Introduction
The term “corporate governance” describes an organization’s commitment to conducting business in a morally, legally, and openly responsible manner. It is a relationship that exists between corporations and their stakeholders, including creditors, employees, shareholders, and even the general public. Corporate governance is a ubiquitous concept.
It exists in the legal sphere as statutory laws, but it is also evident in the way boards operate, how investors and employees are involved, how policy decisions are made, and how the general public views enterprises. Given this context, it is critical to comprehend how various laws support corporate governance, which is a key characteristic of Indian enterprises.
The Insolvency and Bankruptcy Code, 2016 (IBC or the Code) was introduced to modify the laws pertaining to India’s debt settlement system. This comprehensive code attempts to facilitate business resolution (corporate debtor) by transferring ownership of the company to the creditors, allowing them to determine how best to repay the debt; while also giving the corporate debtor the chance to continue operating as a going concern and eventually even turn a profit.
This is accomplished through the use of a resolution plan, which seeks to revitalize the corporate debtor through strategies including debt payback, management and control changes, liability waivers, and other similar measures that are authorized by the creditors.
The Bankruptcy Law Reform Committee claims that a strong bankruptcy and insolvency law facilitates better resolution of debtor-creditor disputes. Even though they were the ones who caused the company to fail, debtors would still have authority over it under the previous system of insolvency and liquidation, as is all too well known. Furthermore, they would adhere to the procedural rules, but in many cases, it would be done to buy asset stripping time.
Today, the IBC offers protection for the value of the firm for all stakeholders by moving away from the debtor-in-control regime and toward the creditor-in-control model. The introduction of legal frameworks like The Insolvency and Bankruptcy Code, 2016 aims to enhance governance by penalizing misconduct and promoting accountability. This paper delves into how Chapter VII of the IBC impacts corporate governance.
UNDERSTANDING CORPORATE GOVERNANCE
The set of regulations, customs, and standards that control an organization’s management and direction is known as corporate governance. A company’s board of directors, management, shareholders, other stakeholders, and regulators must all carefully balance their respective roles and authority. Safeguarding the interests of all stakeholders and achieving business goals in an ethical and effective manner are the two main goals of corporate governance.
When it comes to corporate governance standards, the 1999-established OECD Principles of Corporate Governance (often known as the “OECD Principles”) have gained international recognition. The importance of sound corporate governance in promoting global economic stability and strength is emphasized by these ideas.
When it comes to corporate governance, the OECD Principles are the global norm that directs both public and private sector reform initiatives. The OECD Principles highlight that legislative regulations (such as those pertaining to labour, business, commercial, environmental, and insolvency) or contractual agreements that corporations are required to uphold are the primary means by which the entitlements of stakeholders are defined.
Examining more closely, the OECD Principles emphasize the value of complementing the corporate governance structure with an efficient insolvency process and the enforcement of creditor rights.
The structure that directs and controls businesses is known as corporate governance. The management of their firms is the responsibility of the boards of directors. In terms of governance, the shareholders’ responsibilities include selecting the directors and auditors and ensuring that the right kind of governance framework is in place.
The board oversees the management of the firm, reports to shareholders on its stewardship, sets the company’s strategic goals, and provides the leadership to carry them out. Thus, corporate governance is different from the day-to-day operational management of a firm by full-time executives in that it concerns the actions of the board and how it establishes the organization’s principles.
Enactment Of IBC
An extensive legal framework for the resolution of corporate distress was created in India in 2016 with the passage of the Insolvency and Bankruptcy Code (IBC), a historic piece of legislation that combined and updated the nation’s disparate insolvency and bankruptcy laws.
In an effort to increase efficiency, transparency, and investor confidence in the Indian economy, the IBC established a uniform, time-bound mechanism for insolvency resolution and liquidation.
