LiabilityLiability of undertakings
What are the risk and compliance management obligations of members of governing bodies and senior management of undertakings?
As per the Companies Act 2013, the board of directors is required to develop and implement a risk management policy and identify risks that may threaten the existence of the company. Further, the Act has made the requirement of compliance very explicit by stipulating a mandatory requirement of positive affirmation from the directors as part of the directors’ responsibility statement under section 134, stating that the directors have devised a proper system to ensure compliance with the applicable laws and that such systems are operating effectively. It is to be noted that section 205 also requires a company secretary to provide a report to the board about compliance with the provisions of the said Act, the rules made thereunder and other laws applicable to the company.
Further, SEBI issued the revised clause 49 that would be applicable to all listed companies with effect from 1 October 2014. The revised clause 49 requires senior management to make disclosures to the board relating to all material financial and commercial transactions where they have personal interest that may have potential conflict with the interest of the company at large. The term ‘senior management’ shall mean members of the core management team. This will include all members of management one level below the executive directors including all functional heads.
Do undertakings face civil liability for risk and compliance management deficiencies?
Compliance in general means compliance with laws and regulations. These laws and regulations may stipulate penalties for non-compliance of provisions. While there are no direct consequences for deficiencies in risk and compliance management mechanisms, penalties may be imposed if the same results in infringement of the said laws.
Below are a few examples of penalties imposed:
- As per section 88 of the Companies Act 2013, if a company fails to maintain a register of members, the company and every officer of the company in default shall be punishable with a fine ranging from 50,000 rupees to 300,000 rupees. Further, as per section 92 of the Act, if a company fails to file a copy of annual return within the prescribed timeline, the company shall be punishable with a fine ranging from 50,000 rupees to 500,000 rupees.
- Section 13 of the Foreign Exchange Management Act 1999 imposes a penalty on every person who contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorisation is issued by the Reserve Bank. The said penalty can equal up to three times the sum involved in such contravention where the amount is quantifiable, or up to 200,000 rupees where the amount is not quantifiable. Where such contravention continues, further penalties can be levied of up to 5,000 rupees for each day after the first day during which the contravention continues.
- Section 21 of the Maternity Benefit Act 1961 states that every employer who does not comply with the provisions of the Act shall be punishable with imprisonment of up to three months, with a fine of up to 500 rupees or with both.
- Section 22A of the Minimum Wages Act 1948 imposes a penalty on every employer who contravenes any provision of this Act or any rule or order made thereunder with a fine of up to 500 rupees.
- Via its circular dated 15 June 2017, SEBI has imposed certain penalties for non-compliance with certain provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009, which includes inter alia a penalty of 20,000 rupees a day for delay in completion of bonus issue, until the date of actual compliance.
- Section 43A of the Competition Act 2002 imposes penalties on any person or enterprise who fails to give notice to the commission with respect to forming a combination. The penalty imposed may extend to one per cent of either the total turnover or the assets, whichever is the higher amount.
Do undertakings face administrative or regulatory consequences for risk and compliance management deficiencies?
Yes, undertakings do face administrative and regulatory consequences for risk and compliance management deficiencies.
For example, under the Aircraft Rules 1937, powers have been conferred on the central government and the Director General of Civil Aviation (DGCA) to grant various licences, permits, certificates, approvals, etc. At the same time, these rules empower them to suspend, cancel, withdraw or modify them, if the document holder contravenes certain provisions of these rules or does not comply with the directions issued by the DGCA or does not observe the terms and conditions of the relevant document. This can be termed as administrative action.
Further undertakings in India have been governed by various regulators such as the RBI, SEBI, Insurance Regulatory and Development Authority (IRDA), Pension Fund Regulatory and Development Authority, National Bank of Agriculture and Rural Development, Telecom Regulatory Authority of India, etc.
