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Breach of Trust: What is the Liability of Company Directors & Others?

Who can commit a criminal Breach of Trust? If company directors commit breach of fiduciary duty on their part towards the company’s shareholders, does this come under Breach of Trust, with penalties?

This article will try to discuss the legal perspective regarding breach of trust and throw light upon various facets of the subject, including types, distinctions from other acts / offences, etc. It will focus on Criminal Breach of Trust and provisions laid out by the Indian Penal Code (IPC) and the Companies Act 2013.

The Concept of Breach of Trust

What happens when someone makes a promise to you and does not keep it? Or when you delegate duty to another, but they fail to comply? There’s a violation, a promise that’s broken. This broken promise or violation, translated to legal terms, is known as ‘breach of trust’. In legal parlance, breach of trust can be classified into two categories:

Civil Breach of Trust

Civil breach of trust, as the name suggests, does not amount to an offence under the law of land in force at the time of commission. Such a breach or violation could occur when a trustee fails to fulfill their duty or acts in alteration to their obligation. Covered under the Indian Trusts Act, 1882, this violation is often termed as ‘technical breach’. While a trustee can find some relief against liability for technical breach, they can be held liable in certain cases. These exemptions and exclusions are listed under Section 23 of the Indian Trusts Act.  

Criminal Breach of Trust

Defined under Section 405 of the Indian Penal Code, a criminal breach of trust requires a person to bestow property or control over another person. It is a form of ‘trust’ granted to the other person (trustee) by the owner (trustor). The trustee, being in a fiduciary capacity, has an obligation to perform their duties in an honest manner and under the direction (if any) of the real owner. However, when the trustee misappropriates or converts such property to their own use, or fraudulently uses or disposes off the property, such a person is said to have committed a ‘breach of trust’.

Breach of trust is, therefore, the inability of a trustee to fulfill their duties under the express/implied trust agreement entered with the trustor (real owner of the property).

For example, A lets his friend B stay at his farmhouse, and B uses the space to store illegal goods like drugs. Here, B criminally breaches the trust bestowed upon him by A.

Criminal Liability of Company Directors

The director of an organization is not only responsible to oversee the smooth flow of business but also has a fiduciary duty towards the company’s shareholders. Therefore, a director is held liable in cases where there is a breach of duty on their part. Such breach can be of both civil and criminal in nature. In case of the former, liabilities can be set-off by way of compensations while criminal liabilities attract provisions of various statutes in force at the time of commission of such offence.

A director can be held criminally liable for non-compliances if they were responsible for supervising or conducting such business at the time of commission of offence. Such director, or person in charge, is known as ‘officer-in-default’ for that case. Further, evolution of the concept of ‘vicarious liability’ has brought the senior management and authorities of an organization under the purview of law, imposing liability for breach of trust against the company’s shareholders.

While there are several provisions of the Companies Act 2013 dealing with criminal liability, however, penalty for false statement and destruction of documents, penalty for fraud, penalty for false statement or omission of fact, and penalty for false evidence are provided under Section 229, Section 447, Section 448, and Section 449 of the Act respectively.

What are the key components of a Criminal Breach of Trust?

The key ingredient for a breach of trust is that the accused (trustee) must be ‘entrusted with property or dominion over it’ and must have ‘dishonestly misappropriated’ such property.
  • Entrustment: The term ‘entrusted’ covers a wide ambit and includes all cases in which property is handed over by the owner to the trustee and is thereby dishonestly misappropriated or disposed of, breaching the terms of agreement. Further, as stated in the case of State of Madhya Pradesh v. Pramode Mategaonkar (1965) 2 CrLJ 562 (MP), entrustment does not necessarily have to be expressed and can be implied. The use of the term ‘property’ under Section 405 of IPC has been well-explained in the case of RK Dalmia vs. Delhi Administration AIR 1962 SC 1821. The Supreme Court has held that ‘property’ is not restricted to movable or immovable property alone and is, in fact, used in a much wider sense.
  • Dishonest Misappropriation: ‘Mens Rea’ is another key ingredient for the offence of breach of trust. ‘Dishonest intention’ being the essence of proving liability, the Supreme Court in the case of Krishan Kumar vs. Union of India held that every situation does not necessarily have to prove the exact ways in which a trustee (accused) appropriated the property of the real owner. The issue in cases of breach of trust is tilted more towards intention instead of the direct proof of misappropriation.

