In this article, Sushmita Udayasankar, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses how the legal system tackles cyber terrorism.

Introduction

With the increased usage of internet and computers, there has been an unprecedented increase in the misuse of the cyber world by criminals and anti-social elements. Crimes are now increasingly committed using the internet as a medium. Such crimes have been termed as Cybercrimes.

There are different categories of cyber crimes. Crime committed against the government and the nation as a whole by challenging the integrity and security of the country is referred to as Cyber Terrorism.

Meaning of the term ‘Cyber Terrorism’

Terrorism means intentionally creating fear or horror in the minds of the public and intimidating them by using force or weapons or other means. This is done in pursuit of some unreasonable political, religious, or financial objectives.

Cyber Terrorism means the use of cyber space to cause harm to the general public and disrupt the integrity and sovereignty of the target country. Cyber space refers to the electronic medium or the interconnected network of computers.

Black’s Law dictionary defines cyber terrorism as the act of “Making new viruses to hack websites, computers, and networks”.

The U.S Federal Bureau of Investigation defines cyber terrorism as a premeditated attack against a computer system, computer data, programs and other information with the sole aim of violence against clandestine agents and subnational groups.

Definition as per Information Technology Act, 2000 (“IT Act”)

Section 66F of the IT Act defines ‘Cyber Terrorism’ as all those acts by any person with an intent to create threat to the unity, integrity, sovereignty and security of the nation or create terror in minds of people or section of people by way of disrupting the authorised access to a computer resource or getting access to a computer resource through unauthorised means or causing damage to computer network. If these acts cause injuries to persons, cause the death of any person, damage or destruct any property, cause disruption of essential supplies or services, or negatively affect the critical information structure, they become punishable in nature.

It also includes all those acts committed knowingly or intentionally in connection to getting access to a computer resource in an unauthorized way and that the data so obtained was restricted in the interests of the sovereignty and integrity of the nation.

Modes of Cyber Terrorism

The terrorists commit the crime of cyber terrorism in any or all of the following ways:

1. Hacking into the systems and databases owned by the government of the target country and appropriating sensitive information of national importance.
2. Destructing and destroying the entire database of the government hosted on cyber space along with all backups by introducing a virus or malware into the systems.
3. Temporarily causing disruptions to the network of the government of the target nation and distracting the top officials so that they can pursue other means of terrorism.
4. Distributed denial of service attack (“DDOS”): The terrorists through this attack first infect the systems by introducing viruses and then take control over the systems. The systems are then accessed by the terrorists from any location who manipulate the data and access the information.

Tackling Cyber Terrorism at the International Level

• International Telegraph Union-United Nations

International Telegraph Union (“ITU”), a specialised agency of the United Nations, is entrusted with the responsibility of addressing issues relating to information and communication technologies. One of the basic roles of ITU is to build cyber security in all its member countries and ensure international cooperation. To achieve this, an agenda called the Global Cyber security Agenda was launched in 2007 by the ITU which must be followed by all the member nations.

• Budapest Convention on Cyber Crime – Council of Europe

The Budapest Convention is the first international convention which deals with issues of cyber crime and terrorism. The main objective of this treaty is to promote international cooperation among nations. It has laid down a common policy to control cyber crime and cyber terrorism. It also deals with issues relating to the security of data on cyber space. However, important countries like India and Brazil have not become a party to this convention. India declined to adopt the convention as it was not involved in the drafting of the policy.

• North Atlantic Treaty Organisation

The North Atlantic Treaty Organisation also plays a massive role in trying to combat cyber terrorism. To achieve this objective, it has created Cyber Defence Management Authority which is in charge of ensuring cyber security and preventing terrorism. Further, it has also created a Rapid Reaction Team which will stand up against cyber attacks.

Apart from these above-mentioned organisations and their initiatives, each country has its own set of cyber and defence laws whose sole objective is to ensure cyber security and prevent cyber terrorism.

Tackling Cyber Terrorism in India

Even though the acts of cyber terrorism has increased in heaps and bounds, the Parliament of India is yet to enact any legislation which specifically addresses the issue of cyber terrorism.

However, certain existing legislations have been amended to include it within its purview the crime of cyber terrorism.

The legislations are:

• IT Act

The salient provisions of the IT Act in relation to preventing cyber terrorism are:

Section 66F of the IT Act defines cyber terrorism.  This Section has been introduced by way of amendment to the Act in the year 2008.  This amendment was the outcome of the infamous 26/11 terror attack in India. The terrorists, in this case, made use of the communication services to abet the terrorists who carried out a series of 12 shooting attacks throughout the city of Mumbai. This tragedy is a classic example of terrorism using the cyber network.

This Section also prescribes the punishment for those who commit or conspire to commit cyber terrorism. According to the Section, such people shall be punishable with imprisonment which may extend to imprisonment for life.

However, it is pertinent to note that the cyber space is evolving every day and new loopholes have emerged in this definition of cyber terrorism.

Blocking access to information

Section 69A of the IT Act also empowers the Central government or any of its authorised employees to direct any agency of the government to block access by the public any information from a computer resource in the interests of sovereignty and integrity of the nation.

Indian Computer Emergency Response Team (“CERT-In”)

As per Section 70B of the IT Act, the CERT-In team is set up which provides immediate alerts of incidents challenging cyber security and also lists out the emergency measures for handling incidents threatening cyber security of the Nation.

• Unlawful Activities Prevention Act, 1967

This Act lays down punishment for terrorist activities. Though cyber terrorism does not fall under the definition of terrorism as contemplated under this Act, this Act also prescribes punishment for recruiting persons for terrorist activities and for organising terrorist camps. Using cyber space for the above-mentioned activities is also an act of cyber terrorism and is hence punishable.

• Indian Penal Code, 1860 (“IPC”)

The term ‘property’ used in this Act in connection with punishment for theft and such connected crimes has been extended to cover data too and includes within its ambit the crime of data theft.

The Hon’ble Supreme Court of India in the matter of R.K. Dalmia v Delhi Administration has held that the word “property” defined in IPC is in a much wider sense than the expression “movable property” and that there is no good reason to restrict the meaning of the word “property” to movable property only, when it is used without any qualification. The Hon’ble Supreme Court also recorded that whether the offence defined in a particular section of IPC can be committed in respect of any particular kind of property, will depend not on the interpretation of the word “property”.

Therefore, where material information in the form of data is stolen by the terrorists against the sovereignty and integrity of the nation, it will amount to a crime under the IPC.

• Cyber Security Policy, 2013

For the first time in history, in the year 2013 India introduced its national level cyber security policy. This policy lays down the broad framework for upholding and protecting the cyber space security. The main aim of this policy is to create a broad umbrella of cyber security framework in the country so that the Indian cyber space is secure and free from any kind of attacks both by terrorists and other anti-social elements. However, there is a need to amend this policy to encompass newer methods of ensuring the safety of the ever-evolving cyber space.

Conclusion

The legal systems around the globe are, with every passing year, trying to implement new measures to combat cyber terrorism. However, with more innovative ways of working in the cyber space, more loopholes are formed which will have to be filled in by the countries by amending the procedures and the laws in force to tackle cyber terrorism. Moreover, a unified international framework should be in place to combat this global issue. Further, the public should be made aware of the threats and the ways and means of dissemination and how to deal in case of terrorist attacks.

All these measures will go a long way in establishing a secure cyber space desired by the citizens.

In this article, Roshni Singh, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the tax benefits every entrepreneur should know about.

Introduction

India is in its developing stage and day by day becoming one of the biggest tech startup hubs in the world. To flourish startups in India, the present government has announced STARTUP INDIA program with its main aim to create an environment which works for extension of startups in the country and the progress of entrepreneurs.

What is a startup?

To be considered as a startup under the Startup India policy, the following criteria must be met:

1. It should not be incorporated prior to five years from the day the program came to force.
2. Its annual turnover should not exceed INR 25 crores in the preceding financial year.
3. It should be working for some innovation or development.
4. Such entity should not be in existence by splitting up, or through a reconstruction of a business already in existence.

Tax exemptions given to startups

Startup program has benefited lots of entrepreneurs by giving lots of tax benefits to them. It should be noted that startup which are formed as private limited companies, limited liability partnership (LLPs), One person companies (OPCs) and/or registered as Partnership firms are eligible for tax exemptions and other benefits.

• Tax exemption for first three years

One of the most lucrative benefits which are given to eligible startups is the exemption of 100% of tax on profit gains for the first three years with the exception of Minimum Alternate Tax (MAT). MAT is taxable as 18.5% of the book profit.

For the realization of such benefit, the startup should be registered under the Department of Industrial Policy and Promotion (DIPP) and should be working towards innovation, development or commercialization of new product or service providing through intellectual property. Getting a tax holiday for complete three years can be really useful.

• Funds of Funds

Another benefit that is given by the government to entrepreneurs at their initial stage of development in order to boost up their startup is the fund with an initial corpus of INR 2500 crores and a total corpus of INR 10000 crores over a period of four years. This funding is under the head of “Funds of Funds (FOF)” which will be directly invested but would be under the direction of SEBI. It is only applicable to the eligible startups which are registered under DIPP.

The financial shortage is one of the most common problems faced by entrepreneurs and in that situation even a slightest financial help may result in great acceleration to their startup.

• Exemption on capital gain tax

Companies whether newly incorporated or having a remarkable existence have their shares in the market and they generally raise capital or funds from stock sharing and other things and it is generally a very common way of business with people. Profit earned by these ways are termed as capital gains and thus are under tax provisions. One another important tax benefit that has been provided is the exemption of 20% of capital gain tax to entrepreneurs, that is, tax exemption on getting profit from selling the capital assets like stock, bonds, shares, etc.

• Abolition of angel investment tax

Investments are major sources of funding for an entrepreneur. But during the initial stage of a startup, they lack trust in the market and hence, it is not possible for them to get an investment from a venture capitalist or loans from banks. So entrepreneurs generally prefer to seek angel investors. Interest and profit payable to them are generally negotiable. For further relief, the government has also taken away the angel investment tax, which means, an investment made by angel investors who are friends or family members not registered as Venture Capitalist funds will not be taxed.

Under the amendment of Section 56(2) (vii) (b) of Income Tax Act, they have got a liberty to issue shares to the investors at a higher rate than the fair value without any hassles of taxation.

The policies of the government which include taxation have been drastically changed under the budget of 2017-18. The government has introduced a number of policies which mostly seem to help to the entrepreneurs of the country especially under the startup India program.

• Other beneficiary provisions

Apart from tax benefits, the government had also introduced certain other provisions regarding benefiting and supporting entrepreneurs in the country. There are certain other provisions adjusting taxation and allocating funds to boost up the startup which are as follows:

1. Provisions of allocation of fund of INR 500 crores for support of entrepreneurs belonging to Schedule Tribe and Schedule Caste and Women Entrepreneurs.
2. Long-term capital gains have been lowered from three to two years for unlisted firms.
3. Motor Vehicle Act has been amended to encourage entrepreneurship in road transport sector.
4. Businesses with turnover INR 2 crores now are allowed to use presumptive tax schemes which earlier was INR 1 crores.
5. Employee Provident Fund (EPF) has been provided for the first three years.

