Summary: This blog compares Section 223 of the Bharatiya Nagarik Suraksha Sanhita, 2023 (“BNSS”), with Section 200 of the erstwhile Criminal Procedure Code, 1973 (“CrPC”). The analysis highlights how the new provision introduces an additional safeguard against prosecution for non-executive directors.
Indian corporate law is premised on the principle that a company is a separate and artificial legal entity, which means that only the company is responsible for any legal consequences resulting from its actions. However, directors being the ‘natural persons’, controlling the day-to-day activities of the company, or the ‘mind’ of the company are often dragged into the process of prosecution for the company’s wrongdoing. In this blog, we compare the new Section 223 of the Bharatiya Nagarik Suraksha Sanhita, 2023 (“BNSS”), to Section 200 of the erstwhile Criminal Procedure Code, 1973 (“CrPC”), which provides an extra layer of protection to such directors from prosecution.
Practical challenges faced by non-executive directors
Section 200 of the CrPC stipulates that when a Magistrate takes cognizance of an offence based on a complaint, the Magistrate is required to examine the complainant and any witnesses under oath. The statements must be recorded in writing and signed by the complainant, the witnesses, and the Magistrate. Thereafter, if in the opinion of the Magistrate, there is sufficient ground for proceeding, he/ she may issue summons or a warrant, as the case may demand.
In India, it is an established legal position that directors cannot be vicariously liable for offences committed by the company unless specifically provided for by legislation. A common vicarious liability clause is found in most statutes, which deems every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, to be guilty of the offence or if it is proved that the offence was committed with the consent or connivance of, or was attributable to any negligence on the part of the director concerned.[1] Nonetheless, in practice, directors, especially non-executive directors, have been implicated in multiple prosecutions basis complaints of various regulatory authorities for mere technical violations by the company, such as those under the Shops and Establishments Act, Drugs and Cosmetics Act, Legal Metrology Act, etc., by law enforcement agencies and Judicial Magistrates.
Such summons are issued only because of the directorship held in that company, despite the Supreme Court of India (“SC”) holding that, “the liability arises from being in charge of and responsible for the conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company. … Liability depends on the role one plays in the affairs of a company and not on designation or status.”[2]
Judicial Magistrates continued to issue such summons without any application of mind, despite the SC explicitly clarifying in a catena of judgments, including Sunil Bharti Mittal v. Central Bureau of Investigation[3], that, “a wide discretion has been given as to grant or refusal of process and it must be judicially exercised. A person ought not to be dragged into court merely because a complaint has been filed.” It was further held that the words “sufficient ground for proceeding” in Section 204 of CrPC strongly suggests that the Magistrate shall form an opinion only after due application of mind and such opinion shall be recorded in writing in the order itself.
However, incessant issuance of summons to directors without any application of mind has not only led to serious reputational damage to directors but also the added inconvenience of protracted legal proceedings, especially when the SC in a case where after a long trial lasting over thirty years, reached an inevitable conclusion that the conviction of the appellant convict for the offence was not sustainable in law, has itself recognised “that the criminal justice system of ours can itself be a punishment.”[4]
Further, the non-executive director also has to move the High Court under Section 482 of CrPC for quashing of criminal proceedings. It must be noted that the High Court exercises such power sparingly in the ‘rarest of the rare’ cases and only at the discretion of the Judge hearing the matter. The SC, in State of Haryana v. Bhajan Lal[5], held that a first information report or complaint to the Magistrate shall only be quashed when the allegations made therein, even if taken at their face value and accepted in their entirety, do not prima facie constitute any offence or make out a case against the accused. Therefore, obtaining relief through quashing under Section 482 is uncommon, and extremely expensive as high-profile directors often appoint senior counsels who charge exorbitant fees.
Section 223 of BNSS: New ray of hope?
Section 223 of the BNSS, which corresponds to Section 200 of the erstwhile regime, has introduced a significant and welcome change. It now provides the accused an opportunity to be heard. The newly introduced proviso to Section 223(1) states that, “provided that no cognizance of an offence shall be taken by the Magistrate without giving the accused an opportunity of being heard.”