When proved beyond a reasonable doubt, criminal breach of trust attracts a punishment of imprisonment for up to three years or fine, or both. Punishment for the offence has been mentioned under Section 406 of the Indian Penal Code.

Types of Criminal Breach of Trust as per IPC

A breach of trust can be committed by a trustee, an employee, or any other person. IPC lays down punishments for breach of trust based on who commits the offence. The provisions apart from Section 405 and Section 406 governing such breaches are as follows:
  • Section 407: This section addresses a breach of trust by a carrier, wharfinger, or warehouse keeper. For better understanding, ‘carrier’ covers a person transporting goods, ‘wharfinger’ relates to a person who loads and unloads goods at a dockyard, and ‘warehouse keeper’ refers to a person who oversees or supervises a warehouse where goods have been stored.
When a criminal breach of trust is committed by anyone who falls under these three categories, punishment for them might extend for up to seven years and a fine. A breach of trust under Section 407 falls in the ‘severe’ category since the class of people mentioned are entrusted not only with the property of the trustor but are also paid consideration for such entrustment.
  • Section 408: Referring to a breach of trust by a servant or a clerk, a breach of trust under Section 408 is punishable with imprisonment extendable up to seven years and a fine.
  • Section 409: A breach of trust by a public servant, banker, merchant, broker, attorney, agent attracts an imprisonment of up to 10 years or life imprisonment, and a fine.

While offences committed under Section 407 and Section 408 are cognizable and non-bailable, those committed under the former are compoundable at the instance of the property owner and those under the latter are compoundable with the court’s permission. An offence committed under Section 409 is cognizable, non-bailable, and non-compoundable. For all offences falling under the purview of these sections, however, aggravated criminal breach of trust is committed.

An analysis of the above-mentioned provisions throws light upon the increasing intensity of punishments through the sections. This is because a public servant enjoys a greater status and position of trust in the society as a government representative acting in fiduciary capacity. Addressing the issue regarding a public servant’s capacity to obtain money directly from policyholders, the Supreme Court in the case of Legal Affairs vs. SK Roy held that an examination has to be made about the public servant’s use of his actual official capacity to determine the nexus between the complaints and the official capacity to bring such acts.

Conclusion: Corrective Measures

While provisions under the Indian Penal Code and other statutes have been provided to keep a check on ‘trust’ bestowed over a trustee, several suggestions have been made by law commissions to amend the existing laws related to criminal breach of trust. Major recommendations put forth by the Fifth Law Commission of India are:
  • Align Section 408 of IPC with Section 381 of IPC so as to cover breach of trust by an employee with regard to their employer’s property.
  • Scale down the punishment of life imprisonment for criminal breach of trust by public servants (Section 409, IPC) to rigorous imprisonment for a term extending up to 14 years.
Steps to be taken in case of an offence:
  • An FIR/police complaint can be filed for a breach of trust at the nearest police station.
  • A legal notice for a criminal breach of trust can be sent to the concerned party. This will be considered as the first step towards a legal remedy/proceeding. Some essentials of the legal notice include:
  • It must be drafted with the letterhead of an advocate with his/her details.
  • Date on which the notice is sent with details of the recipient.
  • Details of the victim must be clearly stated.
  • Clear details about the infringements due to the act/omission of the other party with demands.
In conclusion, it is important to note that to get rid of offences relating to criminal breach of trust, it is essential to generate mass awareness about the laws regarding such acts. Further, proper implementation of IPC provisions is crucial since several cases go unreported when people do not wish to get entangled in inappropriate investigations and lengthy trial processes.

We can assist you with civil and criminal breach of trust issues. You can get in touch with us by submitting a query below.

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