Conclusion

Indian regulators find that the very way to help the entrepreneurs is helping them in taxation hassles. All the above tax benefits and other fund allocations are very vividly helpful to the startups. However, there are still rooms vacant to help the startups in India. Some of the long-term demands have been fulfilled by the government while others are left untouched.

• One of the main things is the work environment, which could be fertile for entrepreneurship, which should have been given more consideration in this startup India program.
• Also, the amount of exemption in capital gain tax is low as the initial capital gain is generally low so it is not going to help much effectively. The eligibility standards that has been created has disappointed many startups as they are not able to meet up the eligibility standards.
• One thing that should also be emphasized by the government is the interaction of young entrepreneurs with international investors or business personalities or technological upgradation in innovative startups in the field of technology.

BIBLIOGRAPHY

• https://blog.allindiaitr.com> Taxation
• https://www.thebetterindia.com
• https://m.economictimes.com> Legal
• Income tax act,1961

This article is written by Ameya Vaidya who is currently pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata. 

Introduction

After the banking crisis in Bengal in the year 1946 and 1948, it became an important task to come up with a scheme to insure the deposits which were kept in banks by the general public and the concept of deposit insurance came into the picture. After the crash of Laxmi Bank Ltd. and later Palai Central Bank Ltd. in the year 1960, the Central Government as well as the Reserve Bank of India became vigilant on this issue and subsequently introduced ‘The Deposit Insurance Corporation (DIC) Bill in the parliament on 21st August 1961. The bill came into force from 1st January 1962.

Further, the Central Government introduced a Credit Guarantee scheme in 1960 after recommendations from the Reserve Bank of India. The Credit Guarantee Organisation guaranteed the advances (loans) by banks and other financial institutions to the people who belonged to the weaker and neglected sections of the society. The two organisations, namely, Deposit Insurance Corporation and Credit Guarantee Organisation were merged on 15th July 1978 and a new organisation in the name of Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence.

Framework and working of DICGC

Currently, DICGC is a subsidiary wholly owned by the Reserve Bank of India. The main purpose of the organisation is to provide insurance to the deposits in banks and also to give a guarantee on loan facilities from the banks to a selected class of society. The deposit insurance scheme is mandatory for each and every bank currently present in India.

The Corporation maintains 3 different types of funds, namely, ‘Deposit Insurance Fund’, ‘Credit Guarantee Fund’ and ‘General Fund’. The deposit insurance fund is maintained through insurance premium obtained from the banks and the credit guarantee funds are maintained from guarantee fees received at the time of grant of loan. These two funds are used to settle any claims occurring in respective fields. The general funds are utilised in maintaining the establishment of the corporation and other administrative expenses.

Any surplus amount from all these three categories of funds is further invested in Central Government securities only as permitted under Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961 and any income obtained from such investments is added in these funds. The corporation has the power to transfer amount from one category of a fund to another.

Banks which comes under the ambit of DICGC for deposit insurance (i.e. insured by DICGC)

1. Commercial Banks: Currently each and every commercial bank operating in India is insured under DICGC scheme. The commercial banks include branches of foreign banks operating in India as well as local/nationalised banks and rural banks.
2. Co-operative Banks: All co-operative banks which are functioning in different States and Union territories which has made appropriate amendment to their local Co-operative Societies Act, giving power to the Reserve Bank of India to give specific order to the Registrar of Co-operative Societies of the State or Union territory to constitute and complete winding up of a co-operative bank or to override the management and also making provisions which will require the Registrar to take written permission from the RBI before undertaking any winding up or amalgamation or reconstruction of a co-operative bank, where a bank is covered under DICGC schemes. Currently, all co-operative banks are insured by DICGC.
3. No Primary Co-operative societies bank is covered under DICGC schemes.

What exactly does DICGC insure?

All Deposits such as savings, fixed, current, recurring, etc are normally insured by DICGC except for the deposits which are specifically mentioned below:

1. Any deposits made by any Foreign Government.
2. Deposits of Central Government or any of the State Governments.
3. Deposits made by any State Land Development Banks with a State Co-operative Bank.
4. On amount due on account of any deposit which is received outside India which might be of any amount.
5. Various inter-bank deposits.
6. The corporation can specifically exempt any deposit with prior approval from the Reserve Bank of India.

Amount Insured on deposits under DICGC scheme

1) Rs. 1,00,000/- (1 Lakh) is the maximum amount which is insured by DICGC for each user on deposit amount as well as any interest.

2) If a person has accounts in different branches of the same bank, then the deposits of all the branches will be added together and the maximum amount insured will be Rs. 1,00,000/- on the aggregate amount.

3) However, if a person holds more than one account in different banks then the amount insured will be maximum of Rs. 1,00,000/- on the deposits per bank.

4) Deposits held in the same capacity and the same right

If a person has more than one account in one or more branches of the same bank, such as more than one savings or current accounts or fixed or recurring deposit accounts, then it will be considered that all these accounts are held by that person in the same capacity and same right. Hence, the insurance will be available upto a maximum of Rs. 1,00,000/- on the aggregate of amounts which are available in all these accounts. Also, the account of the person as a sole proprietor of a business will be considered as a deposit in the same capacity and same right.

5) Deposits held in different capacity and different right

If a person has different accounts in his capacity as a partner of a firm or guardian of a minor or director of a company or a trustee of a trust or a joint account with the spouse in one or more branches of the same bank, then all these accounts will be considered as accounts/deposits held by that person in different capacity and different right. Also, these deposits will enjoy the insurance cover separately upto the maximum of Rs. 1,00,000/-.

6) Deposits in Joint Accounts

1. If more than one person holds joint accounts (i.e Savings, Current, Fixed or Recurring) in the same branch of a bank or in more than one branch of the same bank and if their name appears in the same sequence

1. On the other hand, if different joint accounts are held by same persons (in the same branch of a bank or in different branches of the same bank) but the names of those persons do not appear in the same sequence.

Who will pay the premium?

The Banks in which the deposits are kept are liable to the insurance premium itself. That means the depositors or customers of a bank will be insured free of cost.

It is important to note that, if the bank fails to pay the premium for consecutive three half-year periods (i.e. continuously for one and half year) then the DICGC has the power to revoke the registration of that bank. The bank can be re-registered on request and if it pays the amount of premium due with interest.

When is DICGC liable to pay to the Depositor?

If the bank goes into liquidation, then the DICGC will pay the insured amount to the depositors through the official liquidator appointed by RBI. These depositors will be paid within two months from the date when the liquidator sends the list of genuine claims of original depositors.

On the other hand, if the bank is reconstructed or merged with any other bank, then DICGC will pay the insured amount directly to the newly reconstructed or newly merged bank.

How will a person know if his/her bank is insured by DICGC?

When a bank is registered with DICGC, that bank is provided with a printed leaflet which the bank has to display it at the entrance or at any other place in the bank where it will be read by the customers. The leaflet consists of the information that the deposits of the customers of that bank are insured by DICGC.

Customers can also inquire with the bank officials regarding the insurance.

Customers can also access the DICGC website to know if their banks are insured by DICGC. Links to access the same is given below.

• The main website:

https://www.dicgc.org.in/index.html

• List of Commercial Banks:

https://www.dicgc.org.in/FdLibCommercialBanks.aspx

• List of Co-operative Banks:

https://www.dicgc.org.in/FdLibCoOperativeBanks.aspx

• List of Regional Rural Banks:

https://www.dicgc.org.in/FdLibRRB.aspx

• List of Local Area Banks:

https://www.dicgc.org.in/FD_LIB_LABs.html

Conclusion

Hence, in order to keep the faith of the public on the banking system and to further motivate them to deposit their money in banks, it was very important for the Central Government to give some insurance on deposits if the bank fails in the future. Hence, the Deposit Insurance and Credit Guarantee Corporation has made provisions to give insurance of maximum Rs. 1,00,000/- on the amount deposited in the banks.

Reference:

DICGC’s main website: dicgc.org.in

In this Article, Peeyush Jain discusses the Legal mistakes by Startups.

Introduction

To give up a well-paying job or to reject a letter of offer from a multinational company needs a rock solid thought process and a concrete backup to support the decision. A decade ago only a few had the courage to take up these decisions or we can say that situation or circumstances were such that the fresh graduates from the elite management institutes, technological institutes or the commerce experts were biased towards the high paying jobs from multinational companies or government rather than to do something on their own.

But now the thought process of young generation has changed substantially, now these young guns from top-notch schools try to build something different to create a mark on the society as well as to satisfy themselves by way of startups.
Starting a business is not an easy task, a rock solid idea or solution to a problem, a proper research work, efficient team, financial, legal aspects, must be looked up into.

Ten Legal Mistakes by Startups

Generally, it is seen that startups do not comply to the legal aspects and get themselves into legal troubles because they are not aware of these aspects as the law is like a vast sea in our country with thousand pages act on companies, income, goods and services, employee benefits, information technology, intellectual property etc. So the legal aspects must be looked after especially by the entrepreneurs so as to save themselves from committing the same mistakes as others did.

Some legal mistakes by startups are:

Not signing a Non Disclosure of Non-Compete Agreement

• Every startup founder must emboss in his mind that if he believes in his idea than someone else with whom he is interacting may also find its worth. Generally, it is seen that we cannot do everything by ourselves, so we need someone to help us on the journey either personally or professionally. While building our idea we need to disclose each and every aspect of its working to a web or app developer to present it to the general public.
• For proper functioning of the website or at least to build the prototype we need to discuss it with the tech professionals and therefore to protect the idea from being used by another person it is important to sign a Non-disclosure or Non competes Agreement with all such persons from whom we are taking the professional help. If a startup founder signs a Non-disclosure of Non compete Agreement than he can legally prohibit anyone to use his idea.
• It is generally seen that startup founders take professional help from personal friends or some known persons without signing a non-disclosure or non compete agreement to save some money or by virtue of relationships and ends up in legal trouble.
• So to protect the startup it is advisable to sign a Non-disclosure agreement or non compete agreement with all such persons a cofounder is dealing with because business must be on clear professional terms rather than on personal terms. It is also advisable to sign such Non-disclosure or non compete agreements with the co-founders.

Co-Founders Agreement

• It is Important for startup founders to sign co-founders agreement to define the roles and responsibilities of each cofounder also the do’s and don’ts for each of them.
• Starting up without cofounder’s agreement can’t protect anyone of the co-founders from disputes and without the legal agreement, it is not possible to resolve the disputes in the court of law.
• A cofounder’s agreement is a legal document binding upon the signatories and protects the cofounder’s from any dispute along with assigning proper responsibilities to all of them.
• Startups don’t sign cofounder’s agreement because cofounders usually think that they are friends and know each other very well so it is not necessary for them to sign any such legal document. This is a big legal blunder which can shatter all their dreams as happened in the case of Facebook.

