In this article, Animesh Tiwary, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the criminal liability of directors under Companies Act, 2013

Introduction

The director of a company is responsible for smooth carrying out the business and managing the day to day affairs of the company. They are appointed by the shareholders for the efficient and effective running of the company as professionals.

The relationship existing between a director and the shareholder is that of a ‘fiduciary’ one (i.e. based on trust). Therefore, directors are exposed to liabilities whether it may be ‘civil’ or ‘criminal’ in nature in case of breach of duties by them. In cases of civil liabilities, the liability is set off by making payment or compensating the affected party whereas criminal liabilities, mentioned under various statutes, attract punishments for the person responsible for such breach. In this article, the discussion is based on the criminal liability of directors under the Companies Act, 2013.

Who is held responsible under the Companies Act?

It is to be noted that no person can be held liable on the basis of their designation. In order to fix liability, that person needs to fulfil certain legal requirements to be held responsible in law. Therefore, the persons who are held criminally liable for any non-compliance are those who were in charge or responsible for conducting the business at the time of the commission of the offence, i.e. the directors or ‘officer-in-default’ under whose directions any one or more directors is/are accustomed to act. The concept of ‘vicarious liability’ has also evolved in recent years which has brought senior management officials such as directors under the court’s purview for imposing liability.   

Sections determining Criminal Liabilities under Companies Act (2013)

Section 34 – Issue of Prospectus with untrue or misleading statements

According to this section, every person who authorizes the issue of such prospectus which contains untrue or misleading statements in the form of inclusion or omission thereby inducing another person to buy shares on that faith will be subject to imprisonment which may extend from minimum 6 (six) months to 10 (ten) years.

Section 53 – Issue of shares by a company at a discount

This section prohibits any company to issue shares at a discount. Non-compliance of this section results in a fine for the company which can range from one to five lakh rupees. The officer-in-default is held criminally liable and is punishable with imprisonment a period up to 6 (six) months or fine of one to five lakh rupees or both.

Section 68 – Buying back of shares by a company

This section contains provisions and guidelines to be followed by the company while buying back its own shares or other securities. According to Section 68 (11), in case of default by the company in complying with the provisions of aforesaid section or guidelines laid down by SEBI, criminal liability of the officer in default of such company shall be imprisonment up to 3 (three) years or fine of not less than one lakh rupees or both.

Section 71 – Issue of debentures by the company

This section deals with issuing of debentures by the company for financing with an option to convert such debentures into shares, wholly or partly, at the time of redemption. Accordingly, the company must appoint a debenture trustee for protection of rights of debenture holders. In case, when the debenture holder feels that the company would not be able to discharge the principal amount as and when required, the debenture holder may file a petition before Tribunal which may, after hearing the interested parties, pass the order restricting the company from incurring any further liability in the interest of debenture holders.

Moreover, when the company fails in redeeming the debentures at the time of maturity, the debenture holders or debenture trustees can file the petition before the Tribunal which may by order ask the company to make payment of principal amount and the interest due without any delay.

Non-compliance of such an order of Tribunal shall make the officer in default liable for imprisonment for a period which may extend up to 3 (three) years or fine of 2 (two) lakhs to 5 (five) lakhs or both.

Section 92 – Filing of annual return by the company before RoC

This section mandates the preparation of annual return by the company in the prescribed format end of every financial year. The annual return must contain such information as has been prescribed under Section 92(1). This return needs to be filed before the Registrar of Companies(RoC) within 60 (sixty) days from the date of AGM or time prescribed under Section 403. Failure to file the annual return may lead to a fine for the company in tune of fifty thousand rupees and criminal liability for the officer-in-default in form of imprisonment for a period extending up to six months or fine between fifty thousand to five lakh rupees or both.

Section 118 – Preservation of minutes of meetings by the company

According to this section, every company has to ensure that the minutes of proceedings of every general meeting, Board meeting and resolutions passed by postal ballot is prepared and signed in the manner as has been prescribed under the section and must be preserved for at least 30 days of the conclusion of such meetings. These minutes must contain all relevant information related to the meeting and decisions made in the course of such meetings. Further, sub-clause 12 of the section contains the provision for punishment in case a person-in-charge is found guilty of tampering with the minutes. He shall be liable for imprisonment for a period extending up to two years or a fine which may be in between twenty-five thousand rupees to one lakh rupees or both.

Section 128 – Maintenance of proper books of account by the company

This section makes it mandatory for a company to maintain proper books of account including the financial statement for every year and may keep these in an electronic mode in the prescribed form. Further, this information may be provided to investigating agencies as and when required and may be kept for a reasonable period of time.

