Corporate fraud cases often raise the question of whether directors can be personally prosecuted when investors are allegedly cheated by a company. Since the IPC (now BNS) does not impose automatic vicarious liability, directors cannot be prosecuted merely because they hold office.
In S. Venkatraman v. Additional Superintendent of Police, CBI, Economic Offences Wing, the Madras High Court clarified that directors can still face criminal trial if specific allegations show their personal role in the fraud. The case involved an alleged fixed deposit fraud where public deposits were collected but not repaid.
The Court refused to quash the proceedings, holding that allegations of mobilising deposits, diverting funds, operating accounts, or participating in the fraudulent scheme must be tested during trial. The ruling draws a clear line between mere directorship and personal criminal involvement.
Facts of the Case
The case arose from criminal proceedings involving M/s Synergy Financial Exchange Limited (SFEL), which allegedly collected about Rs. 14.73 crores from the public through fixed deposit schemes by promising interest between 18% and 24% per annum. Upon maturity, several post-dated cheques issued to investors were dishonoured, and the deposits remained unpaid.
The CBI alleged that the petitioners were active participants in the fraudulent scheme and had invited public deposits, diverted company funds to associated entities and personal accounts, and misappropriated investors’ money. S. Venkatraman was arrayed as A1, while P. Rajarathinam (A5) was specifically accused of collecting company dues after the takeover of SFEL and misappropriating about Rs. 23.04 lakhs.
Both petitioners approached the Madras High Court seeking quashing of the criminal proceedings, contending that they could not be prosecuted merely because of their association with the company.
Contentions of the Petitioners
The primary contention of S. Venkatraman, who was arrayed as A1, was that the company itself had not been made an accused. He argued that the deposits were collected in the name of the company, the fixed deposit receipts were issued by the company, and the post-dated cheques were also issued by the company. Therefore, according to him, the prosecution against the directors alone was not maintainable.
He submitted that Indian criminal law does not recognise vicarious liability under the IPC (now BNS) unless the statute expressly provides for it. Since there is no provision under the IPC (now BNS) making directors automatically liable for acts of the company, he argued that he could not be prosecuted merely in his capacity as director.
Reliance was placed on the Supreme Court decision in S.K. Alagh v. State of Uttar Pradesh, where it was held that in the absence of a statutory provision creating vicarious liability, a director or employee of a company cannot be held criminally liable merely because of the company’s alleged offence. The petitioner also relied on a Madras High Court decision in B. Jagadeesh v. Deputy Superintendent of Police, EOW-II, Namakkal, where the Court had recognised that directors cannot be fastened with vicarious liability under the IPC in the absence of a penal provision.
The second petitioner, P. Rajarathinam, contended that he was not a signatory to the memorandum of understanding relied upon by the prosecution. According to him, any obligation arising out of the memorandum could not be fastened upon him. He therefore argued that he had no connection with SFEL and could not be prosecuted on the basis of the said document.
Issues Before the Court
The Madras High Court considered the following key questions:
- Whether criminal proceedings against directors could continue when the company itself was not arrayed as an accused.
- Whether the petitioners were being prosecuted merely because of their official position, or whether the prosecution had alleged a specific personal role in the commission of the offences.
- Whether the High Court, while exercising jurisdiction under Section 482 CrPC or Section 528 BNSS, could examine disputed factual defences and quash the proceedings at the threshold.
- Whether the pendency of non-bailable warrants and red corner notice against one of the accused had any bearing on the relief sought under Section 528 BNSS.
Observations of the Madras High Court
The Court accepted the general legal position that there is no specific provision in the Indian Penal Code (now, Bharatiya Nyaya Sanhita) to prosecute directors vicariously for offences committed by the company. However, the Court emphasised that the present case was not a simple case of vicarious liability.
The Court noted that the company had already been wound up and its properties were being dealt with by the Official Liquidator. Therefore, the company was not arrayed as an accused. But this, by itself, did not mean that the natural persons who allegedly committed the fraudulent acts could escape criminal prosecution.
The Court relied on the principle that dissolution or winding up of a company does not wipe out the personal penal liability of those who were personally involved in criminal acts. The Court referred to the Supreme Court’s judgment in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd., where it was held that natural persons such as directors and signatories cannot escape prosecution merely because the company has gone into insolvency, resolution, dissolution or liquidation.
Although that case arose under the Negotiable Instruments Act, the Madras High Court drew support from the broader principle that personal penal liability does not disappear merely because the corporate entity ceases to exist.
Most importantly, the Court held that the petitioner was not being prosecuted merely because he was a director. There were specific allegations that he and other accused persons had actively published advertisements inviting public deposits, promised high interest, collected huge sums, diverted money, operated accounts and transferred funds into personal accounts or to another company.
The Court observed that the allegations showed a personal role in the offence. Therefore, the prosecution was not based solely on the petitioner’s designation as director, but on his alleged participation in the fraudulent conduct.
Scope of Quashing Criminal Proceedings
The Court also discussed the limited scope of the High Court’s power while considering a petition for quashing criminal proceedings. It relied on Supreme Court precedents including Devendra Prasad Singh v. State of Bihar, CBI v. Arvind Khanna, and M. Jayanthi v. K.R. Meenakshi.
The principle emerging from these cases is that the High Court should not conduct a mini-trial at the stage of quashing. It cannot appreciate the evidence, examine inconsistencies in witness statements, or record findings on disputed facts. Such questions must be tested during the trial.
At the quashing stage, the Court only examines whether the allegations, if taken at face value, disclose the ingredients of the alleged offences. If the complaint or charge sheet contains material showing a prima facie case, the proceedings should ordinarily continue.
Applying this principle, the Madras High Court held that the petitioners’ defences could not be accepted at the threshold. The allegations required trial and evidence.
Judgment of the Court
The Madras High Court dismissed both criminal original petitions. The Court held that although the IPC (now BNS) does not create automatic vicarious criminal liability against directors for offences committed by a company, the present prosecution was not based merely on the petitioners’ status as directors.
The charge sheet contained specific allegations of personal involvement, including inviting public deposits, offering high interest, collecting large amounts, diverting funds, operating accounts and misappropriating company money.
The Court therefore found no ground to quash the final report or charge sheet. It held that the truth or otherwise of the allegations must be determined by the trial court after evidence is recorded.
Conclusion
The Madras High Court’s ruling in S. Venkatraman v. Additional Superintendent of Police, CBI, Economic Offences Wing is a significant reaffirmation of accountability in corporate fraud cases. The Court recognised the settled principle that directors cannot be prosecuted merely because they hold office in a company. However, it also made clear that this principle cannot be stretched to protect directors who are alleged to have personally participated in cheating, breach of trust, diversion of funds or conspiracy.
The judgment draws a practical and legally sound line: a director’s designation alone is not enough for prosecution, but a director’s personal role in the fraudulent transaction is sufficient to require trial. Where allegations disclose active involvement in inviting deposits, promising high returns, diverting company funds and depriving investors of repayment, the High Court will not quash proceedings at the threshold.
By refusing to interfere under Section 482 CrPC (Section 528 BNSS), the Court reinforced the principle that disputed factual defences must be tested at trial. The ruling serves as a reminder that the corporate form cannot become a shield for personal criminal acts. Directors who actively participate in company fraud may be required to face a criminal trial, even where the company itself has been wound up or is not before the criminal court.