Type of business entity

• To build a multi-storey building it is necessary to have a strong foundation, so to have a long-running startup the foundation is the type of legal entity that can sustain for a long time and also has no legal limitations.
• There are five types of business entities prevailing in India namely:
  • A partnership firm,
  • A proprietorship firm,
  • A limited liability partnership firm,
  • A private limited company, and
  • A one-person company.
• Out of the above five structures, a partnership firm and proprietorship firms are not advisable because they have the unlimited liability which can even extend to the personal assets of the partners.
• A limited liability partnership firm or a private limited company can be formed by the startup cofounders because both of them have the limited liability, but a private limited company wins over a limited liability partnership firm when a matter of choice arises, because company works on the basis of shareholders and is a separate legal entity, also it is a most suited option for the venture capitalists to pour funds and get a few percentages of shares. But a company has a lot more compliances in comparison to the limited liability firms.
• Another suited option can be to form limited liability partnership firm in the initial stage and then convert it into a private limited company at the stage of funding. This will protect the co-founders from excessive compliance costs as running a company costs more than running a limited liability partnership firm.
• A one-person company is formed when there is a single co-founder; it is also preferred over the proprietorship firm because of its limited liability.

So, choosing a proper legal entity is essential for the co-founders to run the business and take it up to the mark in long run. Choosing a wrong business structure is also a point of failure for the startups.

Adherence to the financial regulatory laws

• Every startup must take the advice of legal experts having the expertise in financial regulatory laws like that of RBI, SEBI etc. These laws come into play when the funds are raised by startups. These laws provide certain boundaries and prohibitions while raising funds.
• A cofounder is not supposed to have the knowledge of these financial laws, therefore to comply the financial regulatory laws an expert must be consulted to save the startup from the trouble.

Intellectual Property Laws

• Another important aspect to be checked is that the startup is not violating any intellectual property right of anyone.
• If the startup is using any symbol, mark, logo, monogram on the website it is required to protect it under intellectual property law and also make sure that it does not infringe any others intellectual property right in terms of image used on the site because while using an image we generally do not make sure whether the image is copyright protected or not.
• Again a legal expert needs to be consulted for such Intellectual property issues.

Proper Documentation

Documentation is an important aspect of building a startup. Each and every document reflecting the income and expenditure needs to be properly saved so that any legal liability can be prohibited. Generally, a nascent startup founder does not preserve the documents properly and ends up in the liquidity crunch. Also, the proper documentation helps in claiming the deduction of expenses under income tax act.

Income Tax Act & Companies Act

Both income tax law and company’s law are very vast and technical.

Company Law

• Like the company’s act provides for the specific meetings of Board of Directors and shareholders for every resolution passed by a company.
• Specific resolutions have separate requirements for the majority by which a decision can be taken also for fundraising by way of loan and advances a company needs to pass the special resolution.
• These are few points of the technicality of companies act. So to have a proper compliance an expert needs to be hired.

Income Tax Act

Income tax act also requires the bifurcation of personal and business expenses because the deduction is available only for business expenditure under the act. In the same way revenue and capital expenditure requires separate treatments under the income tax act. Therefore a proper documentation under the expert advice will work.

Employee contracts

• A startup is also supposed to hire the employees through proper contracts so that the laws relating to employee benefits can be complied along with preserving the valuable human resource because it is really tough to get good employees who can support the startup along with efficient working to get results. Signing of proper contracts with the employees save the startups from litigations and court cases.
• There are a large number of laws relating to employee benefits that a startup needs to follow like Employee provident fund act, Employee state insurance act, payment of gratuity act, payment of bonus act, labor laws etc. All these are employee savior laws which need to be followed properly.

Contract with clients

• Generally, the startups find it difficult to get clients and we know that without clients any business can bring a great failure even if your idea is really promising. While dealing with clients at the nascent stage, the startups generally do not enter into proper contacts and end up giving out of pocket expenses rather than earning.
• So, startups are advised to enter into proper contracts with the clients so that a win-win situation can be created for both clients and startup which can save the startup from any unwanted litigations.
• A properly drafted purchase order and sales order will work if they are followed strictly. Also, a proper contract can help the startup to save it from liquidity crunch by way of timely payments from clients because if a client has signed a contract with the startup that he is legally bound to follow the payment clause also which in turn will help the startup to get timely payments.

Terms of use, privacy policy and disclaimer on the website

Every website is required to properly disclose its terms of use, privacy policy and disclaimer under the Information technology act, These are technical terms which can be defined on the basis of expert advice. So a startup needs to properly follow these as per the act to save itself from legal troubles.

Conclusion

We can wind up on the note that legal liabilities need an expert to address them but as we know startups are the nascent businesses who cannot afford top notch experts but they must hire at least fresh graduates having working knowledge who are available at low remuneration and at least can save the startup from wrong legal decisions. It is advisable to morally consider the remuneration given to legal expert as an investment rather than as expenditure.

In this article, Aditya Srivastava, Marketing Manager at iPleaders discusses 3 Biggest Challenges Entreprenuers Face And What Can They Do About It.

In this era of startup, competitiveness has increased manifolds. Dynamic regulatory compliances have led to individual startups dying, and other challenges like lack of proper contracts, improper co-founders agreement, and most importantly creating a customer base have proved to be some of the significant issues that startup founders face.

However, it is also undeniable that with the rise of technology, unfathomable content on internet and courses like these have proved to be a boon to combat such challenges. In this article we will talk about the three major challenges that the entrepreneurs today face and discuss the possible solutions for the same to ease your business operations:

1.  Where Does The Cash Flow?

Cash flow is the very essence of any business. However, especially for small businesses where the reserves aren’t as much, it becomes all the more vital. It is stressful for most of the fresh, resource-less entrepreneurs to pay all the bills, exorbitant employee remunerations, and for the everyday transactions while the income cheques are yet to arrive. A lot of their issues also stem from delayed billing, which is no stranger to the startup ecosystem.

The process generally is to provide your goods or service, send them an invoice and then if all goes well, get paid 15-30 days later. In the meantime, your employees are jumping on your head for incentives, your wife likes to buy the expensive stilettos, and your investor wants to see your coffers jingling with gold coins! Waiting to get paid, especially in the first few years, often is the most prominent trouble. Even one delayed payment by a client can prove to be a severe blow.

Advance planning, budgeting, and financial projections are the biggest key factors to maintain the cash flows. However, if your business model involves a later payment option, no one can take the stress away from you. I will give you two easy strategies.

Ask For Faster Invoice Payments And Get Invoiced At A Later Date

You can ask your own vendors to invoice you at a minimum of 45 days to 90 days. You can send the invoice to your clients every 15 days. For example, if your customer has to pay on a specific payment date and even if the customer is late on the payment, you will have two weeks to address it, and you can get paid while the next month’s bill is due.

On the other hand, you can ask your vendors to invoice you for later days, so that you have ample time and resources to pay their bills. You will roughly have double the time to make payments after receiving your fees.

Do Not Function Without Down Payments!

If you need to be sure that you are never out of cash, make it a point that you have a system of the downpayment in place. However, you might argue that a downpayment might not cover all the costs. In such a case, ensure that the down payment includes a majority of expenses and a small profit to you. By doing so, you can at least be assured that you won’t be in the middle of nowhere after clearing all your bills.

You can learn more about financial management techniques here.

2.  The Tedious Task Of Hiring!

Having worked with a startup for quite some time now, I have realized that it is the entrepreneurs which dread interviewing people the most. For them, taking interviews is the most time-consuming process. It takes days to review resumes, give them tasks, sit through the interviews, and finally reach a conclusion.

It gets all the more difficult because generally, the bright individuals are hesitant to join startups. They are always questioning job security, the scope of work and are constantly looking to switch. To retain good talent is a big problem. The challenge is greater because most of these startups don’t have HR Managers who could help them with such critical issues.

The best solution for it is to approach the employee the same way you would have approached your customer. You don’t need a bunch of ads seeking candidates. You can have a few ultra-specific advertisements which can save you a ton of time by pre-qualifying candidates. Give them a task to perform; this will further bring clarity.

My current employer took a writing test for me. He told me, that out of 50 people who applied for this job, at least 25 did not even submit the assignment. If they were interested or enthusiastic, they would do it. This works like a filtration process. Once you have extended the offer, please ensure that you get on a long call and have proper expectation setting.

You need to be absolutely aware of what the candidate is seeking from the job, and it is okay for you to bend a little to meet a good prospect’s expectation. You don’t have to compromise on the rules and policies of your startup but ensure that a bright employee is made to feel that his or her expectations are respected.

3. The Ting Of Marketing!

The entrepreneurs are on the top of their game when it comes to their product designs, deliverables, and quality in most cases. The biggest hurdle they face, however, is that they do not know how to market themselves. It is not uncommon to see the cheesiest of advertisements on our social media platforms. Some of them even go to the extent of using print, SMS, and mobile advertisement.

All these methods take up a lot of costs and hardly produce results. Answer it for yourself. How many of us even go to buy jewellery on Akshaya Tritiya?

It is understandable if you are not adept at making marketing strategies, placing advertisements and tracking it. It is advisable for you to go ahead and outsource your marketing strategy to someone who knows how to go about it. Give them a budget and let them do the needful for you. Experimenting at an early point can be problematic. What you can do instead is get an expert to help and once you get the hang of it, do it yourself.

There is no denying the fact that entrepreneurs face innumerable challenges and there has been a lot written on the ways to overcome them. You need to be extremely patient while dealing with such challenge. Use perseverance combined with brains as your best friends. Keep in mind that you are not the first person to face such issues. There are courses which can help you get out of such ruts and help you make your business truly rewarding.

All the luck!

This article is written by Aditya Srivastava, marketing manager at iPleaders. The article is a guide on how to crack law firm interview.

A law school’s sardoodledom can be quite exuberant. Right from the first year of trying to understand ‘what on earth is going on’ to the second year where publishing research papers, moot courts, and debates inter alia scoring good in all the subjects, this journey seemed never-ending. It was intellectually enriching, emotionally frustrating, financially exhausting, and physically repulsive. The name of the journey, of course, was – “Surprise! You have a lot more in store!”

Right when you thought that this drama is soon about to get over, a new surprise was thrown at you. This one, scarier than others. A shocker, perhaps.

This surprise was called – getting hired. It is a challenge in the true sense of the word. No, I am not talking about getting through the Day Zero with fancy firms at your law school, I am speaking strictly for those who opted out of such placements and planned to get a job on their own.

Why is getting a job on your own so tricky?

The National Association for Law Placement reported that only 87.6% of 2010 graduates were employed after graduation. Being employed does not necessarily mean being well-paid. Although this is an American survey, however, the condition in India is no better.

