The government, in response to the rising backlash against corporate wrongdoing –from the big-ticket scandals and scams that make headlines to the subtler but more pervasive forms of fraud and corruption –is amending legislations to curtail corporate fraud by the private enterprises. How does the coming exhaustive legal framework, aimed at bringing in a new regime, change the director’s duties and liabilities in the times to come? Read on to get the complete picture.
From the first law broadly dealing with corruption in pre-independent India, the Criminal Law (Amendment) Ordinance, 1944 to the Prevention of Money Laundering Act, 2002 and the host of other laws dealing with grand to petty corruption in businesses as well as in the public and private life of the individuals, the regulation of corruption in some form or the other has really a long history in India.
But the menace of corruption has spread unabated. Today we cannot count how many cases of corruption our courts dealing with, ranging from big ticket scandals and scams to other subtler forms of fraud and corruption. In the last three financial years and in the current financial year till November 2014, Serious Fraud Investigation Office of the Ministry of Corporate Affairs was asked by the government to investigate 167 cases. According to former CBI Director, Ranjit Sinha, commercial banks have reported 1.69 lakh cases of frauds involving an amount of Rs 29,910 crore as on March 31, 2013. He said this while giving a speech in May last year at Assocham.
The Corruption has become a monster threatening to affect the prosperity and the growth of the country and, therefore, the clamour for more stringent laws dealing with the corruption is more than ever. The Indian government in the recent days has made many changes in many of its laws dealing with public and private businesses in India. In the year 2013, the government amended Companies Act 1956 and brought a new Companies Act 2013. And last year in February the government introduced the Prevention of Corruption (Amendment) Bill, 2013 to amend further the Prevention of Corruption Act, 1988 (PC Act), the Delhi Special Police Establishment Act, 1946 (DSPE Act) and the Criminal Law (Amendment) Ordinance, 1944 in order to widen the description of both demand and supply sides of corruption by providing criminalization of i) bribe giving by any person/organization to public servant; ii) bribe taking by public servant by direct or indirect manner; and iii) corporate liability in bribe giving.
According to the government, the proposed aforesaid Acts/Ordinance have been necessitated due to ratification of the United Nations Convention Against Corruption (UNCAC) in May, 2011 by India and Judicial pronouncements in corruption cases to fill in gaps in description and coverage of offence of bribery so as to bring it in line with the current international practice.
Before talking more about the amendments in PC Act 1988 which are aimed at bringing the PC Act 1988 in line with UK Bribery Act 2010, let us first discuss how the new Company Act 2013 has changed the laws that deal with the fraud in a company.
According to Section 2(34) of the Companies Act, 2013, a “director” means a director appointed to the board of a company. A director is an appointed or elected member of the board of directors of a company. He has the responsibility for determining and implementing the company’s policy. Unlike employees, directors cannot absolve themselves of their responsibility for the delegated duties.
Directors have a fiduciary relation with the company which enjoins upon them a duty to act on behalf of the company with utmost good faith and exercise due care and diligence in managing the affairs of the company. The company as a separate legal entity is subject to statutory controls and the directors are responsible for ensuring that the company complies with such statutory controls.
In fact, the Companies Act 1956 did not contain any provisions that specifically identified the duties of directors. But the Companies Act 2013 has set out the following duties of directors:
If a director of the company contravenes the provisions of this section (Section 166) such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
The company Act 2013 makes the following officers liable to penalty or punishment by way of imprisonment, fine or otherwise:
The Act makes liability of the director as “Officer” under various sections such as Section 66 A (Reduction of Capital), Section 105 (Proxies), Section 173 ( meeting of boards), Section 204 (Secretarial Audit), Section 207 (Conduct of Inspection and Enquiry), Section 212 (Inspection by SFIO), Section 274 (Directions for filing statement of Affairs – Winding Up by Tribunal), etc. Liability as “Officer in Default” u/ S 450
Directors are liable as officers in default under all sections where specific penalty is provided for each officer in default. Where no specific penalty is provided under the Act, they are liable under Section 450.
Comprehensive explanation of term Fraud is given in Explanation to Section 447(1) of The Companies Act, 2013 which is as follows:
“Fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss; (ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled; (iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled
Any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.
The provisions of the Section 447 have a significant impact and there are various areas across the 2013 Act, which will lead a person to be liable under this section. Some of these areas are as follows:
Directors can be made personally liable when the directors enter into contract in their own name; when they enter into contracts on behalf of company but fails to use “LTD. Or PVT LTD; when directors exceeds their powers.
The Board of Directors should act an agent of company, not of a single director. Therefore a single director cannot enter into a contract on behalf of company unless the Board of Directors authorises.
Where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person concerned shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.
Where a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 within the time specified in sub-section (1) of that section or such further time as may be allowed by the Tribunal under sub-section (2) of that section, and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without prejudice to the provisions contained in subsection (3) of that section and liability under section 447, be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.
