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Scope Of Officers-In-Default Under Criminal Liabilities Of Director

As a company is considered an Artificial Entity, it must be managed by capable professionals. The term for this group of competent individuals is Directors. A Director's role is to oversee the entire company's business, and as such, they indirectly influence the company's aspects. With great authority comes enormous duty. The authority placed on the Director to manage a firm creates the way for fraud and improper gain. Hence, the investors become victims.

After the LPG reforms, India's business structure transformed considerably. Due to the inadequacy of the legislation to accommodate the transformation, many directors and promoters were able to conduct fraud. This imposed strict obligations through several Companies Act modifications and Appellate Court rulings. The Indian Companies Act 2013 also enlarged the scope of the term officers in default. This paper examines the criminal liabilities of Directors under the 2013 Companies Act and the extent of officers in default via the prism of Judicial Proclamations.

The term 'company' is a broad term in itself. According to section 2(20) of the Indian Companies Act 2013, 'a company means any company incorporated under the Companies Act 2013 or any earlier companies act.' 1 This definition gives the term 'company' a broad meaning, as a result of which numerous judicial pronouncements have offered characteristics of a company.

Salomon v. A Salomon & Co. Ltd.2 was one such decision; it recognized that the firm is a separate legal entity. Even if the firm is considered a distinct legal entity, it is nonetheless an artificial entity. As a company is an artificial entity that cannot function independently, it needs management and employees to act as agents and operate on its behalf. This brings into the picture the concept of Directors.

In accordance with section 2(34) of the 2013 Companies Act, a director is defined as 'a director appointed to the Board of Directors of a Company.'

A director serves as the leader of a corporation and makes all significant decisions on its behalf. In the case of Bath v. Standard Land Company Limited3, it was determined that 'the board of directors is the firm's brain and that the corporation operates exclusively in accordance with their instructions. While the director is a prominent position, it comes with various rights to manage the company's business.'

As directors are endowed with various powers, they can abuse different things. Thus, the new Companies Act of 2013 establishes multiple responsibilities and liabilities for directors. Compared to the former Companies Act of 1956, the consequences for violating these obligations and responsibilities are more severe under the new law. The Companies Act has several clauses that impose duties on directors, such as the responsibility to disclose honest and accurate statements in the prospectus, the obligation to file annual returns of the business, and the duty to maintain the financial books in the prescribed format, among others.

Directors are appointed by the shareholders and owe them a fiduciary duty. This exposes the directors to civil and criminal culpability, which can result in penalties and imprisonment. India, like other nations, is accustomed to corporate fraud and cons. Several frauds perpetrated by management or promoters have been uncovered in India, including the Satyam, NSEL, and Lilliput cases.

The paper aims to analyze the criminal liabilities of directors and the scope of the term 'Officers in Default' in light of recent case laws. The author will rely upon secondary sources to draw conclusions and comparisons for the said purpose.

Research Question
The author aims to comprehend directors' criminal liability in corporate fraud cases. In addition, the author seeks to trace the scope of the term 'officers in default'.

Literature Review
The director's position in a corporation is crucial. He ensures the firm's smooth operation and oversees the organization's normal tasks. Directors are appointed by the shareholders and owe them a fiduciary duty.

This exposes the directors to civil and criminal culpability, which can result in penalties and imprisonment.

The existing legal system imposes numerous responsibilities and liabilities on directors. Increased penalties under the new Companies Act demonstrate the significance of regulating a director's duties. The legal foundation has been rectified, and it is now the court's responsibility to oversee that these rules are used in such a way as to minimize and eventually end the directors' malfeasance.

In applying general ideas of equity to business directors, four distinct regulations have evolved. They are:

  • directors must act in good faith and do what they believe is in the best interest of the company,
  • they should not use the powers conferred on them for any purpose other than that for which they were granted, and
  • They should not place themselves in a position where there is a possibility of a conflict between their interests and their duties to the company without the company's express consent. 4

Fraud cases can have three sorts of culpability: contractual, tortious, and criminal. Criminal Responsibility is an unlawful act of omission or commission, punishable by criminal consequence, undertaken by an individual or group of individuals during their employment.5

Directors are accountable for violations of the provisions of the Companies Act and other statutes, which can result in a fine, imprisonment, or both. In the case of Maksud Saiyed v. State of Gujarat and Others6 , the Supreme Court of India ruled that if the law provides for vicarious responsibility, the Managing Director and Director would be liable. If directors are found to be negligent or have abused their position, they will be subject to civil and criminal consequences.