As mentioned in this article, “If we dig deeper, there can be two major problems responsible for this trend. First, the unchecked opening of mushrooming universities in every nook and corner of the country without qualified faculty, facilities, and a decaying curriculum. Second, law schools not giving two cents about providing practical knowledge to the law students. This creates a perennial problem of good quality future lawyers.”

There are no secure solutions to either of these problems. The only solution is by coping up with it yourself. Reading as much as possible, publishing as many articles, interning at the right places and taking online courses which can help you grow your skills and knowledge and set yourself apart from the crowd.

Interviews are like the perfect embodiment of the essence of “the first impression is the last impression.” Right from the minute you walk in to the way you dress and hold yourself during a conversation, you are assessed in every possible way. How do you then make an impact that can make you their first pick? Certain necessary steps can really help you with the interviews.

1. Research To The Point

Law firms expect the candidate applying to them to know about them. You must also be eager to work with them and make sure the same is conveyed to them. 9 out of 10 firms ask this question, “Why do you want to join this firm?”

Let us say that you are the interviewer. Now, there are two candidates in front of you. The one candidate answers, “because I think this is the perfect place to use my skills and knowledge to the best of my ability.” (trust me, there are a lot of people who give this answer.) vs. “because the ABC team that I have applied for has emerged victorious in so and so cases, and the partner of the team Mr. XYZ is an inspiration, which I am sure will give me a huge scope to learn and grow!”

What will be your pick?

An easy way to gain insights is by browsing through portals like SuperLawyer, Glassdoor, LinkedIn, Lawctopus Internship Reviews, LiveLaw, etc.

2. Get Your Hands On The Job Description!

What if I told you that there is a way in which you can find out what exactly to prepare right before the interview? What if I told you that there is a way in which you can find out what exactly you need to know for cracking an interview?

The best way to know it is by going through the job description. It does not matter whether you are applying for an associate position or an internship. You need to ensure that you are taking sufficient steps to understand the firm’s expectations and prepare accordingly. You need to dissect the job description and understand what the role really requires you to do.

For example, I applied for a role at an MNC’s compliance team. I started reading about compliances, etc. However, the minute I got the job description, all it required me to know was about derivatives agreements. Needless to say, I had to prepare for something I had never heard before, and once I managed to do that the interview was a cakewalk.

3. Make Your Curriculum Vitae Your Bible!

Your resume just doesn’t get you the interview alone, but it is the majority of what your interview is going to be about. An interviewer’s primary job to check whether whatever is mentioned on your CV is correct or not. You need to ensure that you look like someone who knows what they are talking about and you have your basics strong.

Trust me when I say this, there is nothing they are going to ask you apart from your curriculum vitae. However, it is going to be in much more detail. It works like the General Awareness section in Common Law Admission Test (CLAT). You need to not just know about the current affairs but also its history and future. For example, if you have mentioned that you have worked on arbitration, you also need to know about the amendment act and the bill that has been recently passed by the Union Cabinet. It is that descriptive and elaborate. Prepare for interviews religiously. Take online courses if needed, but ensure that there is nothing about that area that you don’t know.

The questions can move from technical to interpersonal, and that will also depend on the co-curricular activities and skills that you mention in your resume.

Just ensure, that while answering you re-emphasize on your expertise and give well articulated and cohesive answers.

4. Be Ready With Some Funny, True And Fascinating Stories!

Interviewers are funny people. They want to ask you some questions which don’t make sense to you at all. They might make you uncomfortable too, but it reflects poorly if you are not able to answer them. For example, in one of the interviews, I was asked how do you not look like a lawyer? I had no idea what to answer to such a question.

Before an interview, make sure that you are ready with answers for some of the common and uncommon questions. It is undeniable that every interview will be distinct from the other. However, if your answer is articulate and well thought, it is easy to dodge the questions. As per this article, here are some of the sample questions which are most commonly asked. You can use them for starters:

• Tell me about yourself.

• Why did you decide to go to law school?

• Why did you choose your law school?

• Is your GPA an accurate reflection of your abilities? Why or why not?

• What makes you think you are a good lawyer?

• What do you know about our firm?

• What area of law most interests you?

• Tell me about a major accomplishment.

• What are your long-term career goals?

• What interests you most about the legal system?

• What are your weaknesses?

• How has your education and experience prepared you for the practice of law?

• Describe a professional failure and how you handled it.

• Why should we hire you over other candidates?

• What questions do you have?

5. Do Not Shy Away From Asking Questions!

It is utmost important that you ask questions at the end of the interview. It is reflective of the fact that you are not just well prepared, but you are also a keen observer to listen to everything the interviewer had to say. It shows that you are serious and interested in the firm.

Here are a few questions that you can ask:

1. What are your expectations from an associate?
2. What does an average day look like for an associate at your law firm?
3. Where is the firm headed in the next five years?
4. What are the next steps in the interview process?
5. Do you have any more questions?

I can tell you that no two interviews can be the same. While some might boost your confidence, some might demotivate you. You cannot have a full proof plan to change it, but you can have this course which can significantly boost your chances to crack that law firm interview. It arms you with practical knowledge. Wouldn’t you want to have that as an edge over your competitors?

Be confident, look smart and know what you’re talking about. Rest assured, you will make the cut!

Good luck!

This article is written by Tushar Verma, Geeta Institute of Law, currently enrolled in the Ace your Internship course at Lawsikho.

Legal risks refer to damage or any loss incurred to a business due to negligence in compliance with laws related to the business. It can be encountered at any stage of business proceedings. There may be mistakes due to a misunderstanding of laws and due to some documents which need to be deposited to the authority regulating that particular business. Types of risks such as compliance risk, regulatory risk, operational risk etc. may contribute to the term ‘legal risk’. The whole reputation of an organization depends upon these risks as they may result in an immense loss. It may result in the failure of a business too. Let’s understand what legal risks are all about and how they can be prevented.

Types of legal risk a business can face.

• Regulatory risks

Risks which arise from the dynamic behaviour of laws and regulations that significantly affect the business or market are called as regulatory risks. For example, any changes made in the compliance of taxation applicable to the particular company may result in penalties imposed by income-tax authorities or authorities so concerned.

• Compliance risk

Compliance risk covers risk which arises due to non-compliance with statutes, internal policies and best practices applied to any business organisation. It may result in financial loss and legal penalties. For example, annual compliance of a company and LLP is necessary. Failing to file annual returns of LLP may result in a penalty of Rs. 100/day and in case of companies minimum Rs. 50000 and which may extend to Rs. 5,00,000. This may result in shaken legs of the business.

• Contractual risk

Contractual risk is incurred when there is some failure in fulfilment of contractual liabilities. Failure to meet terms of the contract, failure to provide services in compliance with the contract, failure to include risk mitigating clauses in the contract etc.All this results in a contract risk.

• Non- contractual obligation

These risks include certain damages caused to the competitor due to infringement of copyright or trademark done by your entity in the due course of your business proceedings. Other damages like tortious claims arising due to negligence, misrepresentation and claims for unjust enrichment while conducting cross-border business activities also result in non-contractual obligation.

• Dispute risk

Dispute risk results when there is a disruption caused by the stakeholders, customers and partners to the business. These disputes often result in litigations and put the business onto a bed of thorns. It is recommended to resolve the disputes before they get transformed into litigations as it will incur a huge cost.

• Reputational risk

The loss to the good name or standing of an organization arising due to any malpractices or any criminal event is called reputational risk. Reputational risk arises due to the involvement of employees or other peripheral parties like suppliers. Besides having good governance and transparency companies should also focus on Social responsibility.

What is a fraud?

The term ‘fraud’ is used to describe an act or deception committed by an individual or an entity to gain unlawful or unfair advantage. Fraud is one of the most common form of unlawful activity committed by business entities which result in legal risks to the entity. The types of frauds in relation to legal risks are given as follows:

Types of frauds in relation to legal risks

• Assets misappropriation fraud

Frauds such as asset misappropriation, which take place inside of a company where employees themselves exploit the assets of the organization for personal benefits are a common cause of legal risk. These include cheque forgery, inventory theft, services theft, unnecessary claims and what not. Employees abuse their position to misappropriate resources from the company. Ultimately, it results in the cash flow only. Apart from the direct impact of cash flow and financial loss, there is a risk of low employees morale and reputation also. Employees may not like the environment where they are respected.

• Data theft frauds

The term “Data theft” was coined in 1964. Data theft frauds mostly relate to theft of personal data which may be used for destroying the reputation of an organization. This theft may lead to the commission of other frauds and criminal activities which may harm public at large. These types of frauds may affect all the efforts made by sales and marketing teams. These frauds may put the organisation in perilous condition with regulatory bodies taking action against the organisation and may result in sky touching penalties.

• Accounting frauds

Accounting frauds include intentionally manipulating financial statements to create a fake and better position of the company. Generally, window dressing is done so as to achieve particular goals of the frauds planned by top-level managers. This may be done to mislead the investors and shareholders. A fabricated financial statement is the failure of the management machinery and gives rise to greed among the employees. Overstating its assets and understating its liabilities are some of the common practices done by the companies. Some of the examples of great accounting frauds happened from 1998-2009 are Waste Management scandal(1998), Enron scandal (2001), Worldcom scandal(2002), Tyco scandal(2002), Healthsouth scandal (2003), Freddie Mac scandal (2003), American insurance group scandal(2005), Lehman Brother scandal(2008), Bernie Madoff scandal (2008), Satyam scandal (2009).

• Bribery and Corruption

Bribery and corruption arise out of unsatisfied needs of the employees and their greed. Frauds like bribery and kickbacks may lead to serious damage to the financials of a company. Kickbacks are offered by third parties in return for illegal discounts. A bribe may be offered to evade taxes and to launder money. One of the top candies and chocolate makers Cadbury India(Mondelez India Foods) paid a consultant who helped them to obtain a license by bribing government officials. These practices surely destroy the reputation of the companies and the companies may also get restrained from carrying on any business in India.

Case laws under legal risk

• London whale case

The whole case was worth about $6.2 billion loss to the reputed company JP Morgan Chase and co. The actual situation was that Iksil and his colleagues worked in a part of the bank. The main functioning of the Chief Investing Officer is to hold the risk level of the bank. Instead of maintaining risk level, Iksil focused on making money. More than $350 billion was used for this reason. Iksil made $400 million in the year 2011 which was just a start to such a big game. When bank thought of reducing its risk in London by making a derivative contract through which two parties exchange financial instruments often known as “swapping portfolio”. U.S prosecutors allegedly said that the duo has committed a securities fraud by hiding true position from the bank management. The first quarterly loss was reported by the bank in 2013.

• Satyam Computers case

Satyam computers was a company held by Ramalingam Raju, the founder and former chairman of the company. A corporate governance and fraudulent auditing case took place in 2009 which held the Indian economy dumbstruck. The company managed to hide its true position from all the stakeholders, board and even stock exchange. The fraud was committed with the intention to mislead both the market and stakeholders. Even chartered accountants and auditors were the part of the scandal. Many companies indulged in diverting funds from Satyam. A fun fact worth mentioning here is one of the company out of these 350 is having paid-up capital of Rs.500000 and made investment of near about Rs. 90.25 crore. The same company received an unsecured loan of about Rs. 600 crore.

