 24). Judicial construction of this expression determines when directors, key managerial personnel, or other officers may be subjected to civil or criminal liability for corporate misconduct. This article critically analyses the statutory matrix, the interpretative trajectory of Indian courts, and the consequent governance implications, with particular attention to the demarcation between overall policy supervision and day-to-day affairs of a company.

Statutory Framework

Under the Companies Act, 2013, the Board of Directors collectively wields all powers of management (s. 179), while individual directors are bound by fiduciary duties of care, skill and diligence (s. 166). Complementary liability provisions in special statutes, notably s. 141 of the Negotiable Instruments Act (“NI Act”) and s. 24(1) of the SEBI Act, fasten vicarious criminal responsibility on “every person who, at the time the offence was committed, was in charge of, and responsible to the company for the conduct of the business of the company.” These provisions evince a legislative policy that the functional, rather than merely positional, involvement of an officer in the day-to-day affairs triggers liability.

Judicial Construction of “In Charge of and Responsible for the Conduct of the Business”

A. Negotiable Instruments Act, 1881

The Supreme Court’s trilogy—S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla[1], National Small Industries Corporation v. Harmeet Singh Paintal[2], and Anita Malhotra v. AEPC[3]—has crystallised the pleading and evidentiary thresholds for arraigning directors under s. 138 read with s. 141 NI Act. Mere designation as a director is insufficient; the complaint must contain “specific averments” elucidating how the accused was in control of the company’s day-to-day affairs at the time of cheque issuance or dishonour. The Court underscored that non-executive or nominee directors, ordinarily detached from routine management, cannot be subjected to automatic criminal process.

High Court decisions have applied these principles with nuance. In J.N. Bhatia v. State[4], the Delhi High Court dismissed prosecutions against directors where the complaint lacked particulars beyond a bald assertion of responsibility. Conversely, in Sushila Devi v. SEBI[5] allegations that directors “were in charge and responsible for the day-to-day affairs” were held adequate at the summons stage because the complainant (a lay investor) could not reasonably be expected to possess granular knowledge of internal delegations.

B. Companies Act: Fiduciary Duties and Oppression

Although liability for day-to-day affairs generally arises in penal contexts, the concept informs civil remedies for oppression and mismanagement under ss. 241–242 of the Companies Act, 2013 (formerly ss. 397–398, 1956 Act). In Dale & Carrington Investments (P) Ltd. v. Prathapan[6] and Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.[7], the Supreme Court invalidated share allotments undertaken by managing directors who exercised their de facto control of routine operations for collateral purposes. The “proper-purpose” doctrine rests on the premise that directors entrusted with day-to-day affairs wield substantial practical power susceptible to abuse.

More recently, Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd.[8] reaffirmed that Articles of Association allocate operational authority and that appellate tribunals cannot override such contractual arrangements absent a statutory breach. The Court distinguished between strategic oversight by non-executive directors and executive control of everyday management when assessing allegations of oppression.

C. Regulatory Statutes

  • FERA, 1973. In LIC v. Escorts Ltd.[9] the Court read s. 29(1)(b) flexibly, allowing ex post facto permissions where the Reserve Bank evaluated whether the persons “in charge” of the company had complied with foreign-investment ceilings. Liability was not automatically imposed on the entire board but depended on the role of officers in the offending transaction.
  • SEBI Act, 1992. The Securities Appellate Tribunal has applied Chintalapati Srinivasa Raju v. SEBI[10] to hold that non-executive directors not involved in day-to-day matters are ordinarily outside s. 24 liability unless specific participation is shown (Sankalp Vincom Pvt. Ltd.[11]).
  • Stamp Duty Context. Although Hindustan Lever Ltd. v. State of Maharashtra[12] concerned fiscal competence, it illuminates the semantic breadth of “affairs” vis-à-vis “business.” The Court accepted that compliance actions (e.g., filing amalgamation schemes) fall within a company’s affairs even if unrelated to revenue-earning activities—mirroring the Kerala High Court’s exposition that statutory filings persist despite cessation of trading (Palghat Exports Pvt. Ltd.[13]).

Functional Tests Evolved by the Courts

1. Position-cum-Responsibility Test

The Supreme Court in S.M.S. Pharmaceuticals devised a twin test: (i) the accused must hold a position capable of controlling business, and (ii) there must be factual allegations demonstrating such control. Later cases clarified that allegations may be general at summons stage, but cannot be vague or evasive; they must indicate managerial involvement (e.g., signing authority, policy decisions, or attendance at key meetings).

