This article has been written by Yash Devda pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
This article has been edited and published by Shashwat Kaushik.
Table of Contents
Introduction
Every organisation needs people to function properly. In the case of companies, the people who act as functioning heads are called directors. The Companies Act, 2013 in India is the statute that defines and governs all the management of corporate entities. Liability of directors is a very crucial part of corporate governance, which also includes criminal offences committed by directors during their official seat. As we all know, a company is a separate legal entity, and the company is wholly responsible for the actions it takes, but in various scenarios, directors are liable for the company’s actions, which we are going to discuss in this article. This article aims to provide provisions of the Companies Act 2013 that impose criminal liabilities on directors, abstract important sections, their implications, and penalties. Directors are the decision-makers of any company so it is important to explain their duties and liabilities under the Companies Act, 2013. 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.
Who is a director
Directors and shareholders are the two main groups of people in any company. Shareholders are the real owners of the company, while directors are the representatives of the shareholders, which take control of the day-to-day affairs of the company. As we all know, this company is not a real person; therefore, it needs people to govern it. The people who govern the company are called directors, who have vast amounts of powers that can be used for their gain. Liability arises when there is a misuse of these powers by directors; the more clean and clear term used by the judiciary to define these directors is “Offices in Default”. It is the duty of directors to work in the best interest of the company; when they do not work in the best interest of the company, they are held liable under the Companies Act, 2013, which would raise a civil liability or criminal liability depending on the loss that has been done by directors. Directors are also held liable for their acts of misconduct or wilful misuse of powers. Actions that give rise to criminal liabilities are a breach of fiduciary duties, acts that are ultra-vires, Negligent acts, actions that are mala fide, etc.
Provisions of the Companies Act 2013 that dictate criminal liabilities of directors
Mis-statements in the prospectus (Section 34)
Any prospectus issued by any authorised person that contains any statements that are untrue or misleading in form or context, then the person issuing the prospectus shall be liable for such misstatements and directors in default will be liable for punishment, which could be imprisonment for 6 months to 10 years. Misstatement in the prospectus creates criminal liability on issuers, which in the case of the company are mostly directors. Untruth in prospectus leads to loss or damage to the shareholders, which is the direct responsibility of directors.
Statements in the prospectus that are untrue or misleading in form or context authorised by any person are punishable under this section but he proves reasonable ground that such statements are true until the filing of the statement. If the issuers are proposing that the statements in the prospectus are true and not misleading, then he has to prove that the given prospectus are true and are not misleading. A prospectus issued in good faith but is untrue or misleading may or may not amount to criminal liability.
Prohibition on issue of shares at discount (Section 53)
According to this section, if any company issuing shares at a discount price shall be void. Also, violation of this section by any company is subject to a fine of not less than one lakh rupees but could be extended to five lakh rupees. Every employee or officer who’s in default may face punishment with imprisonment for a term that may extend to six months or a term that is not less than one lakh rupees but extends to five lakh rupees or both.
Power of company to purchase its own shares (Section 63)
As per Sub-Section (11) of this provision, any company that fails to comply with this section, whoever employee or officer involved in this default shall be punished with imprisonment for a term which may extend to three years or a fine of not less than one lakh rupees or both. This provision also provides rules and regulations for companies to buy back their shares or any other securities.
Failure to submit an annual return (Section 92)
This provision requires a company to prepare annual returns in the prescribed format, to be submitted at the end of each financial year. The company must also file these returns with the Registrar of Companies within sixty days, as stipulated under Section 403. Failure to comply with this requirement may result in the officer or employee in default being subject to imprisonment for up to six months, a fine ranging from fifty thousand rupees to five lakh rupees, or both. Additionally, the company itself may be fined up to fifty thousand rupees.