• Facebook analytics data breach case

Aleksandr Kogan a developer developed an app in 2014. This app was a quiz app which was significantly influenced by the app developed by Cambridge University. This was the similar place where Kogan works. Kogan got   270000 installations to his app from the users. He could manage to access data of the friends of these users. When the app asked for granting permission to access to that data the app saves that information to some private database which was then provided to Cambridge Analytica. This information was then used to make 30 million “Psychographic” voters profiles. Trump’s most trusted and eminent supporters were having tie-ups with Cambridge Analytica. Cambridge Analytica used “psychographic” tool to purchase some of the targeted ads in relation to Brexit leave the campaign. As the news broke out in the market, Facebook’s shares dropped by 18 percent in 10 days and an online “#deletefacebook” movement started seeking the attention of the users.

• Cadbury case

In January 2017, securities and exchange commission(SEC) a US market regulator has charged a violation of foreign corrupt practices act to Mondelez. The company agreed to pay 90 crores without accepting or denying charges. In 2010, US-based Kraft Foods acquires UK based Cadbury. After two years of acquisition, Kraft Foods changed from Cadbury India to Mondelez. The Mondelez India was allegedly reported to have paid a consultant who indulged in bribing some of the government officials and helping the company in obtaining licenses for a phantom factory in Himachal Pradesh. A separate investigation carried on by the Excise department had found the company and many other members guilty of the offence and imposed sky touching fines on all of them.

Conclusion

There is no doubt that businesses provide a backbone to the economy. Malpractices followed by some of the business have a great impact on our economy and society also. Fabricated financial statements and internal frauds can demolish any organization. Some steps to prevent such practices include:

• Conducting intensive investigation regarding fresher employees;
• Conducting random audits regularly may help in curing assets misappropriation;
• Implementing tight internal accounting facilities and rotating duties of the employees may help in providing more efficient maintenance of accounts;
• Restricting data to the employees only who are in need of that data in the course of performing their tasks;
• Purchasing software which may help in data protection also provide support to cybersecurity of a company.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:  

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

This article is written by Harsh Jain. Along with holding degrees in LLB, and LLM, Harsh is NET, JRF qualified. Harsh has successfully cleared Rajasthan Judicial Services, Mains Examination, Gujarat Judicial Services pre, SBI specialist officer scale II online exam and many other competitive examinations. Many of his students are posted as ADJs, JMs, MMs, Lecturers, APPs etc. Also, Harsh is pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata. This article is about what lessons we can take from Nirav Modi case.

What are the risks that directors can face in case of fraud or other wrongdoings that are occurring in the company on their watch?  

Show-cause notices from regulators

Most statutes specify monetary penalties, fines or imprisonment for statutory violations. In case a violation attracts a statutory penalty, proceedings are initiated by a regulator by issuing a ‘show-cause’ notice, demanding the company to explain how and why proceedings must not be initiated against them. These notices are served on the directors or CEO of the company.

Most commonly used provisions for issuing show-cause notices are:

As a director you will need to respond to such notices, explaining compliance and create systems that ensure in future such violations do not occur.  

FIR and arrest

FIRs can be filed by customers, shareholders or regulators in case a fraud has been committed.
Where a statute stipulates a fine or imprisonment, the direction to file an FIR is issued by the regulator to the police, and the police file an FIR. For example, under the Companies Act, the ROC, shareholder or a person authorized by central government can file a complaint against the company under Section 439 for violation of provisions of the Companies Act.

Banks can file a complaint against directors under section 420 read with section 120B of Indian Penal Code.

Franchisees can also lodge FIR against them under section 120B and 420 Indian Penal Code.

In the Saradha Chit fund scam case, FIRs were filed by CBI under section 406, 420 and 120B, Indian Penal Code, who were asked to deposit funds with the Saradha group companies.

Conspiracy charges and Cheating

Most corporate frauds involve multiple people. Even if you have not been actively involved in a fraud, your passive assistance or non-involvement can lead to a conspiracy charge or an abetment charge.

As per Section 120A of the Indian Penal Code, conspiracy refers to:

Any agreement to do an illegal act or a legal act in an illegal manner by two or more persons.

Punishment for conspiracy to commit a certain offense is 6 months if the offense for which conspiracy was done is punishable with less than 2 years. But if the offense conspired for is punishable with more than 2 years he will be punished in a manner similar to an abetter.

An abettor is punished in the same way as the person who commits the offense (subject to provisions of section 107 to 117 Indian Penal Code).

Similarly, section 420 Indian Penal Code provides punishment for cheating and dishonestly inducing delivery of the property up to 7 years.

Cheating is defined under section 415 Indian Penal Code as :

Dishonestly or fraudulently inducing someone to deliver any property or to give consent to retain any property or intentionally inducing someone to do or omit to do an act which he would not have done or omitted in absence of such inducement and such act or omission will cause him harm in his mind, body, reputation or property.

In this particular case it is alleged that, directors including (Nirav Modi and Mehul Choksi) of Gitanjali Gems, Gilli India, Nakshatra Brands and Firestar Diamond companies entered into a criminal conspiracy with few employees of Punjab National Bank pursuant to which bank was cheated for thousands of crores of rupees which is an offence under section 120B read with section 420 Indian Penal Code, for which they can be convicted up to 7 years and also be fined. Similar FIRs were lodged by franchisees of Nirav Modi against him under section 420 and 120B Indian Penal Code.   

Thus, you can see that active participation in the specific fraudulent act is not necessary. You need to ensure that none of your acts are construed as your participation in the conspiracy or abetment of the offense.

Therefore, if you are aware of a wrongdoing that is happening, not speaking up or recording your dissent (say, in a board or committee meeting, or not informing a regulator where it is required) can make you liable, even if your dissent cannot alter the course of events.

Investigation and raids

• CBI Raids:

CBI derives power to raid and seize properties as per Section 3 of Delhi Special Police Act,1946. As per section 5 and 6 of the act, they have to take permission from Central and State government, as the case may be before doing so.But, central government and almost all state governments have already given standing permission to CBI to use these powers without asking for permission in each individual case. For example, MP government gave the permission to CBI to conduct search and seizure within Madhya Pradesh without permission of MP government if the matters are related to employees of central government excluding certain officials like IPS.

They can enter any premises and search and seize properties, bank accounts, jewelry, cars and other valuable articles of person and other valuable things of such directors under section 93 of criminal procedure code with a warrant and under section 165 Criminal procedure code without a warrant. It may also summon them to produce certain documents or other thing required for investigation under Section 91 Criminal Procedure Code. All the powers of CBI are restricted to the territories of India.

Search and seizure by police

Police have similar kind of powers to enter, search and seize a person’s property in the course of an investigation as per Section 93 and 165 Criminal Procedure Code, within their jurisdiction. Company offices, offices of consultants, advisors and personal residence of directors are likely places for the police to search for documents in case of an alleged corporate fraud.  

If any of your property or palace is outside the territorial jurisdiction of the investigation officer, he can request officer-in-charge of the police station having jurisdiction over the place where your property in which search and seizure are to be conducted, is located. Officer having jurisdiction over such area will conduct a search in your property according to provisions of Section 165 Criminal Procedure Code and will forward anything found during such search to the investigating officer who has requested the search.

Where an investigating officer has reason to believe that it may cause delay if he will request to officer-in-charge of the police station having jurisdiction over the area where your property is located  and you can cause disappearance of evidence in that duration, he can conduct a search in the same manner as he could have done in his own jurisdiction.

If such search is being conducted at your place you can check that police is having a search warrant from a court or not. You must ensure that investigating officer gets free ingress into your premises. They will conduct the search according to provisions of Section 100 by ensuring the presence of 2 respectable neighbors. They must provide you a signed copy of (signed by investigating officer, you and 2 neighbors as a witness) list of all the documents and things which are seized by them. If they are conducting the search after sunset they cannot do it without a warrant. If they suspect you to hide something in your person then they can search you, but women must be searched only by women officers. If you do not provide free access to them they can even break open any door or window for the purpose of the search.

If the place to be searched lies outside their territorial jurisdiction, they can request the officer-in-charge of the relevant jurisdiction, in which case search and seizure might be conducted. Officer-in-charge of the police station having jurisdiction over such area, shall conduct a search according to provisions of section 165 Criminal Procedure Code and will forward anything found in such search to investigating officer who has requested the search.

But, where an investigating officer has reason to believe that following this procedure may cause delay and such delay may cause the disappearance of evidence, he can conduct a search, in the same manner, he could have done in his own jurisdiction.

• Income tax surveys (Raids)

Under section 133A and 133B Income Tax Authorities may conduct a survey of your place. They can make an inventory of all of your cash, jewelry, cars, properties etc. They can place identification mars on the account books etc inspected by them. They may also take statements of any person which may be important regarding the matter.

If they find any unaccounted income they may impose a penalty of not less than 100% and up to 300% of the undisclosed income under section 158 BFA(2) and 271(1) (c), and you may also be imprisoned for up to 7 years under section 276 C(1) and (2) Income Tax Act.

• For competition law violations,

the Competition Commission can undertake a dawn-raid, that is a surprise event which doesn’t give you any time to hide or delete information. A dawn raid has been committed in case of JCB India Limited (JCB India) on 22 September 2014. More recently, the DG carried out a dawn raid on the premises of Eveready Industries Limited (Eveready), a leading dry cell manufacturer.

Ban from accessing securities market

Under Section 11(4)(b) of the SEBI Act, the SEBI can ban you from accessing securities market and from buying, selling or dealing in securities, if according to them it is necessary in the interest of investors or security market. They must record reasons for doing so in writing.

Ban from contesting elections

Under Section 8 of Representation of the People Act, if you are convicted of having committed a crime for a period of 2 years or above, you cannot stand for election as Prime Minister, President, Member of Parliament or Legislative Assembly of a state. They are disqualified for 6 years from the date of the conviction. Earlier the prohibition from contesting elections was applicable to undertrials as well but it has been removed by an amendment under Section 62(2) Representation of People Act, through The Representation of the People (Amendment and Validation) Bill, 2013 in September 2013 which was made effective from July 10, 2013. Thus, a conviction is critical for the prohibition to apply – if you are only an accused and a trial is underway but there is no conviction or acquittal, this provision is not applicable.

Disqualification from being a director of a company

Under Section 164(1)(d) of the Companies Act, if a person is convicted by a court for any offense for 6 months or more he will not be eligible to be appointed as director of a company for 5 years from the expiry of the sentence. For example, if you are sentenced for 3 years’ imprisonment, the bar will apply for 5 years after expiry of the sentence, that is, 8 years from the date of sentence.

