Karnataka HC Quashes PF-Breach-of-Trust Case Against Two Directors Because Their Company Was Not Made an Accused

The petitioners, directors of Southern Chips and Circuits Pvt. Ltd., challenged the Magistrate’s order dated 15 March 2019 taking cognizance of offences under Sections 406 and 409 of the Indian Penal Code, 1860 (IPC), and sought quashing of the proceedings.

The complaint alleged that the company had deducted employees’ provident-fund contributions totalling ₹2,68,686 for July 2011 to May 2014 but failed to remit them by the due dates.

The company was not arraigned as an accused; the petitioners argued that the directors could not be prosecuted for the alleged default without the company being made an accused.

The High Court recorded that the deductions and failure to remit were not in dispute.

Section 405 IPC defines criminal breach of trust, and its Explanation 2 deems an employer who deducts employees’ contributions but defaults in remitting them to have dishonestly used the deducted amount; Sections 406 and 409 IPC prescribe punishment for criminal breach of trust and its aggravated form.

In Employees’ State Insurance Corporation v. S.K. Aggarwal, (1998) 6 SCC 288, the Supreme Court held that, where the company is the employer, its directors are not themselves the employer for purposes of the relevant statutory entrustment merely because they are directors.

The High Court also relied on Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661, for the principle that, where liability is vicarious, arraigning the company is a condition precedent to prosecuting the persons made liable through it.

It noted its earlier decisions quashing prosecutions of directors where the company had not been made an accused.

The alleged entrustment arose from deductions made by the company as employer, and the directors’ status alone did not make them the employer liable for the alleged default under the reasoning in S.K. Aggarwal.

Applying the company-arraignment principle in Aneeta Hada and its earlier decisions, the Court held that the prosecution could not proceed against the directors without the company being arraigned as an accused.

The Court considered the objections about opportunity and alleged mala fides to be matters that did not independently warrant intervention at that stage, noting the prima facie explanation that opportunities had been given.

It therefore resolved the petition on the failure to arraign the company, rather than on the subsequent-remittance contention.

The operative order expressly quashed the proceedings against “petitioners no.1 and 2,” although the petition had three petitioners.