1.1 Connivance :
(a) “A figurative expression, meaning voluntary blindness to some present act or conduct, to something going on before the eyes, and is inapplicable to anything past or future; an agreement or consent, directly or indirectly given that something unlawful shall be done by another; consent; passive consent; voluntary oversight
To constitute ‘connivance’ something more than mere negligence is necessary. Pothi Gollari v. Ghanni Modal, AIR 1963 Ori 60″.
(The Law Lexicon, P. Ramanatha Aiyar, 2nd Edition, Wadhwa & Co.)
(b) “The secret or indirect consent or permission of one person to the commission of an unlawful or criminal act by another. A winking at; voluntary blindness; an intentional failure to discover or prevent the wrong; forbearance or passive consent. Pierce v. Crisp, 260 Ky. 519, 86 S.W. 2nd 293, 296.”
(Black’s Law Dictionary, 6th Edition, West Publishing Co.)
(c) “The Act of conniving — to encourage or assent to a wrong by silence or feigned ignorance; knowledge of a wrongful or criminal act during its occurrence”
(Webster’s Collegiate Dictionary, 2002 Edition, Trident Press Int.)
(d) “Secretly allow a wrongdoing”
(The Concise Oxford Dictionary, 10th Edition, Oxford University Press)
(e) “Pretended ignorance or secret encouragement of wrongdoing; knowledge or encouragement of a wrongdoing without participation in it; avoid noticing something wrong; give aid to wrongdoing by not telling of it;”
(The World Book Dictionary, World Book, Inc.)
1.2 Neglect :
(a) “May mean to omit, fail or forbear to do a thing that can be done or that is required to be done, but it may also import an absence of care or attention in the doing or omission of a given act. And it may mean a designed refusal, indifference or unwillingness to perform one’s duty. In Re. Perkins, 234 Mo. App. 716, 117 S.W. 2d 686, 692.”
(Black’s Law Dictionary, 6th Edition, West Publishing Co.)
(b) “A failure to do what is required; omission, forbearance to do anything that can be done or that requires to be done; the omission to do or perform some work, duty or act; the omission or disregard of some duty; the omission from carelessness to do something that can be done and that ought to be done; negligence. Neglect to do a thing means to omit to do a duty which the party is able to do. King v. Burrell, 12A.&E.468.468.
The word ‘neglect’ is wide enough to cover erosion of the kind indulged in by the petitioner. (It certainly cannot mean that a person on whom a notice has been served can only be prosecuted if he fails to give any reply at all and that any sort of reply to the notice, however inadequate or evasive, is sufficient to avert the prosecution for failure to comply with the terms of the notice.) Pirthi Raj v. The State, AIR 1958 Pun 396, 397.
To disregard; to pay little or no attention to; to fail to perform, render, discharge (a duty) to take (a precaution).
The word ‘neglect’ means ‘gross neglect’, wilful, intentional, culpable or flagrant disregard of duties. Baburao Vishwanath Mathpati v. State, AIR 1996 Bom 227, 231 (DB), Maharashtra Municipal Councils Act Act”
(The Law Lexicon, P. Ramanatha Aiyar, 2nd Edition, Wadhwa & Co.)
(c) “To neglect doing is the omission to do some duty which the party is able to do (per Patterson J. King v. Burrell, 12A & E, 468)”
(Stroud’s Judicial Dictionary, 5th Edition, Sweet & Maxwell Ltd.)
(d) “To disregard; ignore; To fail to give proper attention to or to take proper care of; Habitual want of attention or care”
(Webster’s Collegiate Dictionary, 2002 Edition, Trident Press Int.)
(e) “Fail to give proper care or attention to; fail to do something”
(The Concise Oxford Dictionary, 10th Edition, Oxford University Press)
(f) “To give too little care or attention to”
(The World Book Dictionary, World Book, Inc.)