The IBC 2016’s principal provisions and goals are as follows:
- Procedure for Resolving Insolvency:
The Insolvency Resolution Process (IRP), a time-bound procedure for resolving corporate debtors’ insolvency, was established by the IBC. An Insolvency Professional (IP) with the necessary license oversees the procedure, seizing possession of the debtor’s assets and handling its business during the resolution phase. - Committee of Creditors (CoC):
Financial creditors, who are essential to the resolution process, are part of the Committee of Creditors that the IBC established. The CoC makes important choices, such as approving potential buyers’ resolution plans and, if necessary, starting liquidation procedures. - Moratorium:
Any legal action taken against the debtor or its assets is barred once the IRP is started. This keeps the company’s worth intact and guarantees that no creditors will be able to recoup their debts during this time. - Liquidation:
In the event that the debtor’s efforts at resolution are unsuccessful, its assets may be sold to pay off creditors. To provide fairness to creditors, the IBC sets a particular order for the distribution of proceeds. - Fast-track Process:
In order to expedite resolution and lessen the load on the National Company Law Tribunal (NCLT), the IBC established a fast-track insolvency process for smaller enterprises with shorter durations.
Overview Of Chapter VII Of IBC
A time-bound procedure for resolving insolvency and bankruptcy is provided by the Insolvency and Bankruptcy Code, 2016.
Section II, Chapter VII of the code lists offences and their corresponding penalties, including concealment of property, misconduct in course of the corporate insolvency resolution process, falsification of books of the corporate debtor, etc.
In addition, the IBC stipulates penalties for the transgressions made by creditors in an effort to establish discipline in their actions.
Offences and Penalties under the Insolvency and Bankruptcy Code, 2016
Offences Committed by the Officer of Corporate Debtor or the Corporate Debtor and Subsequent Penalties
Section 68
Where a Corporate Debtor, within the twelve months immediately preceding the insolvency commencement date:
- Wilfully concealed any property or debt
- Fraudulently removed any part of the property of value ₹10,000 or more
- Wilfully concealed, destroyed, falsified, or altered documents relating to the corporate debtor’s property or affairs
- After the insolvency commencement date, knowingly received or disposed of secured property
Penalties: Imprisonment: 3–5 years; Fine: ₹1 lakh – ₹1 crore; or both.
Section 69
On or after the insolvency commencement date:
- Engaging in transactions intended to deceive creditors
- Transferring property within 2 months of an unfulfilled court order for payment
Penalties: Imprisonment: 3–5 years; Fine: ₹1 lakh – ₹1 crore; or both.
Section 70(1)
Failure to disclose property, books, or papers to the resolution professional on or after insolvency initiation.
Penalties: Imprisonment: 3–5 years; Fine: ₹1 lakh – ₹1 crore; or both.
Section 71
Destroying, mutilating, altering, or falsifying documents after the bankruptcy date, or making fraudulent entries to mislead.
Penalties: Imprisonment: 3–5 years; Fine: ₹1 lakh – ₹1 crore; or both.
Section 72
Deliberate and significant omission from any statement about the corporate debtor’s affairs.
Penalties: Imprisonment: 3–5 years; Fine: ₹1 lakh – ₹1 crore; or both.
Section 73
Falsifying information or committing fraud before or after insolvency to obtain creditor approval for a deal.
Penalties: Imprisonment: 3–5 years; Fine: ₹1 lakh – ₹1 crore; or both.
Section 74
- Section 74(1): Intentional violation or facilitation of Section 14 of the code.
- Section 74(3): Wilful violation or assistance in violating the terms of a resolution plan.
Penalties: Imprisonment: 3–5 years; Fine: ₹1 lakh – ₹3 lakh; or both.
Offences by Insolvency Professional Agency or Insolvency Professional
Section 70(2)
Deliberate contravention of the Code by an insolvency professional.
Penalties: Imprisonment: up to 6 months; Fine: up to ₹5 lakh; or both.
Section 185
Deliberate contravention by insolvency professionals under the insolvency framework for individuals and partnerships.
Penalties: Imprisonment: up to 6 months; Fine: up to ₹5 lakh; or both.
Section 220(3)
Contravention by an insolvency professional agency, professional, or information utility of provisions or rules of the Code.
Penalties:
- Three times the loss caused or the unlawful gain, whichever is higher
- Up to ₹1 crore if loss cannot be measured
- Cancellation or suspension of registration by the Disciplinary Committee
Offences by Creditors of Operational Creditor
Section 74(2)
Violation of moratorium conditions or intentional authorisation of such violation.
Penalties: Imprisonment: 1–5 years; Fine: ₹1 lakh – ₹1 crore; or both.