Criminal liability may ensue, for instance, if directors make false statements in the prospectus, fail to maintain books of account as required by Section 209, or fabricate reports. A director may be acquitted if he can demonstrate that he was not in command or control of the company's day-to-day activities or that the act was committed without his approval, knowledge, or connivance, and he was not negligent in ensuring compliance with the law.7

Liability of Directors
As per the Companies Act 2013, a director has various liabilities.

These liabilities can be divided into the following heads:

  1. Liability to the Company
  2. Liability to Third Party
  3. Liabilities for breach of statutory duties.
  4. Liability for the acts of Co-directors
  5. Criminal Liability

However, in this article, the author will explore the scope of the Criminal Liabilities of Directors.

Criminal Liability of Directors
As stated above, a fiduciary relationship exists between a director and a company, i.e., the directors have to act in the company's best interest. However, if they fail to do so, liability is imposed. Liability can be civil or criminal. This paper talks about the criminal liability of the directors.

Historically, corporate criminal liability was not identified because it was a common notion that commissioning crime requires mens rea. Since a company does not have a mind of its own, there cannot be mens rea, due to which the concept of corporate criminal liability was not recognized. However, with time judiciary started realizing the idea of corporate criminal liability. In Iridium India Telecom Limited v. Motorola Incorporated & Ors.,8 the Supreme Court, for the first time, said that a company could be a part of a criminal conspiracy and can be held criminally liable.

After the Iridium case, Indian Companies Act 1956 was replaced by Indian Companies Act 2013. Under the new act, there were increased monetary penalties and imprisonment for criminal acts of the company. The new act recognized the corporate criminal liability of the companies. Furthermore, Section 2(60) of the Indian Companies Act 2013 defined 'Officers in default'. 'Officers in Default' include key managerial personnel, whole-time directors, directors etc. Supreme court, in the case of K.K. Ahuja v. V.K. Vora9, held that only those persons who fall under the scope of officers in default will be held criminally liable.

In another case of Pritha Bag v. SEBI10, the difference between an officer in default and other directors was established by the Securities Appellate Tribunal.

In the case of Pooja Ravinder Devidasani v. State of Maharashtra11, the apex court held that just holding the director position would not make a person liable for the company's actions. Certain factors must be considered to make a person liable for the company's activities. These factors are provided under Section 149(12) of the Indian Companies Act 2013. It states that a director can be made liable for the company's acts if they occurred with their knowledge, consent or attributed through board processes.

In another case of SEBI v. Gaurav Varshney12, it was held that criminal liability arises when the director of the company is in charge of the conduct of the company.

In conclusion, there are many cases in which the judiciary has talked about the criminal liability of the directors and has cleared the scope of the term Officers in default. The Indian Courts have expanded the scope of corporate criminal liability and officers in default.

End Notes:

  1. Companies Act 2013, No. 18, Acts of Parliament, 2013 (India)
  2. Salomon v. A Salomon & Co. Ltd. [1897] AC 22
  3. Bath v. Standard Land Company Limited, (1910) 2 Ch. D. 408
  4. Ananya Jain, Criminal Liability of Directors: An Important Facet for Developing India, 10 Supremo Amicus 13 (2019).
  6. Maksud Saiyed v. State of Gujarat and Others (2008) 5 SCC 668
  7. Smita Satapathy, Corporate Fraud and Criminal Liability of Directors, 5 INT'l J.L. MGMT. & HUMAN. 1148 (2022).
  8. Iridium India Telecom Limited v. Motorola Incorporated & Ors (2011) 1 SCC 74
  9. K.K. Ahuja v. V.K. Vora, (2009) 10 SCC 48
  10. Pritha Bag v. SEBI, 2019 SCC OnLine SAT 110
  11. Pooja Ravinder Devidasani v. State of Maharashtra, (2015) 3 SCC (Civ) 384
  12. SEBI v. Gaurav Varshney, (2016) 14 SCC 430

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