1.3 Consent :
(a) “(In the Contract Act) Two or more persons are said to consent when they agree upon the same thing in the same sense.”
‘Consent’ is an act of reason, accompanied with deliberation, the mind weighing, as in a balance, the good and evil on each side. Where a consent is given substantially, the Court does not look very minutely into the form in which it is given” (Per Stirling, J., Re Smith, 59 LJ Ch 284.)
“You cannot consent to a thing unless you have knowledge of it” Jessel, M.R., Ex parte Ford; In Re Caughey, (1876) LR 1 CD 528.
‘Consent’ must imply a knowledge of the necessary facts and materials which leads to the consent, consent cannot be given in the abstract or in vacuo : Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw, AIR 1953 Bom 285.
‘Consent’ must imply a knowledge of the necessary facts and materials which leads to the consent, consent cannot be given in the abstract or in vacuo: Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw, AIR 1953 Bom 285.
Consent and assent. ‘Consent’ in law means an affirmative, positive act and ‘assent’ means passivity or inaction: S. Raghbir Singh Sandhawalla v. The Commissioner of Income-tax, AIR 1958 Pun 250, 252.
Connivance is also consent in the legal sense. ‘To consent’ means according to the Concise Oxford Dictionary, ‘to acquiesce’ or ‘to agree’ To connive’ at a thing means, to wink at it. The word’ connive’ is only used in connection with a thing which is, unlawful or immoral which one ought to oppose. It implies knowledge and lack of opposition where there is a duty to oppose. Sheopat Singh v. Narishchandra, AIR 1958 Raj 324, 332. [Representation of the People Act, 1951, S. 100].”
(The Law Lexicon, P. Ramanatha Aiyar, 2nd Edition, Wadhwa & Co.)
a) “Consent. A concurrence of wills. Voluntarily yielding the will to the proposition of another; acquiescence or compliance therewith. Agreement; approval; permission; the act or result of coming into harmony or accord. Consent is an act of reason, accompanied with deliberation, the mind weighing as in a balance the good or evil on each side. It means voluntary agreement by a person in the possession and exercise of sufficient mental capacity to make an intelligent choice to do something proposed by another. It supposes a physical power to act, a moral power of acting, and a serious, determined, and free use of these powers. Consent is implied in every agreement. It is an act unclouded by fraud, duress, or sometimes even mistake.”
(Black’s Law Dictionary, 6th Edition, West Publishing Co.)
c) “Consent is an act of reason, accompanied by deliberation, the mind weighing, as in balance, the good and evil on each side.”
(Stroud’s Judicial Dictionary, 5th Edition, Sweet & Maxwell Ltd.)
d) “A voluntary yielding to what is proposed or desired by another; acquiescence; Agreement in opinion or sentiment”
(Webster’s Collegiate Dictionary, 2002 Edition, Trident Press Int.)
e) “Permission; agree to do something”
(The Concise Oxford Dictionary, 10th Edition, Oxford University Press)
2. Supreme Court decision:
2.1 The Supreme Court has passed a landmark decision under the Negotiable Instruments Act in the case of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, 2005 8 SCC 89. Although this is a judgment under the Negotiable Instruments Act, it has several far reaching consequences and its ratio descendi can be applied under various other statutes which affix a vicarious criminal liability on directors in respect of offences committed by a company.
2.2 In this case, the Court was posed with important questions regarding the criminal liability of directors of a company in case of dishonour of a cheque issued by such company. Ultimately the Supreme Court answered the queries posed to it as under:
(a) It is necessary to specifically aver in a complaint under the Negotiable Instruments Act that at the time the offence was committed, the person accused was in-charge of and responsible for the conduct of business of the company. This averment is an essential requirement of the Negotiable Instruments Act and has to be made in a complaint. Without this averment being made in a complaint, the requirements cannot be said to be satisfied.