Section 76
Concealment of the existence of a dispute or full repayment notice by an operational creditor in a Section 9 application.
Penalties: Imprisonment: 1–5 years; Fine: ₹1 lakh – ₹1 crore; or both.
Conclusion
The nation’s corporate sector is regulated by strict penal legislation. Decriminalizing corporate wrongdoing and substituting small fines for harsh penalties may erode accountability, encouraging deliberate violations with the understanding that profits outweigh penalties.
Fixed penalties across businesses of varying sizes are discriminatory. As observed in Adamji Umar Dalal v. State of Bombay, sentencing must consider contextual factors. Ignoring circumstances could lead to excessive punishments and severe harm to individuals or businesses.
Fines are only meaningful when they serve as a deterrent. For large corporations, a ₹1 lakh penalty may be negligible; for a small firm, it could mean bankruptcy. Furthermore, indiscriminate penalties may deter foreign investment, undermining economic objectives.
Role Of Corporate Governance In Corporate Crimes
The public is indirectly affected when corporate crimes occur, and handling corporate crime cases in court is a laborious process because it can be difficult to determine how to punish corporate offences. Because of this, the adage “prevention is better than cure” applies here and emphasizes the need of corporate governance in preventing corporate crimes.
To put it succinctly, corporate governance is a framework for overseeing and controlling businesses. In this sense, corporate governance is a collection of procedures that enable a business to run with ownership and management kept apart. It also creates a framework for goal-setting, the development of strategies for reaching those goals, and the exercise of the owner’s oversight over the business’s operations.
A strong corporate governance framework will effectively incentivize employees to work toward the company’s goals and protect the interests of shareholders. Consequently, this will enhance the effectiveness of operations supervision, thereby directly affecting the utilization of resources.
In a limited liability company, corporate governance refers to the interactions between the main clients, employees, directors, management, and suppliers. The legal, institutional, and regulatory frameworks of any country contain both formal and informal corporate governance concepts.
The Board of Directors and executives should have valid incentives to achieve objectives that maximize value for the company and its investors. Additionally, effective corporate governance should streamline and improve the quality of management functions.
A stable and competent general legal framework and an institutional environment that considers how firms are structured and how best to operate are both applicable to corporate governance. In any case, a certain course of events may create such an environment, preventing the misuse of power, and speculation won’t begin until businesses are certain that the risk associated with their venture and the “state’s” risk are both reasonable.
Taking into account the corporate governance framework, the World Bank, national governments, and other pertinent international organizations were advised by the OECD (1998) to establish guidelines and standards for corporate governance. Governments view the principles as a wide framework that is necessary for the advancement of good governance practices.
They ought to focus on the following and be clear, succinct, and understandable to people around the world:
- Laying the groundwork for efficient corporate governance
- The role and rights of shareholders
- Openness
- Board accountability
On the other hand, ineffective corporate governance can facilitate corporate criminality. A prime example of inadequate corporate governance is the “Satyam Scam” case.
Satyam Computer Services founder and chairman B. Ramalinga Raju acknowledged that the Satyam scam was the biggest corporate fraud in India, with the scheme involving manipulation of the company’s cash flows, balance sheet, and income statements over a period of more than seven years. The company’s founder and his brother, the CEO, committed a $1.47 billion fraud on Satyam’s financial sheet by inflating revenues and profitability in an effort to draw in new business and stave off a hostile takeover.
In his confession statement, Raju compared the experience to being on a tiger and not understanding how to get off without getting devoured. Satyam had received high appreciation for its outstanding corporate governance, and Raju was looked up to as an example of a prosperous businessman and entrepreneur.
The founder and his accomplices documented false cash deposits, fictitious accounts payable and receivable, overstated assets, and understated liabilities; these lies came to light only after Raju made an attempt to purchase two more family-run companies. The proposed acquisition infuriated shareholders, who perceived it as an attempt to utilize the software company’s profits to support other faltering family businesses.
Even before the Satyam scandal surfaced, in 2003, corporate wrongdoing and poor governance had already cost Indian shareholders more than $2 billion.