2. Executive v. Non-Executive Dichotomy

In Chintalapati Srinivasa Raju the Court expressly held that non-executive directors are “not involved in the day-to-day affairs of the company and are not in charge of and not responsible for the conduct of the business.” This doctrinal marker now guides tribunals: liability presumptions attach primarily to managing directors, whole-time directors, CEOs, and officers to whom the board has explicitly delegated operational control (s. 2(60) & s. 203, Companies Act, 2013).

3. Delegation and Sub-Committees

Decisions such as J.N. Bhatia and Managing Director, Tops Security Ltd. v. State of H.P.[14] recognise that the board may create sub-committees or appoint departmental managers. When such delegation occurs, liability for statutory breaches attaches to the delegatees, not to directors of unrelated divisions. This functional attribution aligns with Lord Denning’s dictum that oppression remedies extend even where business has ceased, for the company’s “affairs” continue in residual statutory obligations[15].

4. Temporal Nexus

Liability hinges on the accused holding managerial charge at the time of the offence. Certified Form 32 filings accepted by registrars have been treated as conclusive evidence of resignation that severs liability (Dr. Sarla Kumar v. SREI IFL[16]). Conversely, delayed or fabricated Form 32 filings invite factual scrutiny at trial (Deepika Malhotra v. Kanti Lal Jain[17]).

Governance Implications

The jurisprudence encourages boards to articulate clear lines of operational authority and maintain documentary trails—board resolutions, delegation matrices, and internal controls—to mitigate unwarranted prosecutions. Simultaneously, the courts safeguard minority and stakeholder interests by preventing directors from disavowing responsibility through artifice (Bennet Coleman v. Union of India[18]). The equilibrium struck promotes accountable yet non-onerous corporate governance.

Conclusion

Indian courts have progressively infused the statutory expression “in charge of, and responsible for, the conduct of the business of the company” with pragmatic content. The enquiry is fact-centric: Who actually runs the show on a daily basis? Directors or officers who wield decision-making authority over routine commercial activities bear civil and criminal consequences for statutory contraventions; those affixed to ceremonial positions do not. This calibrated approach furthers two policy imperatives: (i) deterrence of managerial malfeasance, and (ii) insulation of passive directors whose expertise and independence enrich boards. Future legislative reforms—such as codifying safe-harbour disclosures for non-executive directors—should preserve this balance while enhancing clarity for corporate actors navigating India’s complex regulatory landscape.

Footnotes

  1. S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.
  2. National Small Industries Corporation Ltd. v. Harmeet Singh Paintal, (2010) 3 SCC 330.
  3. Anita Malhotra v. Apparel Export Promotion Council, (2012) 1 SCC 520.
  4. J.N. Bhatia & Ors. v. State, 2006 SCC OnLine Del 793.
  5. MOHD Iqbal v. SEBI, 2023 SCC OnLine Del 4070 (relying on Sushila Devi v. SEBI).
  6. Dale & Carrington Investments (P) Ltd. v. P.K. Prathapan, (2005) 1 SCC 212.
  7. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981) 3 SCC 333.
  8. Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd., 2021 SCC OnLine SC 272.
  9. Life Insurance Corporation of India v. Escorts Ltd., (1986) 1 SCC 264.
  10. Chintalapati Srinivasa Raju v. SEBI, (2018) 7 SCC 443.
  11. Sankalp Vincom Pvt. Ltd. v. SEBI, SAT Appeal No. … (2022).
  12. Hindustan Lever Ltd. v. State of Maharashtra, (2004) 9 SCC 438.
  13. Palghat Exports (P) Ltd. v. Ramkumar, 1993 SCC OnLine Ker …; Palghat Exports (P) Ltd. v. Chandran, 1993 SCC OnLine Ker …
  14. Managing Director, Tops Security Ltd. v. State of Himachal Pradesh, 2014 SCC OnLine HP …
  15. Lord Denning in Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1959] AC 324 (HL).
  16. Dr. (Mrs.) Sarla Kumar v. SREI International Finance Ltd., 2006 SCC OnLine Del 670.
  17. Deepika Malhotra v. Kanti Lal Jain, 2012 SCC OnLine Del …
  18. Bennet Coleman & Co. v. Union of India, 1973 SCC OnLine Bom 41.