Many corporate frauds have led to corporate insolvency, and directors frequently apply to the court for insolvency in case of a fraud. This happened in case of Nirav Modi. As per Section 164(1)(b) and (c) of the Companies Act, any person who is an undischarged insolvent or who has applied to get himself declared as an insolvent cannot be appointed as director of a company.

Passport can be confiscated  

Your passport can be confiscated as per Section Section 10(3)(e) of the Indian Passports Act if you are accused of having committed any offense, irrespective of how serious the offense is and irrespective of the quantum of punishment.

Similarly according to Section 10(7) If a court in India has convicted the passport holder under the Passports Act, or under any rules made thereunder he his passport can be confiscated.

In such cases, you cannot travel outside India to escape from law enforcement authorities, once your passport is confiscated. If you are outside India you cannot pass through immigration. You will not be treated as a citizen of India.

Extradition proceedings can be initiated against the person to bring him back to India and face the trail before Indian courts (these proceedings depends on extradition treaties between India and country in which person to be extradited has gone).

In the Kingfisher situation, Vijay Mallya had already left the country, hence in respect of him, extradition proceedings were initiated so that he could be extradited for trial to India from the UK.

• Note: Indian passport is the property of Indian government (section 17). It cannot be canceled without the permission of the government of India. [section 10(2)] and no prosecution can be initiated against a person under this act without permission of Government of India (section 15).

Declaring Absconder

Directors may also be declared absconder by Indian courts under section 82 Criminal procedure code. If you do not appear before the courts even when the court has issued summons and warrants, courts may issue a proclamation under section 82 Cr.P.C. giving at least 30 days time to them to appear before the court and if they do not appear even after that, the court can declare you an absconder.

Attachment of offshore assets and properties through a letter of request (Letter Rogatory)

Investigating officer/agencies may have grounds to believe that some evidence is available in a foreign country regarding the matter. They may apply to the courts in India under Section 166A Criminal Procedure Code, to issue a letter of request to a court in a foreign country to collect evidence in the foreign country, either by examining a person in that foreign country or by asking for submission of necessary documents.

Such letter of request is sent by the criminal court to the High Court which in turn sends it to Ministry Of External Affairs/The International Police cooperation cell/Crime Investigation Department/Central Bureau of Investigation. Ministry or the such other agency to whom it is sent will sends it to its embassy in that foreign country or Foreign ministry of that country or Interpol or may apply directly to the legal authorities or police of that country (It will depend on the treaties of Indian government with the country in which such letter of request is to be sent). They send this letter to the competent court which after doing the needful forward all the evidence taken, statement recorded and documents taken in the same manner back to the court issuing letter of request. The detailed guidelines regarding Investigating abroad and issue of letter rogatory and also the procedure for extradition request and contact with foreign police and legal bodies are given in following guidelines issued by the central government of India: No. 25016/14/2007-Legal Cell, Government of India, Ministry of Home Affairs, Internal Security Division.

In this matter, such letter was sent to at least 6 countries where it is suspected that these directors have their properties.

This procedure exists so that you cannot merely acquire and park properties overseas under the assumption that Indian law enforcement authorities cannot reach you. Through the above process, such letters can be issued to find out your properties in other countries and seized.

Proceedings may be initiated by banks, against you under SARFAESI Act, The Recovery Of Debt Due To Banks And Financial Institutions Act,1993

If you do not pay your secured debts which are due to bank, on time, and your account converts to Non Performing Asset than an authorised officer of bank send you a demand notice under section 13(2) read with Rule 2(b) SARFAESI Act 2002, to discharge your debt within 60 days. If you will avoid its service then it may be served on you by affixing it at a conspicuous place of your house or business and publishing it in 2 newspaper circulating in your area.

You can make your representation and objections before the bank as per Section 13(3A) SARFAESI Act 2002, which will be adequately decided by the courts. If you fail to discharge your liability, the bank will take physical possession of your property with permission of Chief Judicial Magistrate/Chief Metropolitan Magistrate or District Magistrate under Section 14(1) SARFAESI Act 2002.

Now bank will initiate auction proceeding for your property under Rule 8 and will serve a 30 days notice of sale upon you. The minimum reserve price for your property will be determined and your property will be sold to the highest bidder. With your permission, it can be sold at a price lower than the minimum reserve price.

Once all the formalities of auction sale are complete, certificate of sale will be issued to the buyer and physical possession will be given to him. If the debts due to banks are not discharged fully even after this process, they may apply to Debt Recovery Tribunal for recovery of balance amount by selling your other properties as per Section 13(10) read with Rule 11 SARFAESI Act 2002.

If you do not pay your debts on time to the bank and your account converts into a Non Performing Asset, they may give a power of attorney to concerned official [Bank Manager (law)]to take steps under the act under Section 13(12) read with Rule 2(a) SARFAESI Act 2002, against you.

Such officer will send a demand notice to you under Section 13(2) read with Rule 2(b) and 3 SARFAESI Act 2002, asking you to discharge full of your liabilities within 60 days from the date of the notice. On your failure, they will be entitled to exercise any rights provided to them. Such notice can be sent by registered post or speed post or courier or e-mail to you by them. If you will avoid service of the notice, it shall be made by affixing the notice to a conspicuous part of your house/place of business and by publishing it in two newspapers which are circulated in your area. An individual notice must be sent to each borrower if there are more than one.

You can make representation and file your objections under Section 13(3A) SARFAESI Act 2002. Bank will have to suitably adjudicate and decide upon your objections. If you fail to discharge full of your liabilities within the time specified bank will issue notice for taking possession of your assets kept as securities with them under Section 13(4) and take its symbolic possession under Section 13(4) SARFAESI Act 2002. After this bank will file an application before the Chief Judicial Magistrate/Chief Metropolitan Magistrate or District Magistrate for taking actual possession of the property under Section 14(1) SARFAESI Act 2002 and comply with the orders given by them.

After the possession is taken by the bank, a notice (performa in Appendix IV) will be sent to you and will also be affixed on your property under Rule 8(1) SARFAESI Act 2002 and it will also be published in two leading newspapers within 7 days under rule 8(2). Name of the bank will be displayed on the property as per Rule 8(1). Bank will also arrange for insurance cover, deploy security guards at the site, get valuation of your property from an approved valuer, serve on you a 30 days notice for sale, obtain quotations/ invite tenders from public or hold an public auction of your property (public notice must be published by bank in 2 leading newspapers of the area where property to be sold is situated) under provisions of Rule 8.

As per Rule 9, the sale must be confirmed only to the highest bidder unless he fails to fulfill other conditions of the auction. Bank cannot sell your property at a price which is less than the reserved price without your consent. Which means that you can give consent to the bank to sell your property at a lesser price. Buyer will have to deposit at least 25% of the sale price immediately and remaining amount within 15 days from winning the auction bid. If the buyer fails to deposit the balance within 15 days, the amount already deposited will be forfeited and property will be auctioned. Such sale will be considered as effective from the date of sale deed. If the buyer fulfills all the conditions of sale, the bank will issue a certificate of sale in his favor.After all this process, the bank will transfer possession of your property to the buyer and will take an undertaking from him that he has taken physical possession of such property.

If the debts due to banks are not discharged fully even after this process, they may apply to Debt Recovery Tribunal for recovery of balance amount by selling your other properties as per Section 13(10) read with Rule 11 SARFAESI Act 2002.

References:

1. https://blog.ipleaders.in/cbi-investigation/
2. http://www.cbi.gov.in/aboutus/dspe.php
3. https://www.oecd.org/site/adboecdanti-corruptioninitiative/46814340.pdf
4. https://www.itrtoday.com/all-about-income-tax-raid/
5. https://taxguru.in/income-tax/penalties-prosecutions-income-tax-act-1961.html
6. http://www.dnaindia.com/india/report-supreme-court-takes-on-netas-with-conviction-1859642
7. http://www.livemint.com/Politics/BnmnCJJSKmxmqtFA2YLo5L/Those-in-jail-cant-fight-elections-Supreme-Court.html
8. https://www.ndtv.com/india-news/jailed-politicians-can-contest-elections-as-parliament-amended-law-supreme-court-541691
9. https://www.indiatvnews.com/news/india/mlas-mps-convicted-for-2-years-or-more-cannot-contest-polls-24871.html
10. http://www.advocatekhoj.com/library/bareacts/indianpenalcode/index.php?Title=Indian%20Penal%20Code,%201860
11. https://www.sebi.gov.in/enforcement/unserved-summons-notices/jul-2007/notice-to-show-cause-under-section-11-and-11b-of-sebi-act-1992-in-the-case-of-numero-uno-projects-ltd-vivek-ruparel-and-harish-devji-ruparel_8515.html
12. https://indiankanoon.org/doc/1260928/
13. http://gstcouncil.gov.in/sites/default/files/CGST.pdf
14. https://www.oecd.org/site/adboecdanti-corruptioninitiative/46814340.pdf
15. http://cbi.nic.in/interpol/invletterrogatory.php
16. http://www.icnl.org/research/library/files/India/IndiaIncomeTax1961.pdf
17. https://www.rbi.org.in/scripts/DraftNotificationsGuildelines.aspx
18. https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx
19. https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11224
20. https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11223
21. https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9809
22. http://www.banknetindia.com/banking/pvtdirectors.htm
23. http://passportindia.gov.in/AppOnlineProject/pdf/passports_act.pdf
24. http://cbi.nic.in/firs/2018/2018_wp/2018_bsnfc_mumbai_firs.php
25. http://cbi.nic.in/firs/2018/2018_pdf/2018_bsnfc_mumbai_firs/RC0772018E0002.pdf
26. https://www.indiainfoline.com/article/research-articles-ideas/income-tax-search-and-surveys-raids-what-you-need-to-know-113111403531_1.html
27. https://blog.ipleaders.in/cbi-search-seizure/
28. https://indiankanoon.org/doc/129721/
29. https://indiankanoon.org/doc/323071/
30. https://indiankanoon.org/docfragment/133989/?formInput=letter%20rogatory
31. https://indiankanoon.org/doc/47021412/
32. https://indiankanoon.org/doc/27905/
33. http://lawmin.nic.in/ld/P-ACT/1988/The%20Prevention%20of%20Corruption%20Act,%201988.pdf
34. http://profit.ndtv.com/news/your-money/article-how-to-file-for-bankruptcy-327827
35. https://indiankanoon.org/doc/393016/
36. http://www.ey.com/Publication/vwLUAssets/ey-the-insolvency-and-bankruptcy-code-2016-an-overview/%24FILE/ey-the-insolvency-and-bankruptcy-code-2016-an-overview.pdf
37. http://icsiipa.com/Portals/0/Articles%20%28March%2C%202017%29.pdf
38. http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
39. https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=5675
40. https://blog.ipleaders.in/directors-duties/
41. http://www.mondaq.com/india/x/626056/securitization+structured+finance/Recovery+Process+Enforcement+Of+Security+Interest+In+India
42. https://www.drt.gov.in/pdf/Act-s/SARFAESI%20Act.pdf
43. https://taxguru.in/income-tax/penalties-prosecutions-income-tax-act-1961.html
44. http://www.advocatekhoj.com/library/bareacts/indianpenalcode/index.php?Title=Indian%20Penal%20Code,%201860
45. https://iimb.ac.in/research/sites/default/files/WP%20No.%20309.pdf
46. https://www.sebi.gov.in/sebi_data/commondocs/regulation_p.pdf
47. https://www.sebi.gov.in/sebi_data/attachdocs/1456380272563.pdf
48. https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx
49. https://www.sebi.gov.in/enforcement/unserved-summons-notices/jul-2007/notice-to-show-cause-under-section-11-and-11b-of-sebi-act-1992-in-the-case-of-numero-uno-projects-ltd-vivek-ruparel-and-harish-devji-ruparel_8515.html
50. https://indiankanoon.org/doc/1260928/
51. https://taxguru.in/corporate-law/shop-and-establishment-license-not-required-for-less-then-10-employees.html
52. http://gstcouncil.gov.in/sites/default/files/CGST.pdf
53. http://www.drat.tn.nic.in/Docu/RDDBFI-Act.pdf
54. https://www.oecd.org/site/adboecdanti-corruptioninitiative/46814340.pdf
55. http://cbi.nic.in/interpol/invletterrogatory.php
56. http://www.icnl.org/research/library/files/India/IndiaIncomeTax1961.pdf