In a report released on January 7, 2009, an analyst at one of India’s leading investment houses found that only 4 out of 68 Indian companies adhered to “highly desirable” disclosure standards; more than half of the companies on the list that did not make the grade were well-known companies with significant global presence.
According to every source, corporate governance plays a significant part in a company’s unlawful operations. While poor corporate governance and widespread opportunistic behaviour can negatively impact business operations, ethical governance can help keep irregularities on the part of the organization under control.
Ways and Means to Strengthen Corporate Governance
Corporate crimes have become increasingly significant in recent times, with the impact of corporate governance being questioned. These crimes are often driven by meticulous planning and unethical activities by individuals hiding behind the corporate veil. Scandals like Enron, Satyam, and Punjab National Bank have demonstrated the detrimental effects of these crimes on the economy and society.
In India, corporations can be held criminally liable for offences that require compulsory imprisonment, but the court has ruled that imprisonment should be substituted with compensation.
The primary objective of criminal sanctions is to deter and ensure that corporations do not indulge in criminal activities. However, a cost-benefit analysis is required to determine whether monetary fines are effective. Large companies are financially sound and can afford compensatory damages, so punitive fines may not be an efficient deterrent for erring corporations. In some cases, individual sanctions may be more effective, as corporate entities cannot be imprisoned.
The legal proceedings in such cases remain complex and lengthy due to the involvement of numerous documents and evidence. Corporate democracy is not well-functioning in corporations, and influential Boards of Directors manage to find their way in everything. Therefore, courts may adopt a mixed model, imposing sanctions based on the facts of every case.
Both compensation and imprisonment are useful tools in the hands of the judiciary, working together as a deterrent against complex corporate crimes. Newer and alternative forms of economic and social sanctions are needed to bar corporates from indulging in organized corporate crimes. Alternatives to imposing fines and imprisonment include:
- Restrictions on trade
- Forcing closure of companies
- Earmarking corporations as fraud
Good governance is crucial for ensuring the welfare of all stakeholders, including the Board of Directors, shareholders, and other stakeholders. Good governance respects the rights of shareholders and society dependent on corporations, maintains stock prices, and reduces dishonest corporate activities. The idea of corporate democracy should be promoted, and small shareholders should take more interest in company meetings and operations.
Conclusion
There are important ramifications for corporate governance when looking at the offenses and punishments under Chapter 7 of the Insolvency and Bankruptcy Code (IBC). By enforcing severe sanctions for non-compliance and fraudulent activity, Chapter 7 seeks to strengthen the integrity of the bankruptcy process.
This legal framework accomplishes several goals:
- Deterrence of Malpractices: A strong disincentive against dishonest behavior and poor management is the possibility of heavy penalties and jail time. Chapter 7 urges businesses to uphold moral standards and preserve openness in their financial transactions by enforcing harsh penalties for offenses such as record-keeping fraud and deception.
- Enhanced Compliance: Companies are more likely to adhere to governance principles and procedures when they face the severe penalties described in Chapter 7. Organizations are compelled to guarantee correct documentation and adherence to legislative responsibilities out of fear of legal ramifications, which helps to foster a more disciplined corporate climate.
- Promotion of Ethical Conduct: Chapter 7 encourages an ethical and responsible culture in organizations by making people and businesses accountable for their deeds. The legal penalties for noncompliance serve as a reminder of the value of moral conduct and corporate responsibility, which strengthens governance principles.
- Difficulties with Enforcement: Although there is a strong structure in place, it is nevertheless difficult to effectively apply these sanctions. The prompt application of penalties can be impacted by factors including procedural delays and the intricacy of judicial proceedings. This could have an influence on both the general deterrence effect and the uniformity of enforcement.
- International Comparison: Chapter 7 is consistent with international norms of using legal penalties to make businesses accountable when compared to global standards. Nonetheless, ongoing assessment and modification of these clauses are required to handle new challenges and align with global best practices.
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- Letschert, R. & Groenhuijsen, M., 2011. Global governance and global crime: Do victims fall in between?
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https://doi.org/10.1177/0011128702048002005 - The Insolvency and Bankruptcy Code, 2016
https://ibbi.gov.in/uploads/legalframwork/2020-09-23-232605-8ldhg-e942e8ee824aa2c4ba4767b93aad0e5d.pdf
