This article is written by Divyansh Prasad, pursuing Executive Certificate Course in Competition Law, Practice and Enforcement from LawSikho.com.
The directors and key managerial persons are considered as the guardians of a company and they owe a duty to the stakeholders to manage the affairs of the company in a legally sound manner. Even though a company is considered to be a different legal entity, the directors and key managerial persons can be held vicariously liable for the offences committed by the company as they are the individuals who are responsible to take business decisions and manage the daily affairs of the company.
The Competition Act, 2002 (‘Act’) is the governing act for offences related to anti-competitive agreements, abuse of dominant position, and combinations. Once an enterprise is found guilty of contravening the substantive provisions of the Act, Section 27 of the Act empowers the Competition Commission of India (‘CCI’) to impose a penalty upon the infringing enterprise. Section 48 also provides for individual liability for the directors and key managerial persons of the infringing company.
When an offence is committed by a company, every person who was in charge of, or responsible to the company to conduct business shall be considered guilty and a penalty shall be imposed on him/her as well. Furthermore, any director, manager, secretary or officer of the company may be held liable for the infringement if it is established that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of them.
Further, if a person has been convicted of an offence under the Competition Act or has been imposed a fine exceeding one thousand rupees, it results in disqualification from holding the post of managing director, whole-time director, or a manager in a company under the Companies Act 2013. Hence, individual liability is not limited to monetary penalties but also covers the reputational loss.
Understanding Section 48
Section 48 is an all-encompassing penalty provision that covers each and every individual of the company who can be proved to have played a role in the implementation of the anti-competitive practice. According to Section 48(1) of the Act-: “Where a person committing contravention of any of the provisions of this Act or of any rule, regulation, an order made or direction issued thereunder is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the contravention was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such contravention.”
The first subsection covers those individuals who were in charge of or responsible for the conduct of the business of the company. This puts the key managerial persons and directors at a higher risk since this deeming provision would make them liable irrespective of their level of participation in the conduct. However, the proviso to this subsection provides a way through for these individuals to be absolved of their liability. It says that if the person proves that the contravention was committed without his knowledge or that all due diligence was exercised to prevent the contravention, the person shall not be held liable. Hence, a very high burden of proof is placed on these individuals to plead their innocence.
Section 48(2) states that-: “Notwithstanding anything contained in sub-section (1), where a contravention of any of the provisions of this Act or of any rule, regulation, order made or direction issued thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that contravention and shall be liable to be proceeded against and punished accordingly.”
This provision extends the powers of the CCI to each officer of the company who was actively involved in the contravention of the provisions of the Act. The burden of proof on the CCI is to prove that the contravention took place with the consent/connivance or neglect of the particular officer. Hence, Section 48 in its entirety gives a wide array of powers to the CCI to punish each and every individual who can be proved to be responsible for the contravention of the Act.
CCI’s decisional practise
The CCI’s intent of penalising individuals can be traced back to the Varca Druggist and Chemist Case decided way back in 2012. Varca Druggist and Chemist had alleged that the Chemist and Druggist Association Goa (‘CDAG’) was practising unfair trade practises by issuing guidelines which related to appointment of stockists/wholesaler by a pharmaceutical company only from those who were already a member of CDAG, rendering stockists who were not a member ineligible for being appointed. A ‘No Objection Certificate’ by the CDAG was also mandatory for such appointments. The CCI found the CDAG guilty of violating Section 3 of the Act and then moved ahead to examine the roles of the individuals who were responsible for the conduct. The CCI attributed the contravention committed by the association to its members who were primarily responsible for conducting the affairs of the association and were active participants in such decision of the association. Hence, the Commission held the Executive Committee of the CDAG responsible for the anti-competitive practise of CDAG.
Althoughthe CCI clubbed both Section 48(1) & 48(2) in the above-mentioned case, its distinction was dealt in detail later in the case of Maruti and Company v Karnataka Chemists and Druggist Association where the CCI interpreted both the provisions and clarified their scope. The CCI held that ‘Section 48(1) of the Act is triggered when the party in contravention is a company (including a firm or an association of individuals) and a person/individual officer/office bearer is found to be in-charge of, and responsible for the conduct of the business of the contravening company/firm/association,’ whereas ‘Section 48(2), on the other hand, attributes liability on the basis of the de-facto involvement of any officer.’
This made it very clear that the CCI would test the culpability and ascertain the involvement of individuals of the companies on two touchstones. First is the position held by the individual in the hierarchy of the company. The second is the level of involvement of the individual in the alleged anti-competitive acts of the company. It has been the decisional practice of the CCI to keep both these parameters open-ended and use them as per the facts of the case to hold the individual officers of a company liable. Also, as seen in the case of P.K Krishnan v Alkem Laboratories, the CCI has not limited itself to imposing monetary penalties on such individuals, but has gone on to order the disassociation of the erring individuals from the company to create a much larger deterrent effect.
The offences under the Act are serious ones and some of them even have the power to affect the economy and harm consumer welfare. Large scale cartels in public procurement can dent a blow to the public exchequer and consequently result in irreparable loss to consumers as well. Hence, a strong individual liability system is essential to ensure that the directors and key managerial persons of the company perform their duties without contravening the provisions of the Act. Their role assumes significance as the offences are not merely procedural, for e.g. filing a form before the ROC, but involve serious decision making and are not likely to go ahead without the knowledge of those at the top. Individual Liability ensures that the decision making of the key managerial persons is legally sound and they take into account all possibilities of contravention of the act before proceeding with any agreement or unilateral action.
However, excessive intervention or high penalties might pose the risk of suppressing innovation. Moreover, with the poor record of the CCI in collecting penalties; with most of them being stuck in appeals at the NCLAT and the Supreme Court; the unwanted outcome of suppression of innovation is more like to occur. As a result, the key managerial persons might abstain from taking any risks while taking decisions related to investments or collaborations due to the uncertainty and fear of being held liable by the CCI.
A balance can be struck between such outcomes by the companies through strong competition compliance programs. Such programs would ensure that they are well aware of the existing law and the contraventions which their actions might result into. Hence, the key managerial persons would be better placed to make their business decisions without any fear of being held liable for contravention of the Act and the consequent monetary and reputational loss.
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