This section further states that if the managing director or Chief Financial officer or the officer in default fails to comply with such provisions, he shall be criminally liable for imprisonment for a term of one year or a fine, not less than fifty thousand rupees and extending up to five lakh rupees or both.

Section 129 – Financial statement should be in the prescribed form

It deals with the provision that mandates a company to provide the financial statements in the prescribed form for respective class and which give a true and fair picture of the actual financial position of the company and complies with the approved accounting standards. Moreover, a company also needs to attach financial statements of its subsidiaries or associate companies, if any. According to Section 129(7), in case of the company’s failure to comply with the requirements of this section, the managing director or Chief financial officer or officer-in-default shall be punishable with imprisonment for one year or fine of at least fifty thousand rupees which may go up to five lakh rupees, or both.

Section 134 – Approval of financial statement by officials of the company

According to this, it is mandatory for every company that the financial statement, which may include the consolidated ones, must be approved by the Board of Directors through getting it signed by Chairman of such company authorized by Board or by two directors out of which one may be managing director and CEO, CFO and company secretary of such company. In case of non-compliance with the provisions laid down under this section, the officer-in-default shall be punished with imprisonment extending up to three years or fine in the range of twenty-five thousand rupees to five lakh rupees or both.

Section 167 – Vacation of office of the director of the company

This section is related to conditions or events which leads to the vacation of office of director. There are various events specified in this section which leads to the vacation of office such as disqualification under specific sections of the Act or by a court of law or Tribunal, acting in contravention of Section 184 while entering a contract or disclosing his interest in such contract, etc.

However, Section 167(2)(a) provides that if a person continues to hold the office of a director in the company even after having knowledge of vacation of office under him, such person is criminally punishable with imprisonment for term extending up to one year or a fine which may be in between one lakh rupees to five lakh rupees, or with both.

Section 185 – No advancement of loan to a director by the company

This section provides that no company shall advance an amount as loan represented by a book debt to a director or any such person for whom director gives a guarantee or any security against such loan, except as provided otherwise in the Act. According to Section 185(2), if any such act is committed in contravention to the above provision, such director or another person shall be criminally liable for imprisonment which may be extended up to six months or fine which may amount to minimum five lakh rupees and may extend up to twenty-five lakh rupees, or both.   

Section 188 – Cases of related party transaction

This section states that no company shall enter into a contract or transaction with a related party commonly known as ‘related party transaction’ without the approval of Board of Directors through a resolution passed in the Board meeting. These transactions may include sale or purchase, or supply of goods, an appointment of an agent or a related person to the office of profit in a company, etc. As per subclause 5 of this section, non-compliance of above provisions in case of listed companies may result into criminal liability of the director for imprisonment for a term extending up to one year or fine between twenty-five thousand rupees to five lakh rupees or with both.      

Section 229 – Penalty for False statement and destruction of documents

This section provides for a penalty for furnishing false statement, mutilation or destruction of documents by any person bound to cooperate during an investigation. If the statement made by him turn out to be false he shall be liable for punishment under the provisions of Section 447.

Section 447 – Penalty for fraud

This section is related to commission of fraud by any person of the company or wrongful loss to shareholders or wrongful gain to himself, such person shall be liable for imprisonment for period of at least six months which may extend to ten years or fine which shall be equal to amount of fraud and not any less but which may also extend to three times of the amount involved.

Section 448 – Penalty for providing false statement or omission of fact

This section provides for punishment for false statements. It states that if any report, financial statement, return, prospectus, filing or another document under any provision of this Act made by any person is false or omitted any material fact despite having knowledge of the same, then such person will be liable under provisions of Section 447.

Section 449 – Penalty for providing false evidence to authorities

This section deals with punishment for providing false evidence. According to this, if any person intentionally provides false evidence in the course of the examination upon oath or in the form of deposition, affidavit or winding up process of the company. Then, in that case, such person would be liable for imprisonment of at least three years which may extend to ten years or fine which may go up to ten lakh rupees.

These are the various sections under which a director of a company can be held criminally liable for any contravention of the provisions specified under the Companies Act, 2013.

Conclusion   

This article can be concluded as every director or officer-in-default (person who takes decision) of a company has huge responsibility of complying with various provisions of the Companies Act while dealing with the matters of the company and failure to abide by the provisions of the Act can lead to huge penalties to the company as well as themselves individually which can be in both civil and criminal form. Thus, they must be aware of the various compliance which is needed to be performed. There is also the concept of vicarious liability which plays an important role in determining the liability of a director. Therefore, a director must be careful while dealing with the affairs of the company and must ensure the maximum amount of transparency in his actions.