Directors Cannot Be Held Liable For Company Debt Merely By Their Designation: Delhi High Court

The Delhi High Court has restored a ₹23.39 lakh arbitral award against Vanilla India Producer Company Limited while upholding the setting aside of the award against its four directors. The court held that directors cannot be made personally liable for a company's contractual debt merely because of their positions in the company.

A Division Bench of Justice Anil Kshetarpal and Justice Bharat Parashar observed, “The LSA having held that the Directors were not personally liable, nevertheless fastened joint and several liability upon them solely by reason of their being Directors. Such reasoning is self-contradictory and contrary to settled law.”

The Bench further observed, “The Appellant's submission that the Chairman, Managing Director and Joint Managing Director are liable with the company, despite no averment against them, is not supported by any statutory provision, contractual term or judgment placed before this Court, and is contrary to the settled position stated above.”

The dispute arose from a sanction letter dated August 8, 2005, followed by a loan agreement dated August 29, 2005. Under the agreement, the Small Farmers Agri Business Consortium sanctioned ₹23.39 lakh as Venture Capital Assistance for Vanilla India's agri-business project.

The amount was disbursed into the company's account with Union Bank of India, Ernakulam, which had also extended a term loan to the company.

Under the agreement, the assistance would be converted into a loan upon recovery of the bank's term loan or the scheduled end date of that loan, whichever occurred earlier. After Union Bank informed the Consortium that it had initiated debt recovery proceedings, the Consortium demanded repayment on May 11, 2012.

Vanilla India rejected the demand as premature in a letter dated July 9, 2012.

The Consortium invoked arbitration on November 1, 2012, appointing advocate B.K. Srivastava as the sole arbitrator.

On March 9, 2017, the arbitrator awarded ₹23.39 lakh with 12% annual interest from May 11, 2012, until payment, along with ₹1 lakh in costs. The award held the company and its directors jointly and severally liable.

Vanilla India and its directors challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. In April 2024, the District Judge set it aside over improper notice of the arbitrator's appointment and the directors' personal liability. The Consortium appealed under Section 37.

The court observed, “Mere failure to avail an opportunity cannot be equated with a denial of such opportunity.”

On the directors' liability, the Bench noted that they had neither executed the agreement in their personal capacity nor furnished personal guarantees or indemnities. The statement of claim also contained no allegations of fraud, misrepresentation or specific misconduct against them.

The court held that the portion of the award imposing liability on the directors could be separated from the award against the company, whose liability had been independently determined by the arbitrator.

It also rejected the Consortium's objection that the challenge was time-barred. No evidence established delivery of the signed award before April 24, 2019, and the challenge filed on June 7, 2019, was within three months of receipt.

The Bench partly allowed the appeal, restoring the award against Vanilla India while upholding its setting aside against the four directors. It directed the executing court at Ernakulam to proceed against the company alone.

The company may bring to the executing court's notice any payments made or amounts realised towards the award debt, including under its one-time settlement with Union Bank of India, without reopening the merits of the award.

For Appellant (Small Farmers Agri Business Consortium): Advocate Prashant Goswami.

For Respondents (Vanilla India Producer Company Limited & Ors.): Advocates Jojo Jose, Sunitha John and Jeba.