(b) Merely being a director of a company is not sufficient to make the person liable under the Negotiable Instruments Act. A director in a company cannot be deemed to be in-charge of and responsible to the company for conduct of its business. The requirement of the Negotiable Instruments Act is that the person sought to be made liable should be in-charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact, as there is no deemed liability of a director in such cases.
(c) A Managing Director or a Joint Managing Director would be in-charge of the company and responsible to the company for conduct of its business. Holders of such positions in a company become liable under the Negotiable Instruments Act. Merely by virtue of being a Managing Director or Joint Managing Director, these persons are in-charge of and responsible for the conduct of business of the company. Therefore, they get covered under the Negotiable Instruments Act. So far as signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the dishonour and will be covered.
3. What can Directors do to safeguard their interests?
3.1 The vexed question which thus arises is, what can Directors do to safeguard their interests and ensure that they are not made personally liable for any defaults by the company?
3.2 One of the first things which the Board of Directors must ensure is that the company has a system for compliance with all the applicable laws. The company must have a written Compliance Manual enlisting all the laws applicable to it, which it must comply with and also who from the company is responsible for ensuring compliance with the same.
Further, the laws must be bifurcated into those which are critical to the survival of the company and those which although are not so crucial must be complied with. For instance, compliance with Food & Drug Administration Law is paramount for a pharmaceutical company. Similarly, compliance with the SEBI Merchant Banker Regulations .are critical for the existence of a merchant banker. Any serious lapse in such laws may result in the company’s registration being suspended or even permanently cancelled. There have been several recent instances where certificates of SEBI intermediaries have been suspended for not complying with the Code of Conduct or the conditions of registration.
The Manual may contain the important provisions with a reference to the relevant sections, rules, notifications, circulars, important case laws, etc., so that the user can refer to the same. It may be segregated into various sections, for instance, Corporate laws, SEBI Regulations, etc. It should be updated on a regular basis, so that the users do not refer to outdated material. The Referencer published by the BCAS is a very good starting point for preparing a Compliance Manual.
The optimum utility of the Manual would be if it is prepared by an outsider, i.e., not someone from within the company. A CA or a lawyer can be entrusted with this assignment. This is necessary because in several transactions there is a cross-influence of laws. For instance, in case of a loan given by a company to a related entity, the provisions of the Companies Act (e.g., S. 295), the Income-tax Act [e.g., S. 2(22)(e)], FEMA (if the recipient is a non-resident), etc. would have to be considered. In such situations, it is better if an independent professional prepares a comprehensive Manual. There must also be certain Red Flag Transactions, i.e., before such transactions are to be entered into, the Company Secretary or the Legal head must be consulted. A list of the Red Flag Transactions should also be circulated to the Head of the Accounts, so that his department should not process such transactions without receiving the prior approval of the legal department. A classic example of a Red Flag Transaction would be an inter-company investment within the group. In several cases it is observed that the listed company funds the private limited companies within the group by way of loans or investment. In all such cases, the concurrence of the legal department should be obtained before executing the transaction. Thus, the Accounts department should not write a cheque or pass an entry till it has been cleared by the legal cell.
3.3 The company must appoint a compliance officer to ensure compliance with various applicable laws and regulations. He must be a person who is well-versed with the legal and commercial fields, say, a Chartered Accountant, a Lawyer, a Company Secretary, etc. At every Board Meeting, the Compliance Officer should be asked to table a Compliance Certificate certifying compliance with all laws. This should also be preferably signed by the Managing Director and/ or the Whole-Time Directors and must be backed up with supporting certificates from various departmental heads who are responsible for compliance with individual laws. For instance, the Head of Administration can be asked to certify compliance with the Shops and Establishments Act; similarly, the Factory Head can be asked to certify compliance with pollution/ effluent control regulations, etc. This way the Directors can demonstrate that they have not failed in their duty of setting up a competent system for ensuring legal compliance. Whenever in doubt, the company should not hesitate to obtain an opinion from an appropriate CA or a lawyer. It is better to be cautious than to act in haste and make everyone repent at leisure.
