By Anup P. Shah, Chartered Accountant
Laws and Business
1. Introduction :
1.1 In India, we are surrounded by a plethora of laws and
regulations. Being in business is not easy and there is a multitude of legal
obligations and reporting requirements. It is in this backdrop that a business
must consider and study the relevance of several laws which could turn out to be
decisive to the success of a business. Non-compliance with certain laws may
affect the very substratum of the business or the going concern concept of an
entity.
1.2 A company is an inanimate body and it functions through
its Board of Directors. The Directors are the brain and the heart of the
company. The Directors have been vested with wide powers under the Companies
Act, 1956. However, as powers and responsibilities are two sides of the same
coin, the Directors also have several and vicarious responsibilities. It is well
known that Directors owe a fiduciary responsibility to the company and its
shareholders as they are Trustees and Agents of the company.
1.3 The Companies Act contains several express provisions
dealing with the responsibility of Directors — the Act prescribes that in case
of certain offences by the company, the Directors are personally liable. For
instance, in several Sections, the Companies Act provides that the company and
every ‘officer in default’ shall be liable for punishment and/or
prosecution. S. 5 of the Act defines the term ‘officer in default’ to mean the
Managing Director and any Director so specified, and failing both, all the
Directors of the Board. However, if the Director can demonstrate that he had
entrusted responsibility of overseeing the compliance to a competent and
reliable person, then he would be able to use this as a defence. S. 211 of the
Act is one such Section which expressly makes such a provision. Thus, it all
boils down to a question of fact as to whether the Director was negligent in his
duties and hence, punishable for the offence.
2. Are Directors responsible under laws other than the Companies Act ?
2.1 The Companies Act is only one of the several laws which
impact a company. A company is also liable for complying with several other laws
which directly or indirectly impact its operations. Directors being the organ
through which a company functions they are also responsible for ensuring that
the company complies with the responsibilities and obligations mandated by the
relevant enactments. The important laws concerning a company in addition to the
all-important Companies Act, 1956, can be classified as under :
- Immovable and Intellectual Property Laws
- Financial & Capital Market Laws
2.2 Some of the important laws under each of the above
include :
(A)
Commercial Laws :
- Benami Transactions (Prohibition) Act
- Arbitration and Conciliation Act
- Negotiable Instruments Act
- Information Technology Act
2.3 Immovable and Intellectual Property Laws :
- State Property laws, if the company is a real estate developer, such as, the Development Control Regulations, Maharashtra Flat Ownership Act, etc.
2.4 Financial & Capital Market Laws:
- SEBIDIP Guidelines – for a company coming out with a public issue
- SEBI Insider Trading Regulations
- SEBI (Buyback of Shares) Regulations
- Regulations for Capital Market Intermediaries, if the company is one, e.g., the company is a stockbroker
- Foreign Exchange Management Act and Regulations
2.5 Labour Laws:
- Employees’ Provident Funds & Miscellaneous Provisions Act
- Workmen’s Compensation Act
- Employees State Insurance Act
- Employment Exchanges (Compulsory notification of vacancies) Act
- The Maternity Benefit Act
2.6 Taxation Laws:
- Value Added Tax/Sales Tax
2.7 Others:
- Sector Specific Laws, e.g., Drugs and Cosmetics Act, Drug Price Control Order, Narcotic Drugs and Psychotropic Substances Act for Pharma Sector, Cinematograph Act for Media Sector, etc.
- Air Pollution Act, Water Pollution Act, Environment Protection Act, etc.
- Shops and Establishments Act
3. There can be no quarrel against the proposition that a company can be proceeded against in criminal proceedings even where the imposition of sentence is provided for. That law is laid down in Standard Chartered Bank & Others v. Directorate of Enforcement & Ors., [(2005) 4 SCC 530]. However, that case does not state that the company alone should be prosecuted. Hence, in the case of a company not only the company, but also the Directors can be personally proceeded against and punished. We are all familiar with the Directors’ responsibility u/s.138 of the Negotiable Instruments Act dealing with dishonouring of a cheque. The consequence u/ s.138 is imprisonment and there is no provision even for exempting professional and independent Directors of the company, who are in no way connected with the day-to-day management of a company. However, there are judicial decisions whiCn have taken a reasonable interpretation on this enactment but harassment continues. Thus, Director’s responsibilities are extremely onerous and it is often said that being a company’s Director is like wearing the proverbial ‘Crown of Thorns’.
4. Many laws provide that where the person committing any offence is a company, then every person who at the time of the offence was responsible for the conduct of the business of the company would be liable to be punished. Further, any director with whose connivance, neglect or active con-sent any offence has been committed by the cornpany, shall also be deemed to be guilty of the offence and shall be liable to be directly proceeded against and punished. It is important to understand the meaning of the terms, such as connivance, neglect and consent.
(….To be continued)
