Employee not liable for recovery of defaulted amount: High Court

In a significant ruling on the accountability of company officials for criminal offenses, the Punjab and Haryana High Court has ruled that an employee cannot be held liable for the recovery of defaulted amount even if he is working as a company’s director.

The Bench held that any individual in charge of, and responsible for, the conduct of business at the time of an offense will be deemed guilty and subject to legal action. Criminal liability would extend to anyone responsible for the company's operations, including directors and other key officials, if the offense was committed due to their consent, involvement, or negligence.

“If it is proven that offence has been committed with the consent or connivance, or is attributable to neglect on the part of any director or manager, secretary or other officer of the company, such individual shall be guilty of the offence. It means for criminal liability, every person who is either in charge of and responsible for the conduct of business of the company or any director, manager, secretary or other officer with whose connivance, consent or negligence offence has been committed shall be guilty and proceeded against,” Justice Jagmohan Bansal asserted.

The court, at the same time, ruled that the standards for criminal and civil liabilities would differ as the parameters were different. “A person who is a director, but does not fall within the definition of ‘employer’ cannot be held responsible for recovery of defaulted amount,” Justice Bansal added.

The ruling came on a petition filed against the Regional Provident Fund Commissioner and another respondent. Appearing before Justice Bansal’s Bench, advocates R S Bajaj, Sidakit Singh Bajaj and Sachin Kalia said one of the petitioners was “factually an employee” of a company, but made director after three out of the five directors retired.

The Bench was told that the respondent initiated recovery proceedings against the company and all the assets were attached. The respondent also initiated recovery proceedings against all the directors including petitioner. 

“The petitioner was never holding position of ‘employer’. He was not in charge of affairs of the company. He was de facto employee of the company which is evident from the fact that he was contributing to provident fund as well as ESI. He was regularly getting salary and working like other employees,” Bajaj argued.

Justice Bansal asserted the defaulter organization, engaged in the manufacturing of shoes, was a private limited company. The shareholders were its ‘owner’. The directors could not be called an ‘owner’ of the company. “Company is owned by its shareholders who carry limited liability,” the Bench observed.