If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct.
The Companies Act, 2013 was notified on 29.8.2013 and out of 470 sections in the Act, 283 sections and 22 sets of Rules corresponding to such sections have so far been brought into force. In response to the views expressed by the stakeholders and also to ease in doing business, Lok Sabha in December 2014, softened the Companies Act 2013
The following amendments have been proposed:
The Prevention of Corruption (Amendment) Bill, 2013 was referred to the Standing Committee on Personnel, Public Grievances, Law and Justice which submitted its report on February 6, 2014. The Bill amends the Prevention of Corruption Act, 1988 and makes the giving of a bribe an offence, enlarges the definition of taking a bribe and covers commercial organisations.
The Prevention of Corruption Act, 1988 does not have provision to deal with the supply side of corruption directly. However, only Section 12 of that Act deals with supply side of corruption indirectly through the route of abetment which provides minimum punishment of six months extendable to five years of imprisonment with fine. But Section 24 of that Act provides that statement made by the bribe giver in any proceedings against public servant for the crime of corruption (described under Sections 7 to 11, 13 & 15 of the Act) shall not subject that person to prosecution.
In order to plug such deficiencies in the law, Section 8 of that Act has been substituted by introducing a new definition of ‘bribe giving’ which is largely based on Section 1 of the UK Bribery Act, 2010 under Clause 3 of the Bill. As per this provision of the bill, any person who now offers, promises or gives financial or other advantage to another person (third party / intermediaries) or public servant to induce or reward the public servant to perform improperly any public function or activity would constitute as on act of corruption. Even the offering/giving or promising financial other advantage by the bribe giver itself constitutes ‘improper’ performance of relevant public function or activity’
The minimum punishment proposed for that offence is three years which is extendable to seven years of imprisonment with fine. The punishment prescribed for bribe giver is equal to the punishment prescribed for the bribe taker in corruption cases. At the same time the immunity provided to the bribe giver for subsequent reporting during proceedings in the Court of law has been proposed for abolition under Clause 12 of the Bill.
9 of the Act (Clause 3 of Bill) it will be an offence for the commercial organization if person associated with it bribes a public servant intending to obtain or retain business for such organization; or to obtain or retain an advantage in the conduct of business for it. But it shall be a defence for the commercial organization to prove that it had in place adequate procedure designed to prevent person associated with it from undertaking such conduct of bribe giving. The proposed new Section10 under Clause 3 of the Bill provides for punishment to any Director, Manager, Secretary or any other officer of the commercial organization if it is proved that the offence is committed with consent or connivance of or is attributable to any neglect on the part of that person for punishment of three years extendable to seven years of imprisonment with fine. But if it is proved that the offence is committed without his/her knowledge or he/she has exercised all due diligence to prevent commissioning of such offence the commercial organization may be liable to fine proposed under new Section 9 coupled with proviso to proposed new Section 10 (1) of the Act under Clause 3 of the Bill.
The government on 17th November 2014, requested the Law Secretary at the Department of Legal Affairs to make a reference to the Twentieth Law Commission for its views on the proposed amendments in the 2013 Bill and the 2014 amendments.
The Law Commission in its report submitted to the government in February 2015 has told the government to amend certain provisions of the proposed Bill in which every person in charge of and responsible to a fraud shall be deemed guilty, unless he/she can prove that the offence was committed without their knowledge or that they had exercised all due diligence. The Law Commission has recommended amendment of the proposed PC Act bill to provide for a section, along the lines of Section 9 of the UK Bribery Act, introducing a statutory obligation on the government to publish guidance as to the procedures that commercial organizations can take to put in place adequate systems.
The commission has further asked the government to add a clause in Section 9 stating that “the central government shall prescribe and publish guidelines about the adequate procedures, which can be put in place by commercial organizations to prevent persons associated with them from bribing any person, being or expecting to be, a public servant”.
As per the recommendations of the law panel, directors of a firm shall only be held guilty in a situation where they have digressed from the set procedure. The commission has said that to provide for consistency and coherence between Sections 9 and 10 of the PC Act (Amendment) Bill and to remove the overbroad elements of negligence, Section 10 should be redrafted and modified” to make directors guilty only if such “offence is proved to have been committed with the consent or connivance of any director, manager, secretary or other officer of the commercial organization.
In the times to come the laws will be stringent to deal with the cases of omission and commission. When the going is tough considering the overall business scenario over the world, the companies and its directors will be fooling themselves if they will not pay attention to changing shift in the laws dealing with business transaction. The Supreme Court while describing what is the duty of a Director of a company held in Official Liquidator v A. Tendolkar that, “a Director may be shown to be placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of business of the company even though no specific act of dishonesty is provide against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company even superficially.” The business of doing business should be business but with attention to statutory guidelines. The companies who are mired in cases know how dearly they pay for the acts of flouting the rule of law. The governments of the day also need to dispel doubts and confusions and simplify norms for compliance.
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