In addition to the Compliance Certificate, the CEO / MD and the various Departmental Heads along with the Legal Head/Company Secretary must be asked to table an Action Taken Report at each Board meeting. This Report must list down regulatory lapses, problems, issues which had arisen at the last meeting and the action taken by the company on the same. Quite often what happens is that niggling issues are swept under the rug and they come to the fore only once they have blossomed into full-fledged calamities. In this way, the Independent Directors can keep a track of the problems as they arise and the actions taken by the company and thereby nip a problem in the bud.
3.4 Another aspect which a good compliance system must have is a mechanism which provides for “what to do in case a default arises ?” Quite often, a small problem snowballs into a major crisis. Hence, if violations and lapses are tackled at an initial stage itself, then there might not be major problems at a later stage. The Compliance Officer and/or the Managing Director or some other Executive Director must be informed about all such compliance lapses and this must be followed up with immediate corrective action and expert professional aid.
Item 15 of Annexure-IA to Cl.49 of the Stock Exchange Listing Agreement, which provides for items which must be placed before the Board of Directors includes, “Non-compliance of any regulatory, statutory nature”.
3.5 It may be a good move to seek expert certifications on all important compliance matters, e.g., a periodic certificate from an outside consultant on matters of pollution control. Several listed companies have started obtaining certificates from practising company secretaries on compliances with various corporate laws. This is a step in the right direction and needs to be beefed-up with similar certificates in other areas of compliance.
3.6 Other important areas which the Directors need to monitor are of protecting and preserving the title of the company’s assets. Especially at the time of acquisition of assets, such as immovable properties, they should ensure the obtaining of a title search, proper conveyance/ adequate documentation, payment of appropriate stamp duty, registration, if required, etc. Similarly, the protection of intellectual capital of the company in the form of patents, copyrights, trademarks, designs, etc. is very essential. Proper steps must be taken in this regard to ensure that these IPRs are valid and subsisting. To ensure preservation of assets, the Directors must ensure that there is an appropriate system which addresses issues, such as payment of taxes, compliance with conditions of lease deeds, adequate insurance, etc.
3.7 Independent Directors have a vital role to play in ensuring that the company complies with all applicable laws. In case of defaults, they may be saddled with penalties and prosecutions for offences which they have never committed or were never even aware about. Hence, they should at every Board Meeting ask intelligent questions about the state of the company’s legal department, the compliance policies and procedures. If they feel that the company is taking a wrong view on certain issues or has wrongly interpreted certain provisions, they may insist upon a second opinion.
4. Epilogue:
4.1 To conclude, it must be remembered that compliance with laws and regulations is a journey and not a destination. It is more a question of a mindset which must percolate through the organisation right from the top, i.e., the Board of Directors all the way down to the lowest rank and file. Once the company imbibes a compliance culture, it would become second nature to the executives. Several companies have an attitude that they would tackle the problem only if and when it arises. Such a shortsighted fire-fighting approach is detrimental to the interests of all the stakeholders in the long run. It may yield some results in the short term, but once the law of averages catches up, there would be serious trouble. Hence, the top management must instill a ‘zero-tolerance’ attitude within the organisation towards legal lapses.
4.2 One can only wish that just as companies strive for prestigious Quality Certifications, such as ISO: 9001, ISO: 9002, etc., they would also strive for similar standards in the field of Regulatory Compliance.
4.3 It must also be reckoned that one of the tenets of ‘Corporate governance’ is to conduct business according to the laws of the land – hence to do this awareness of applicable laws is essential. An attempt has been made in this write-up to bring awareness of the consequences of non-compliance. It is also clarified that the list of laws applicable given here in above is not exhaustive and the directors must obtain from the management the list of applicable laws and record the same in the minutes. This list should be annually reviewed in view of the fact that new laws are being enacted and existing laws amended on a continuous basis at times without realising economic and social consequences.