This article is written by Harsh Jain. Along with holding degrees in LLB, and LLM, Harsh is NET, JRF qualified. Harsh has successfully cleared Rajasthan Judicial Services, Mains Examination, Gujarat Judicial Services pre, SBI specialist officer scale II online exam and many other competitive examinations. Also, Harsh is pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata. This article is a guide about your responsibilities as a director during the twilight period and what are the safeguards available to you.

On 4th April 2018, it was reported by the Business Line, The Hindu, that a statement was given by MS Sahoo, Chairman of Insolvency and Bankruptcy Board of India, giving a warning to the directors of companies, which are facing the insolvency process. He said that action would be taken against such directors, who have not discharged their duties towards the creditors during the twilight zone period. Such action will be taken under the Insolvency and Bankruptcy code (IBC).

Under Section 17 of IBC, powers of the board of directors are suspended immediately after the commencement of insolvency proceedings, that is, from the date when an application for initiating corporate insolvency resolution process is admitted by the Adjudicating Authority (see Section 5(12) of the IBC). They are then vested in the interim resolution professional.

If you are a director of a company, as per Section 46 of IBC, you can be held responsible for actions taken up to one year preceding the commencement of insolvency proceedings, and two years in case of related party transactions.

As per Section 66 of Insolvency and Bankruptcy Code, as a director, you have to exercise due diligence in minimizing the potential loss to the creditors during the twilight period.

If you knew or ought to have known that commencement of insolvency resolution process cannot be avoided and you have not exercised due diligence in minimising the potential loss to the creditors, then you will be liable under Section 66 of Insolvency and Bankruptcy Code,  to make such contribution to the assets of the corporate debtor as the Adjudicating authority ( National Company Law Tribunal constituted under Section 408 of the Companies Act, 2013) deems fit. In this article, you will get to know various legal aspects related to you as a director of a company and your role, liabilities, defenses, legal provisions applicable and various other dimensions related to your role during twilight period.

What is Twilight period?

It is not defined in Insolvency and Bankruptcy Code, and it may range from a few months to a few years before the commencement of insolvency process.

Section 46, Insolvency and Bankruptcy Code:

Says that where liquidator or resolution professional after examination of transactions of your company, has a opinion that you or your company has at a relevant time given preference in any transactions like undervaluing transactions etc. as mentioned under Section 43 (2), Insolvency and Bankruptcy Code, to any person as mentioned under Section 43 (4), Insolvency and Bankruptcy Code, he will apply to Adjudicating authority for avoidance of such transactions. Adjudicating authority may pass one or more of orders referred to, under Section 44, Insolvency and Bankruptcy Code, like they can declare such transactions void or even reverse the effect of such transactions.

It is deemed that a corporate debtor has given a preference if a property or an interest of the corporate debtor has been transferred for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor and putting such creditor or surety or guarantor in a position which is more beneficial to him than he would have been in case of distribution of such assets in accordance with the provisions of Section 53 IBC. ( Section 43(2), IBC).

In other words we can say that according to Section 43(2) of IBC, when your company have some legally enforceable financial or operational or other obligation of a creditor/ surety/ guarantor, and your company transfer any property or any of its interest for the benefit of such creditor or surety or guarantor, by which such creditor/ surety/ guarantor comes into a position which is more beneficial to him as compared to the position he would have been if such distribution of such asset had taken place in accordance with the provisions of section 53, IBC, in such a case it is said that your company has given a preference to such creditor/ surety/ guarantor.

As per Section 43 (4) and 46 (1), Insolvency and Bankruptcy Code:

such preference is considered to be given at a relevant time if it was given to a related party ( except if it was just given only for the reason of being employee) during the period of two years before the commencement of insolvency proceedings or to a person other than a related party during the period of one year before the date of commencement of insolvency proceedings.

The time duration of the twilight period:

By analyzing Section 43 and 46, Insolvency and Bankruptcy Code, we can see that Insolvency and Bankruptcy Code has provided for a period of up to 2 years in case of related party and a period of one year in case of other persons where such preferences as prescribed by Section 43 (2) cannot be given.

Which period can be recognized as twilight period:

So in the light of Section 17, 43, 46, and 66 of Insolvency and Bankruptcy Code, we can draw out that, The Twilight zone period is:

• Two years preceding from the date of commencement of insolvency when the preference is given to a related party.
• One year preceding from the date of commencement of insolvency when the preference is given to a person other than a related party.  

Legal consequences of not performing duties properly:

• While during normal days, your duty is about the company and its shareholders, but, during the twilight period, you have a duty to protect creditor’s interest before shareholder’s interest. In other words, we can say that twilight period leads to a shift in your duty from shareholders to creditors. If you fail to protect the interest of the creditors, you may be held liable under Section 66 IBC.
• Undervalue transactions and preferences which were entered by your company up to two years before the commencement of insolvency process can be declared as void and their effect can be reversed by setting aside such transactions by the Adjudicating Authority ( Section 45, IBC)
• You can be made personally liable to make such contributions to the assets of the corporate debtor as deemed fit by Adjudication authority ( Section 66, IBC).
• You will be liable to make such contributions under if you knew or ought to have known that corporate insolvency resolution process is unavoidable and you did not exercise due diligence in minimizing the potential loss to your creditors [ Section 66 (2)(a), IBC]. This means that you cannot take the defense of lack of awareness. You will be judged on the standards that what you should know as a reasonable competent director and also on the special skills you actually possess.
• You can be held liable for concealment or fraudulent removal of whole or part of a property, or willful concealment, destruction, mutilation or falsification of any book or paper affecting or relating to the property, willfully making any false entry in any such book or paper or other such kind of activity which are considered as prejudicial to the interest of the creditors as a director of a company which has entered the process of insolvency. In such case, imprisonment will not be less than three years, but it can extend up to five years. A fine may also be imposed, which shall be at least one lakh rupees, and extend up to one crore rupees. You may also be punished with both. ( Section 68, IBC)
• The look-back period will be two years for related party transactions and one year for transactions other than related parties. (Section 43 and 46 IBC).
• If you commit a breach of duty, it will expose you to statutory remedies under legislations related to insolvency and company like misfeasance, etc. As per the Eleventh schedule to IBC point number 10, If a petition is filed under Section 272 of Companies Act, 2013, the Tribunal may even wind up the company if you are found guilty of guilty of fraud, misfeasance or misconduct.

Safeguards or defenses for directors/ When you are not liable and what you should do to save yourself:

Regardless of these previously mentioned concerns, neither the courts nor insolvency professionals intend to punish you or other directors who act reasonably and sensibly in securing creditors. You can keep in your mind following practical considerations to minimize the risk of claims:

• You must regularly monitor financial position of the company by preparation of financial statements, projections, and accounts.
• You will not be rendered liable under the provisions of this act, if, you prove that you did not commit any contravention of the provisions of this code or you didn’t have the intention to do so to harm creditors. ( Proviso to Section 68, 69, 70, etc. of IBC).
• If you prove that you have exercised due diligence to protect the interest of creditors, you will not be held liable under this act.
• Explanation to Section 66 provides that due diligence means diligence which can be reasonably expected from a director carrying out similar kind of operations in relation to the corporate debtor. If you have worked in such manner, then you will be deemed to have exercised due diligence.
• You must always take advice from professionals. You must ask your company’s accountant to verify current solvency and cash flow to find out whether you can avoid insolvency or not. You can also consult lawyers to find out inappropriate or unlawful, proposed transactions (if any). You must also seek advice from insolvency professionals to assess new and potential strategies for recovery.
• There should be board meetings and other informal meetings at regular intervals which are attended by all the directors. Minutes should be kept as detailed as possible and briefing papers must be circulated in advance so as a discussion is promoted. If you are absent, then you should keep yourself informed.
• If you are an independent director having concerns about the solvency of the company, you must raise your concerns with other board members and have them minuted. If your concerns are ignored, you may even take independent legal advice. You may also consider resigning as a final step. However, resigning will not save you from liability for wrongful trading.
• Before you incur further liabilities or agree to a large compensation or a pension package for departing management, you first must consider company’s financial situation.
• If you are a director of several groups of companies or a nominee director, you have duties as a parent or appointing company as well as to a subsidiary and its creditors.
• You must keep major creditors and investors of your company informed unless advisers of the company have advised you otherwise.
• You can be given an indemnity in your favor in respect of liabilities, costs, charges, and expenses incurred in the execution of and discharge of your duties in the Articles of association of the company. But, indemnity or insurance cannot save you from your liabilities for negligence, default, breach of duty, breach of trust or fraudulent trading.
• It is not mandatory to obtain a directors and officers insurance coverage under the law. But, it is a popular tool for mitigating some of the risks which you are exposed to as an independent director. Depending on the type and extent of directors and officers insurance cover, extent of protection available to you would vary from case to case.
• You must keep your company’s position under regular review and timely advice of the insolvency expert.

Conclusion

In the context of the directors and twilight zone, there are few aspects which the legal system has touched upon, and there are few issues that remain to be addressed. There is still a situation of confusion and debates are going on that, should first signs of the insolvency have a freezing effect on directors or whether they must attempt to bring the company out of the potential insolvency by accelerating the business of the company. No clear guidelines are explaining what is the exact time when there must be a shift in the duties of the directors.

It is also important to notice that something which is favorable to a particular kind of company may not be appropriate and advisable for another. Hence, your duties and role in the twilight zone, as a director may also differ according to the kind of company you are in.

The twilight period is a challenging time for many distressed companies and their directors like you, as you have to focus your attention on keeping your business afloat. But, at the same time, you must also avoid exposing yourself, and your insures to any kind of personal liabilities and claims by remaining aware of the extra risk that you face.