An analysis of the proviso makes it abundantly clear that before taking cognizance, basis a private complaint, the Magistrate must issue a notice to the accused and provide them with an opportunity to represent themselves. Although this proviso was introduced silently without any mention or debate in the 247th Report on BNSS by the Department-Related Parliamentary Standing Committee on Home Affairs, its apparent purpose appears to be to afford accused individuals the opportunity to avoid false implication or summons in cases where they have no direct involvement, but may have previously been summoned automatically — for instance, non-executive directors included solely due to their corporate designation.
The ambiguity pertaining to the stage at which notice must be issued and whether it must precede pre-summoning evidence, as per the proviso to Section 223 of BNSS, was addressed by the Karnataka High Court in Basanagouda R. Patil v. Shivananda S. Patil[6]. It held that, “the notice that is sent to the accused in terms of proviso to sub-section (1) of Section 223 of the BNSS shall append to it the complaint; the sworn statement; statement of witnesses if any, for the accused to appear and submit his case before taking of cognizance. In the considered view of this Court, it is the clear purport of Section 223 of BNSS 2023.”
The Allahabad High Court, in Prateek Agarwal v. State of UP[7], too, laid down the following procedural drill for Magistrates to follow, upon receiving a private complaint under Section 223 of the BNSS:
- Basis the complaint, the Magistrate will examine the complainant on oath, which would be their sworn statement, and examine witnesses, if any, and reduce such statements in writing;
- post which, the Magistrate will issue a notice to the accused, to give them with an opportunity of being heard; unlike the erstwhile regime, where the Magistrate would take cognizance at this stage;
- thereafter, upon hearing the accused, the Magistrate will either take cognizance and issue a summon/ warrant or dismiss the complaint.
In our view, this proviso will help non-executive directors to make adequate representation at the stage of cognizance, and avoid mechanical issuances of summons/ warrants against them. It will also ensure that Magistrates apply their mind and implicate only those individuals who are ‘in charge of’ and ‘responsible for’ the company’s ‘affairs’, in relation to the alleged incident cited by the complainant. For instance, previously a non-executive director with no involvement in a mere one-week delayed filing under the Employees Provident Fund Act could be summoned and subjected to trial proceedings, which by itself can be a form of punishment. Now, they have the opportunity to present their case before the Magistrate prior to the initiation of formal proceedings.
Concluding Thoughts
Not unsurprisingly, one Bar Association has filed a writ petition, challenging the constitutional validity of Section 223 of the BNSS on the ground that the Section contemplates sufficient grounds for proceeding against the accusation, and not the accused. Obviously, lawyers are feeling threatened that this provision will take away significant part of the assignments they undertake before the Trial Court and the High Court. While the writ is still pending before the SC, it is uncertain whether the Magistrate will provide adequate opportunity to the accused before mechanically deciding on the issuance of summons. But this provision certainly offers non-executive directors an opportunity to demonstrate their lack of involvement with the offence, if any, and seek removal of their names before cognizance of the offence is taken.
In the authors’ opinion, this is the most salutary provision of BNSS, as the SC has time and again emphasised the need for application of mind by the Magistrate before initiating criminal law in motion.
Given the pendency and inordinate delays associated with criminal trial in India, this provision has the potential of reducing some new cases that are routinely initiated for even technical violations and lessen the burden on High Courts to quash FIRs under Section 528 of BNSS (erstwhile Section 482 of CrPC).
[1] Detailed discussion of vicarious liability of non-executive directors may be found in my previous blog at: Vicarious Liability of Non-Executive Directors: A Case for Reform of Law | India Corporate Law
[2] S.M.S. Pharmaceuticals v. Neeta Bhalla, (2005) 8 SCC 89.
[3] 2015 4 SCC 609.
[4] Naresh Kumar v. State of Haryana, Criminal Appeal No(s). 1722/2010.
[5] 1992 Supp (1) SCC 335.
[6] 2024 SCC OnLine Kar 96.
[7] 2024 SCC Online All 8212.
