Directors Cannot Be Prosecuted For Default In Remitting Employees' PF Dues Without Arraigning Company As Accused: Karnataka High Court

"Applying the doctrine of strict construction, we are of the considered opinion that commission of offence by the company is an express condition precedent to attract the vicarious liability of others." Ruling that a company is the juristic "employer" and its prosecution is an indispensable prerequisite to fasten vicarious criminal liability upon its management, the Karnataka High Court quashed criminal proceedings initiated against directors of a private firm under Sections 406 and 409 of the Indian Penal Code, 1860 (IPC) for alleged non-remittance of provident fund contributions, holding that the prosecution was fatally defective due to the non-arraignment of the corporate entity.

Justice Ravi V Hosmani held that when an establishment registered under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) is an incorporated company, the default in remitting deducted employee contributions cannot lead to the personal prosecution of its directors unless the company itself is arraigned as a primary accused.

The prosecution originated from a private complaint filed by an Enforcement Officer under Section 13 of the EPF Act, alleging that the directors of M/s Southern Chips & Circuits Pvt. Ltd. deducted employees' provident fund contributions amounting to Rs. 2,68,686 between July 2011 and May 2014 but failed to deposit the sum with the authorities. Following the filing of a charge sheet, the IV Additional Chief Metropolitan Magistrate at Bengaluru took cognizance of offences punishable under Sections 406 and 409 of the IPC. Aggrieved by the order taking cognizance and the initiation of proceedings without arraigning the company as an accused, the directors invoked the inherent powers of the High Court under Section 482 of the Code of Criminal Procedure, 1973 (CrPC).

Whether directors of an incorporated company can be prosecuted for criminal breach of trust under Sections 406 and 409 of the IPC for non-remittance of provident fund contributions under the EPF Act without the company being arraigned as an accused?

Whether vicarious criminal liability can be fastened onto individual directors in the absence of the company being prosecuted as the principal offender?

Company alone constitutes the statutory employer under Explanation to Section 405 IPC

Examining the statutory definitions and precedents governing employer liability, the High Court observed that the default in depositing statutory contributions must be assessed against the entity deemed to be the employer. In the corporate context, the establishment possessing dominion over the funds and holding the statutory obligation is the corporate entity itself, rather than individual directors in their personal capacity.

The Court referred to the landmark ruling of the Supreme Court in Employees' State Insurance Corporation v. S.K. Aggarwal & Ors. (1998) 6 SCC 288, where the Apex Court held that the expression "a person being an employer" under the Explanation to Section 405 IPC refers to the company which employed the workmen, and not individual directors.

Vicarious criminal liability requires principal arraignment of the juristic entity

The bench emphasized that criminal law does not recognize vicarious liability unless an express statutory mandate provides for it. Therefore, individual corporate officers cannot be brought into the criminal dragnet unless the juristic entity itself is arraigned and prosecuted for the primary statutory infraction.

The High Court placed strong reliance on the three-judge bench decision of the Supreme Court in Aneeta Hada v. M/s Godfather Travels & Tours (P) Ltd. (2012) 5 SCC 661, which settled the doctrine of strict construction concerning corporate criminal liability.

Quoting the Supreme Court's authoritative finding in Aneeta Hada, the bench highlighted that the commission of an offence by the company is an express condition precedent to attract the vicarious liability of others. The Court noted that maintaining prosecution against officers while omitting the juristic person is legally unsustainable.

Omission to array corporate entity renders criminal prosecution non-maintainable

The Court observed that multiple coordinate benches of the Karnataka High Court had consistently applied this doctrine to quash criminal proceedings initiated under Sections 406 and 409 IPC where directors were prosecuted without arraigning the corporate employer, including in Sri Prakash R Kota v. State of Karnataka and Ms Swapna v. State of Karnataka.

While the prosecution contended that the directors were in charge of day-to-day affairs under Form-5A of the Employees' Provident Funds Scheme, 1952, the Court observed that administrative declarations cannot circumvent the foundational legal requirement of prosecuting the corporate offender first.

The Court held that although disputed factual defences such as bona fide financial distress and post-complaint remittance along with damages and interest would ordinarily require a trial, the legal defect of omitting the company as an accused was fatal to the prosecution at the threshold itself.

Allowing the petition, the High Court quashed the order dated March 15, 2019 passed by the IV Additional Chief Metropolitan Magistrate, Bengaluru taking cognizance of the offences punishable under Sections 406 and 409 of the IPC, and quashed the entire criminal proceedings in C.C. No. 6398/2019 qua the petitioner-directors.

Date of Decision: October 27, 2026