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Introduction
With the Drugs and Cosmetic Act[1] being in force, companies and firms have to face severe restrictions in the manufacture, supply, and storage of several types of drugs for the public good. However, in case of default or offences committed by the company or firm, who is to be held responsible? The Act clearly states that the persons involved and having control over the business are to be held responsible. This provision had led to many partners and directors of the companies or firms being prosecuted and facing imprisonment for committing offences under different provisions of the Act. The State of Karnataka v Pratap Chand and others[2] is an important Judgement given by the High Court of Karnataka in the matter relating to the responsibility of the partners in the commission of an offence by the Company. In this case comment, I shall be discussing and analyzing the Judgement in detail, comparing it to various case laws as well as the future case laws that adopted a similar approach while deciding on similar issues.
Facts of the case in brief
The firm M/s. Mafatlal and Co. And the partners of the firm were booked under S.18A, S. 18(a)(ii) and S. 18(c) of the Drugs and Cosmetics Act[3] read with S. 28, S. 27(a)(i) and S. 27(a)(ii) of the Drugs Control Act.[4] the defendants pleaded “not guilty”. The Chief Metropolitan Magistrate held respondent 3- the firm and respondent 1- one of the partners, guilty for offences under S. 18(a)(ii) and S. 18(c), but acquitted three of them under S.18A of the Drugs and Cosmetics Act. The Respondent 2 was acquitted of all charges as the court found that he was not in-charge of the business of the firm. The appellant made an appeal in the Karnataka High Court against that order for the acquittal of the three respondents under S.18A and the Acquittal order of Respondent 2 from all the offences. The Court examined whether respondent 2 actually had any control over the business of the company which was essential in determining whether he would be liable for the offences committed by the company. It was found that respondent 2 had no control over the business and, in-fact, was not even aware of the actions of other directors of the company. The respondents and respondent 3 of the company were held guilty as the court observed a direct control exercised by them over the conduct of the business. The appeal was dismissed by the Karnataka High Court.
Issues in the case
- Whether Respondent No. 2 can be held liable for offences under the S.18(a)(i) and S. 18(c)
- Whether the three respondents can be held liable for concealment of the name of the manufacturer under S. 18(A)[5]
Arguments on behalf of the Appellant
- The Counsel for the appellant argued that the name and address of the manufacturer and supplier of the drugs submitted by the respondents to the Drug Controller was fictitious. The same was said by the assistant commissioner of food and drugs administration upon being deposed. Thus, they should be made liable for offence under S.18A of the Drugs and Cosmetics Act for concealing the real name and address of the manufacturer or supplier of drugs. S. 18Aof the Drugs and Cosmetics Act states that “Every person, not being the manufacturer of a drug or cosmetic or his agent for the distribution thereof, shall, if so required, disclose to the Inspector the name, address and other particulars of the person from whom he acquired the drug or cosmetic.”[6] The counsel further argued, regarding the acquittal of Respondent No. 2, that under S. 34 of the drugs and Cosmetics Act, all partners- who are persons responsible for the day to day business of the company, should be punished for any offence, the firm is booked for, under S.18(a)(i) and S. 18(c).
- The Counsel relied on the case of G. L. Gupta v. D. N. Mehta[7], a leading case on S. 23(c) of the FERA Act[8], the section that is similar to S. 34 of the Drugs and Cosmetics Act[9]. The Case set out the definition of the expression “a person in charge and responsible for the conduct of the affairs of a company” as “the person who is in over all control of the day to day business of the company or firm”. S. 23C(2)[10] also mentions officers that are part of the major policies or decisions taken by the company, even though they do not control the business of the company.
Arguments on behalf of the Respondents
The Counsel for the Respondents, on the issue of concealment of the name and address of the drugs’ supplier, contended that in the form of exhibit 2, they had submitted the real name and address to Drug Controller and even though the assistant commissioner deposed that the name and address were fictions, the inspector who verified the information to be fictitious, did not submit any proof or record supporting the contention. Thus, they cannot be made liable under S.18A on grounds that are not proven.
Summary of the Judgement Given by the High Court of Karnataka
- The allegations of offences under S.18A remained un-established and the defense contention could not be rebutted. Though, it was submitted by the assistant commissioner that the name and address of the supplier were fictitious, the report of the inspector was not submitted and the claims couldn’t be proved. Thus, the previous orders were sustained. Thus, the three respondents were held not liable and the decision of the trial court on this issue was maintained.
- After considering the evidences, it was proved that not Respondent No.1 was responsible for the business of the company and had control over the day to day business and that Respondent No.2 had no control. Thus, he cannot be held liable under as S. 34 states that “ Where an offence under this Act has been committed by a company every person who at the time the offence was committed, was in charge of, and was responsible for the company for the conduct of the business of the company, as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly”[11].
Analysis of the case
“CONTROL OVER DAY TO DAY BUSINESS”
Section 34 of the Drugs and Cosmetic Act, primarily states that if the company commits any offence, the people responsible for the everyday business of the company would be held liable. The proviso in S.34 provides that a person would not be held liable if he is able to prove that he was in no way in control of the company’s business or that he had exercised his rights to prevent the wrong committed. S. 3(2) thus reads “Notwithstanding anything contained in the sub- section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.”[12]
The Supreme Court, in the matter of Drug Inspector v B.N Krishnaiah[13], had quashed the orders of the High Court that held the Respondents- “the Directors of the Company, not liable for the charges levied against the Company. In doing so, the apex court held that the person, if found to have a control over the affairs of the company” would be liable for all offences committed by the Company. The Court then put the responsibility on the Trial Court to determine the extent of the liabilities in accordance with the law, after being presented with all evidence.
