Legal Aspects of Business Assignment 1

Summary of Article
New Companies Act may give Directors Sleepless Nights
The Companies Act of 1956 had prescribed that a corporate body can be prosecuted and penalized, yet
not be imprisoned. But, the new Companies Act enforces that the governing body i.e. the Board of
Directors or the management itself can be held liable to penalty or imprisonment as the legal entity
itself is incapable of conceiving malice unless enforced by its agents. The attribution of criminality to the
"officer who is in default" is established under section 2(60) of the Companies Act, 2013. This has called
for a question upon the independency of Independent Directors.
The amendment seeks to charge every director who is aware of any breach or infringement of any sort.
In case a director participates in a proceeding which is directed towards any contravention and he/she
does not object to such a proceeding or a proceeding where such contravention takes place with his/her
consent, he/she shall be held liable.
Even though the director didnt attend the meeting but the information regarding any contravention
was mentioned in the proceedings of the board received by him/her, he/she is implied to be held liable.
The primary objective of including this clause in the Company Act 2013 is to promote independent
directors to act as whistleblowers whenever such contraventions take place. But, the law seems to turn
a blind eye towards the whistle blowers.
In Iridium Indian Telecom Limited vs. Motorola and others (2011), the Supreme Court observed that a
company is in the same position as an individual and thus can be convicted of common law as well as of
statutory offences. But, the court reiterated its earlier decision in the very case of Standard Charted
Bank vs. Directorate of Enforcement.
The apex court, thus, recognizes that a legal entity needs agents to conceive and execute malice. In the
new Companys law 2013, under Section 447, it has been taken care of. The section seeks to imprison a
guilty for a minimum of six months (three years, in case the fraud involves public interest) up to a
maximum of 10 years.
According to the Company Act 2013, fraud has been defined as, Fraud in relation to affairs of a
company or anybody corporate, includes any act, omission, concealment of any factor or abuse of
position committed by any person or any other person with the connivance in any manner, with intent
to deceive, to gain undue advantage from, or to injure the interests of, the company, or its shareholders
or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.
Since, the activities involved in the term fraud are quite intensive, it may be difficult for independent
directors to prove innocence in this case. Adding to the misery, it would become a nightmare for some
independent directors representing specialized/technical areas of expertise as they may not have indepth legal and financial expertise to detect the nuances of 'fraud'.
With SEBI deepening its PIT regulations, resulting in intensification of criminal liabilities, coupled with
Serious Fraud Investigation Office reinforced with a legal status under the new company law; directors,
especially independent directors, are bound to have sleepless nights!
....

Submitted by:
Utsav Gahtori
80011314014

Submitted to:
Prof. A Srinivasa Rao
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