In addition to the penalties imposed by the RBI and SEBI as explained above, please note that section 105B of the IRDA stipulates the penalty for failure of an insurer to undertake life insurance business and general insurance business in the rural or social sector. In such an event, an insurer shall be liable to a penalty of up to 500,000 rupees for each such failure and shall be punishable with imprisonment for up to three years or with a fine for each such failure.
Do undertakings face criminal liability for risk and compliance management deficiencies?
Yes, undertakings face criminal liability for risk and compliance management deficiencies in India. The Companies Act 2013 prescribes the penalties for offences committed by companies. Under the Income Tax Act 1961, the Customs Act 1962, the Central Sales Tax 1956 and the Central Excise Act 1944, various tax-related crimes such as tax evasion, smuggling, customs duty evasion, value added tax evasion and tax fraud are prosecuted.
Further, the Environment (Protection) Act 1986 is an act under which the central government is empowered to protect and improve the quality of the environment. A significant statutory rule framed under this Act is the Hazardous Waste (Management and Handling) Rules 1989. It is to be noted that any violation of any rule framed under the provisions of the said Act renders the offender liable for imprisonment for a term of up to five years with a fine, and if the contravention continues beyond a period of one year, the term of imprisonment may be increased by another five years.Liability of governing bodies and senior management
Do members of governing bodies and senior management face civil liability for breach of risk and compliance management obligations?
Yes, the members of governing bodies and senior management face civil liability for breach of risk and compliance management obligations. For example, section 35(1) of the Companies Act 2013 imposes civil liability on every director, promoter or other senior management personnel for any mis-statements in the prospectus.
Do members of governing bodies and senior management face administrative or regulatory consequences for breach of risk and compliance management obligations?
Yes. See question 12.
Do members of governing bodies and senior management face criminal liability for breach of risk and compliance management obligations?
The Companies Act 2013 prescribes punishments for offences committed by companies under the Act. Liability for an offence leads to conviction or punishment by way of imprisonment or fine or both, and the punishment is inflicted on the company, the directors and other officers of the company who were accused and found guilty of the offence by a court.
In most cases, the persons liable for the offences are ‘officers who are in default’ and the said term is defined exhaustively under the Act. For the purpose of any provision under that Act, an ‘officer of the company’ means any of the following:
- a whole-time director;
- key managerial personnel, who include:
- a managing director, or chief executive officer or manager and, in their absence, a whole-time director;
- the company secretary; and
- the chief financial officer (CFO);
- where there are no key managerial personnel, such director or directors as are specified by the board on its behalf who have given their consent in writing to the board to such specification, or all of the directors if no director is so specified;
- any person in accordance with whose advice, directions or instructions the board of directors of the company is accustomed to act, other than a person who gives advice to the board in a professional capacity;
- any person who, under the immediate authority of the board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, and who authorises, actively participates in, knowingly permits or knowingly fails to take active steps to prevent, any default;
- in respect of a contravention of any of the provisions of the Act, any director who is aware of a contravention by virtue of receiving any proceedings of the board or participating in such proceedings without India objecting to the same, or where such contravention had taken place with their consent or connivance; and
- in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer.
Section 439 of the Act provides that, notwithstanding anything contained in the Code of Criminal Procedure 1973, every offence under the Act shall be deemed to be non-cognisable within the meaning of the Code of Criminal Procedure and that no court (as defined under the 2013 Act) shall take cognisance of any offence under the Act that is alleged to have been committed by any company or any officer thereof, except on the complaint in writing of the companies registrar, a shareholder of the company or a person authorised by central government.
In Anath Bandhu Samanta v Corporation of Calcutta (AIR 1952 Cal 759), the Calcutta High Court held that there is nothing in Indian law that precludes the trial of a company for an offence except where it was physically impossible for the company to have committed the offence in question; mens rea is essential. Furthermore, if the only punishment for the offence in question is imprisonment, a company can be tried for that offence and, if found guilty, punished by imposing a suitable fine.