Impact of regulatory push on making directors personally liable for violations

Directors and officers owe a fiduciary duty to the stakeholders of the company, government and the general public at large.

The emerging jurisprudence in the space of directors’ duties entails an exposure of personal liability to the directors or officers in default for any violation of the laws, which includes the Companies Act, 2013 and Competition Act, 2002.

While adherence to the appropriate compliance can mitigate the risk of potential exposure, it cannot abrogate all liabilities in entirety. In fact, the regulatory regime facing directors and officers in charge today is the most rigorous ever in the regulatory landscape of India.

Under Section 48 of the Act, the Competition Commission of India can levy fines on directors and officers in charge responsible for conducting the affairs of the company at that relevant point of time. If one sees the pattern of the CCI in recent  history, the Commission directs the office of the Director General, which is its investigative arm, to look into the role of persons in charge of the company when the violation of the Act were committed.

This is done to ensure that directors and officers in charge at the time of the violation are made personally liable for the lapse. In this regard, it is apt to note that the term ‘officers in charge’ covers an entire gamut of relevant employees, including but not limited to supply head, procurement head, marketing manager, legal manager etc.

As such, personal liability has already being imposed by the CCI on the directors and officers in charge (refer to case of Bengal Chemist and Druggist Association). The collective penalty imposed on the officers at default by the CCI was as high as Rs 18 crore.
 
This trend will only increase of levying personal liability, because the investigating pattern of the DG, in the recent past (last 12 months) has started to investigate the role of the persons and officers in charge, which would ultimately culminate in heightened fees levied by the CCI on the directors and officers in charge.

Directors’ personal liability under the Act presently is often neglected but going by the investigative practice of DG and CCI, it should make headlines in another 6 months from now.

Similarly, under the provisions of the Companies Act, the fiduciary duties of the directors have increased and the Companies Act seeks to implicate every director who is aware of any contravention of the provisions of the Companies Act.  

Further, the Companies Act has increased monetary penalties and there are civil and criminal liabilities on directors and officers in default

Given the above changing and aggressive regulatory landscape, it has become very essential that directors and senior management personnel are aware of the heightened norms to obviate any risks of personal liability. There is a greater emphasis done on doing business the right way and the Companies Act and Act are the much needed regulatory impetus in that regard.

Abir Roy is Partner, Khare Legal Chambers