In the present case, the prosecution was able to prove that Respondent No.1, a partner of the firm was in control of all the activities of the business. Respondent No. 2, though a partner, was not involved in any business nor had any control over it. It was also found out that Respondent No. 2 did not have any knowledge of the acts that amounted to any offence under the Drugs and Cosmetics Act. Thus, he was acquitted of all charges.
In Sadanand Devidas Kamat v State of Maharashtra[14], the accused were partners of a partnership firm and one of the partners had died during the course of trial. The other two partners contented that they did not have any authority over the conduct of business and relied on S. 34(2) proviso. However, upon considering the evidence and the contract of their partnership it was observed that the partners had secured authorization. The Bombay High Court held that “Their conduct in securing such authorization would necessarily mean that they would be taking part in the business of the firm, otherwise there was no necessity for securing the authorization.” The other two partners were, thus, held liable.
Later, in Dinesh B. Patel v State of Gujarat[15], it was held regarding the involvement of directors in the commission of an offence that “it will be open for the directors of the company to prove at trial that they were not involved in the offence committed and, therefore, should not be held liable.
The Bombay High Court in Pannalal Sunderlal Choksi v State of Maharashtra[16] said regarding a person accused of an offense under the Drugs and Cosmetics Act that “Person charged should effectively exercise all control of day to day business of the company or the firm; legal requirement is the control over the day to day business of the firm or the building”. The Court then quashed the summons that charged the Directors of the offences committed by the company merely because of their position as Directors.
The case of Rajasthan Pharmaceutical Laboratory v State of Karnataka[17], however puts a cap on the powers of S. 34. It was held in this case that “once a director, manager, or an officer of a company or firm is ‘deemed guilty’ of an offence by virtue of S.34(1), he cannot again be ‘deemed to be guilty of that offence’ within the meaning of S34(2) and that manager of a firm punished under S.27(a)(ii), S.27(b) and S.28 along with the firm and the partner for offences under S. 18(c), S. (a)(i) and S. 18 A, respectively, cannot be punished further for the same offences by virtue of S. 34(2).[18]
Similarly, in the case of State of Haryana v Brij Lal Mittal[19], it was said regarding S.34 that “simply because a person is director/partner of the company, he does not vicariously become liable for offences committed by the company-it must be shown that he was in charge of the company and also responsible to the conduct of its business.”
However, it wouldn’t be proper that if every time the company faces a prosecution for any offence committed in the course of business, the case proceeds with the Directors. The Karnataka High Court in the matter of Sanjay G. Revankar v State of Karnataka[20], stated that “ all the directors of the company cannot be proceeded with. There must be specific averment in the complaint about their being responsible for the day to day affairs.”
Conclusion
Thus, the High Court of Karnataka followed the similar approach that was followed by the Supreme Court and other High Courts in similar cases like in Drug Inspector v B.K Krishnaiah[21]andSadanand Devidas Kamat v State of Maharashtra[22]. The extent to which a director or a partner faces liability is to be decided by the Trial Court. Upon carefully studying all the evidence, the Court held that a person cannot be made liable merely because of his position in the firm. There has to be some evidence that his involvement was important in the commission of the offence. This, thus, prevents the group of partners that would have otherwise been wrongfully prosecuted for the offences committed that they had no control over. In such cases, the responsibility lies on the Judiciary to consider the actual facts and decide on them rather than going strictly by what the statute says. If not, this would lead to a situation of a morass where every person, in the position of a director or partner, would be liable for any offence committed by the company, irrespective of whether they were responsible for the said offence or not, or whether they had any knowledge of it or not. A similar approach was adopted by the courts in deciding future cases like the case of State of Haryana v Brij Lal Mittal[23]
References:
[1] Drugs and Cosmetics Act 1940
[2] State of Karnataka v Pratap Chand and others 1981 AIR 872
[3] Drugs and Cosmetics Act 1940
[4] Drugs (Control) Act 1950
[5] State of Karnataka v Pratap Chand and others 1981 AIR 872
[6] Drugs and Cosmetics Act 1940
[7] G. L. Gupta v. D. N. Mehta AIR 1971 SC 28
[8] Foreign Exchange Regulation (FERA) Act 1973
[9] Drugs and Cosmetics Act 1940
[10] Drugs and Cosmetics Act 1940
[11] Drugs and Cosmetics Act 1940
[12] Drugs and Cosmetics Act 1940
[13] Drug Inspector v B.N Krishnaiah (1981) 2 SCC 454 para 5, 6
[14] Sadanand Devidas Kamat v State of Maharashtra 1978 SCC OnLine Bom 319 para 6
[15] Dinesh B. Patel v State of Gujarat (2010) 11 SCC 125 paras 1, 8, 9, 10
[16] Pannalal Sunderlal Choksi v State of Maharashtra (2001) 1 BOMLR 349 para 23, 33
[17] Rajasthan Pharmaceutical Laboratory v State of Karnataka (1981) 1 SCC 645
[18] Drugs and Cosmetics Act 1940
[19] State of Haryana v Brij Lal Mittal (1998) 5 SCC 343 p 681
[20] Sanjay G. Revankar v State of Karnataka ILR 2002 KAR 475 p 482, 483
[21] Drug Inspector v B.N Krishnaiah (1981) 2 SCC 454
[22] Sadanand Devidas Kamat v State of Maharashtra 1978 SCC OnLine Bom 319
[23] State of Haryana v Brij Lal Mittal (1998) 5 SCC 343