Reference:

1. https://www.thehindubusinessline.com/economy/policy/insolvency-law-ibbi-chief-puts-india-incs-directors-on-notice/article23437130.ece
2. https://www.domain-b.com/finance/banks/20180405_cases.html
3. https://www.lawteacher.net/free-law-essays/company-law/directors-and-the-twilight-zone-law-essays.php
4. http://www.rediff.com/business/report/bankruptcy-code-giving-sleepless-nights-to-many-directors/20171030.htm
5. http://www.mondaq.com/uk/x/76804/Directors+Officers/The+Road+To+Insolvency+And+Directors+Duties+In+The+Twilight+Zone
6. https://indianinfrastructure.com/2017/09/28/decoding-the-code/
7. http://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf
8. http://pib.nic.in/newsite/PrintRelease.aspx?relid=130208  
9. http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

This article is written by Chaitanya Verma of Rajiv Gandhi National University of Law.

Decoding the Judgment of Dr. Subash Kashinath Mahajan v. State of Maharastra – Prevention of Atrocity Act, 1989

‘Let a hundred guilty be acquitted, but one innocent should not be convicted.’

The aforementioned statement is one of the basic cardinal tenets of Indian Criminal Jurisprudence.

Courts, as institutions, are principled pragmatist sentinel and judges, while deciding issues, even economic, cultural, technological or political, which reach the adjudicatory authority of the high bench, consider solutions, after due hearing not from the impossible perspective of perfection but from the humanist approach of what is best under the circumstances, constitutionally acceptable and values inscribed in the constitution and statutes.

Perfect justice is a mirage. In the Pursuit of the illusion of perfect justice, we jeopardize the justice that lies within our grasp. In the words of great Oliver Wendell Holmes: ‘Of relative justice, the law may know something; of expediency, it knows much; with absolute justice, it does not concern itself’. So I would like to proceed with relative justice.

In the recent times, Hon’ble Supreme Court of India has given two perspicacious judgments, dispensing its duty as the arbiter of justice and imposing check and balance. First one is laying down the guidelines to immune the innocent people from falsely getting arrested under Prevention of Atrocities Act, 1989 and another is also of same nature under Section – 498A of IPC. After perusal of both the orders, it is evident that there is a misuse of power granted by law in order to protect the rights of SCs and STs and Women. It is the misfortune of this country that both the orders of the Hon’ble court has been misconstrued. I will be drawing the attention on Hon’ble SC’s ruling in Dr. Subash Kashinath Mahajan’s case. Hon’ble Sc has laid down four guidelines, which are as follows:

• There is no absolute bar against the grant of anticipatory bail in cases under the Atrocities Act if no prima facie case is made out or where on judicial scrutiny the complaint is found to be prima facie mala fide.

• In view of acknowledged abuse of law of arrest in cases under the Atrocities Act, the arrest of a public servant can only be after approval of the appointing authority and of a non-public servant after approval by the S.S.P. which may be granted in appropriate cases if considered necessary for reasons recorded. Such reasons must be scrutinized by the Magistrate for permitting further detention.

• To avoid the false implication of an innocent, a preliminary enquiry may be conducted by the DSP concerned to find out whether the allegations make out a case under the Atrocities Act and that the allegations are not frivolous or motivated.

• Any violation of direction (iii) and (iv) will be actionable by way of disciplinary action as well as contempt.

We have witnessed hue and cry against this order of Hon’ble SC. It is pertinent to put emphasis on one of the most relevant observations made by Hon’ble Court:

The underprivileged need to be protected against any atrocities to give effect to the Constitutional ideals. The Atrocities Act has been enacted with this objective. At the same time, the said Act cannot be converted into a charter for exploitation or oppression by any unscrupulous person or by police for extraneous reasons against other citizens as has been found on several occasions in decisions referred to above. Any harassment of an innocent citizen, irrespective of caste or religion, is against the guarantee of the Constitution. This Court must enforce such a guarantee. Law should not result in caste hatred. The preamble to the Constitution, which is the guiding star for interpretation, incorporates the values of liberty, equality and fraternity.

These lines can also be considered as the gist of this case. In the Present case the charges were framed under the under Sections 3(1)(ix), 3(2)(vi) and 3(2)(vii) of the Scheduled Castes and the Scheduled Tribes (Prevention of Atrocities) Act, 1989 (the Atrocities Act) as also Sections 182, 192, 193, 203 and 219 read with 34 of the Indian Penal Code, 1860 (IPC).

Shri Amrendra Sharan, learned senior counsel, who appeared as amicus in instant case and he substantiated all the charges which were levied against the accused (he was serving as Director of Technical Education in the State of Maharashtra at the relevant time) and none of the charges was able to stand the scrutiny of amicus and court found merit in submission of learned amicus and quashed the proceeding against the appellant.

Now several questions have been raised about this judgement and many have claimed that instant judgement has rendered the Scheduled Castes and the Scheduled Tribes (Prevention of Atrocities) Act, toothless.

The court has extensively and exhaustively deliberated on various issues before issuing the guidelines.

The rationale behind imposing a restriction on the arrest of Public and non- public Servant, which is now to be done after the prior permission of Appointing authority in terms of a public servant and S.S.P in terms of Non- Public Servant, is:

• Under the scheme of the Atrocities Act, several offences may solely depend upon the version of the complainant which may not be found to be true. There may not be any other tangible material. One-sided version, before trial, cannot displace the presumption of innocence.

• Referring to Section 41(1)(b) Cr.P.C. that arrest could be effected only if there was ‘credible’ information and only if the police officer had ‘reason to believe’ that the offence had been committed and that such arrest was necessary. Thus, the power of arrest should be exercised only after complying with the safeguards intended under Sections 41 and 41A Cr.P.C.

• To balance the right of liberty of the accused guaranteed under Article 21, which could be taken away only by just, fair and reasonable procedure and to check abuse of power by police and injustice to a citizen.

The matter of Anticipatory bail to be granted to accuse is not exclusive but subject to some restrictions. The court has analyzed the repercussion of this; it has taken into consideration the situations like: perpetrators of such atrocities are likely to threaten and intimidate the victims and prevent or obstruct them in the prosecution of these offenders if they are granted anticipatory bail. Vested interests try to cow them down and terrorise them. Thus, the persons who are alleged to have committed such offences can misuse their liberty, if anticipatory bail is granted. They can terrorise the victims and prevent investigation. Section 18 of The Atrocities Act excludes section 438 of IPC i.e. Anticipatory Bail. The rationale behind the prohibition of the absolute bar, as given by Hon’ble Court was:

• Life and personal liberty are the most prized possessions of an individual. The inner urge for freedom is a natural phenomenon of every human being. Respect for life, liberty and property is not merely a norm or a policy of the State but an essential requirement of any civilised society.

• On the one side is the social need to check a crime, on the other, there is a social need for protection of liberty, oppression and abuse by the police and the other law enforcing agencies.

• The Court observed that arrest brings humiliation, curtails freedom and casts scars forever. It is considered a tool for harassment and oppression. The drastic power is to be exercised with caution. Power of arrest is a lucrative source of corruption. This is the significance of the Right to Life and Personal Liberty guaranteed under the Constitution of India in its Third Part. …

Way Forward

It is necessary to understand that the steps taken by Hon’ble Apex Court are just to prevent the misuse of The Atrocity Act. It has nowhere tried to undermine the authority of the Act or tried to skew in favour of Non-SCs and Non-STs. It is the duty of the court to protect the fundamental right of the citizens, any law if contravenes the Part – III of the Constitution cannot be termed as good law. Article – 21 of the Constitution encompasses Right to Life with Dignity and Right to Fair Trial in its ambit.

If anyone falsely accused of atrocity against SCs and STs and he has been incarcerated under the said act, then it is the violation of his/her fundamental right and that is an unreasonable restriction on the liberty as guaranteed under Art. 21. The anticipatory bail, which was debarred under section 18 of the said act, can be granted to accuse if only, prima facie there is no case made out of it.

The court has not abolished the restriction which has been put under Section 18, it has just ensured that the bail should be granted where prima facie, no case exist The intervention of appointing authority in terms of a Public servant and S.S.P in terms of Non-Public Authority is made to check the false complaints. A life without dignity is worthless, “If dignity or honour vanishes what remains of life?

This is the significance of the Right to Life and Personal Liberty guaranteed under the Constitution of India in its Third Part.…. If a person is handcuffed or accompanied by police, then it leaves an indelible impression or scar on the character of that individual and it becomes almost impossible to restore the dignity of that individual, once he/she gets arrested. Hon’ble Court is the arbiter of justice has ensured the check and balance on the use of the said act. The hue and cry by the benificaries of this act need to understand that the act will function to fullest of its potential. It is just before arresting any individual, the laid guideline must be followed.

The 3rd Police commission report has mentioned that 60% of corruption takes place while arresting, Parliament in ushering social beneficial legislation cannot be permitted to be abused and converted into an instrument to blackmail to wreak some personal vengeance for settling and scoring personal vendetta or by way of some counter-blasts against opponents some public servants, as prima facie appears to have been done in the Dr Subash Kashinath Mahajan’s case. The basic questions in such circumstances therefore are- Whether a torch which is lighted to dispel the darkness can it be permitted to set on fire the innocent surroundings? Whether a knife an instrument which is meant for saving human life by using the same in the course of operation by a surgeon, can it be permitted to be used in taking the life of some innocent?

The very same fundamental question arises in the facts and circumstances of this case also, viz., ‘whether any statute like the present Atrocities Act, especially enacted for the purposes of protecting weaker sections of the society hailing from S.C. & S.T. communities can be permitted to be abused by conveniently converting the same into a weapon of wrecking personal vengeance on the opponents?’ The answer to this question is undoubtedly and obviously ‘No’.

Under such circumstances, if the Courts are to apply such provision of Section 18 of the Atrocities Act quite mechanically and blindly merely guided by some general and popular prejudices based on some words and tricky accusations in the complaint on mere assumptions without intelligently scrutinising and testing the probabilities, truthfulness, genuineness and otherwise dependability of the accusations in the complaint etc., then it would be simply unwittingly and credulously playing in the hands of some scheming unscrupulous complainant in denying the justice.

Virtually, it would be tantamount to abdicating and relegating its judicial duty, the function of doing justice in such matters in favour and hands of such unscrupulous complainant by making him a Judge in his own cause. This is simply unthinkable and therefore impermissible.

Whether the provisions of any particular Act and for that purpose the rules made thereunder are applicable to the facts of a particular case or not, is always and unquestionably a matter which lies strictly and exclusively within the domain of ‘judicial consideration-discretion’ and therefore neither mere allegations made in the complainant by themselves nor bare denials by the accused can either automatically vest or divest the Court from discharging its ultimate judicial function-duty to closely scrutinise and test the prima facie dependability of the allegations made in the complaint and reach its own decision.