Issue of debentures by the company (Section 71)
Debentures are a very common method used by the company to raise funds for their various projects. Debentures work at a particular rate of interest and can be converted (wholly or partly) into shares as per the will of the debenture-holder and promise to pay principle as well as interest on demand of the debenture-holder. According to this section, if a company fails to return capital generated through debentures, then the debenture-holder can file a petition to the tribunal, which, after proceedings, may pass an order to the company to return the principal amount and interest on it to the debenture-holder without any further delay.
Upkeeping of minutes of meetings of the company (Section 118)
This section mandates that every company must preserve the minutes of meetings conducted during its business operations. This includes meetings such as annual general meetings (AGM), board of directors meetings, resolutions, and decisions made via postal ballot. These records must be maintained for a minimum of thirty days. Sub-Section (12) of this section imposes liability on any person found guilty of tampering with the minutes of the company’s meetings, making them subject to imprisonment for up to two years, or a fine ranging from twenty-five thousand to one lakh rupees, or both.
Maintenance of proper books of account by the company (Section 128)
As per this provision, every company is required to maintain accurate and detailed books of account that record all financial information for each financial year in the prescribed format. If the managing director, chief financial officer, or any officer in default fails to comply with this requirement, they may face imprisonment for up to one year, a fine ranging from fifty thousand rupees to five lakh rupees, or both.
Vacation of office of director (Section 167)
This section outlines the circumstances under which a company director may vacate their office, such as being absent from all board meetings, disqualification under Section 164 of the Act, or violation of Section 184 while managing the company’s affairs, as determined by a court or tribunal. If an officer knowingly continues to hold office after vacating it, they will face penalties, including imprisonment for up to one year, a fine ranging from one lakh rupees to five lakh rupees, or both.
Loan to directors (Section 185(2))
This section prohibits directors, or any person whose guarantee has been provided by a director, from obtaining loans or any security against loans from the company, except as otherwise permitted by the Act. If a director or such a person takes a loan or secures it in violation of this section, they will face penalties, including imprisonment for up to six months, a fine of not less than five lakh rupees, which may extend to twenty-five lakh rupees, or both.
Loan and investment by Company (Section 186(12))
This section allows companies to invest in or provide loans to other companies and individuals, following the guidelines set out in Sub-Section (2) of Section 186. If a company intends to invest in another company, it cannot acquire more than sixty percent of the shares of any subsidiary company without first holding a Board of Directors meeting. Additionally, any loan provided under this section must not have an interest rate lower than the prevailing yield of a one-year, three-year, five-year, or ten-year government security that is closest to the loan’s tenor. If any officer violates the provisions of this section, they may face penalties, including imprisonment for up to two years and a fine ranging from twenty-five thousand to one lakh rupees.
Disclosure of interest by the director (Section 184(4))
As per this section, every company director must disclose any interest or involvement they have in other companies, corporations, firms, or associations of individuals at the first Board meeting of each financial year. If a director enters into a contract or arrangement with another company, they must inform the Board of their interest. Additionally, if a person becomes a director and subsequently enters into a contract or arrangement, they must disclose their interest or involvement at the next board meeting. What will happen when directors fail to comply with these disclosure requirements? They may face penalties, including imprisonment for up to one year, a fine ranging from fifty thousand to one lakh rupees, or both.
Conclusion
At last, this article explains that every company and every office in the company must comply with the provisions, rules, and regulations of the Companies Act, 2013, and if any person violates any such section, shall be punished with said provisions of this act. Criminal liability is a very effective tool that checks on the company to operate in a legitimate way. Directors should be aware of their duties and responsibilities to avoid any criminal liability under the Companies Act, 2013.
References
- https://blog.ipleaders.in/criminal-liability-directors/
- https://libertatem.in/blog/criminal-and-civil-liabilities-of-the-director-of-a-company/
- https://www.jsba.in/blog/Directors-Duties-&-Liabilities-under-Companies-Act-2013
- https://www.legalserviceindia.com/legal/article-11722-scope-of-officers-in-default-under-criminal-liabilities-of-director.html
