KMPs (such as CEO, CFO, whole time CS, MD) play a pivotal role in the management and functioning of the company. The directors/KMPs attract criminal liability under the Companies Act, 2013 by virtue of the statutory liability and also under other statutes by virtue of vicarious liability.
1. Corporate criminal liability can be defined as a crime which has been committed by individual or association of individuals who for pursuing a common purpose or make business gain in course of their occupation commit such acts or omission which is forbidden by law and with guilty mind, whether it is for the benefit of the corporation or any individual or the association of individuals.
2. Liability depends on the role one plays in the affairs of a Company and not on designation or status. A person not holding any office or designation in a Company (or there are no designated KMPs) may be liable if he satisfies the main requirement of being in charge of and responsible for the conduct of business of a Company at the relevant time.
3. There are various statutes that do not recognise the difference between executive and non-executive directors thereby subjecting all classes of directors to the same liability. For instance, when an offence of cheque dishonour is committed by the Company under section 138of Negotiable Instruments Act, 1881 (herein referred as NI Act) the punishment is imposed by virtue of vicarious liability under section 141 of NI Act. All directors of the Company face incrimination under this section including independent directors who have no control over the everyday management of the Company.
4. The Companies Act 2013 contemplates two sets of criminal liability for directors/KMPs. Firstly, the statutory liability which is clearly laid down in the Act. Secondly, the liability arising due to breach of duty of the Directors as mentioned u/s 166.
5. The Companies Act defined the term “officer who is in default”. The criminal liability is imposed on them under the broad head” Officer in default” which is defined under section 2(60) of the Companies Act 2013
6. The legal action can also be initiated against the defaulting director by the Company, on the grounds that the director owed a duty to the Company. Apart from the Company, the shareholders (minimum 100) can also file a case against the director under section 245 of the Companies Act.
7. Section 166 of the Companies Act, 2013, mentions about the fiduciary duties of the directors. If the director takes the undue advantage, then, it shall be held liable to pay an amount equal to that gain to the company and he shall be liable to pay fine which may extend to Rs. 5,00,000/-.
-Section 447- Punishment for fraud-
-Section 448- Punishment for False statement
-Section 449- Punishment for False evidence
-Section 450- Punishment where no specific penalty or punishment is provided
-Section 451- Punishment in case of repeated default:
-Section 452- Punishment for wrongful withholding of property
Protection from criminal liability:
1. Section 463 of the Companies Act, however, provides relief in the proceedings for negligence, default or breach of trust against an officer of a company, if it appears to the court hearing the case that he is or may be liable in respect of negligence, default and that having regard to the all the circustances of the case, but that he has acted honestly and reasonably and that having regard to all the circumstances of the case, he ought to be excused, the court may relieve him either wholly or partly, on such terms as it may think fit.
2. Where any such officer has reason to apprehend that any proceedings will or might be brought against him in respect of negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High Court for relief and the High court on such application shall have same power to relieve him as it would have had it had been a court before which the proceedings for negligence, default, breach of duty, misfeasance or breach of trust had been brought.
3. Supreme Court in the case of SUNIL BHARTI MITTAL Vs. CBI held that directors of the company can be held responsible for wrong done by company only there is sufficient evidence to prove that such persons played an active role and they had criminal intent.
4. KMPs can insist the company to obtain the `Directors and officers liability insurance’ in the company to hedge against any pecuniary liability, arising on KMPs. The KMP Policy Provides Cover for The Personal Liability Of Directors And Officers Arising Due To Wrongful Acts In Their Managerial Capacity. Defence Costs Are Also Covered And Are Payable In Advance Of Final Judgment. This Policy Provides Protection For Claims Brought Against Directors, Officers And Employees For Actual Or Alleged Breach Of Duty, Neglect, Misstatements Or Errors In Their Managerial Capacity. TATA AIG is providing such cover.
5. KMPs may insist on the indemnification clause in the shareholder’s agreement or employment agreement. This will safeguard for their bonafide actions.
6. Directors/KMP should dissent to any activity or business which they feel violative and they should ensure that their dissent is recorded in the minutes also.
7. It is seen while the companies Act and LODR regulation recognise the difference between the executive and non-executive directors, various other statutes don’t. There is a need to harmonise the various provisions imposing criminal liability. It is recommended that the liability under these statutes be aligned with the Companies Act, so that the independent directors can take advantage of the safe harbour provisions. In an alternative, there can be amendments made to the provisions of vicarious liability in statutes so as to distinguish between the executive and non-executive directors. Further, a provision with a non-obstante clause can be made in the Companies Act giving overriding effect to liability in any other Act.
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