Directors and Officers liabilities has taken serious turn under the new Companies Act, 2013. Liability can also arise under other statutes, including the Securities Exchange Board of India Act 1992, the Foreign Exchange Management Act 1999, the Factories Act 1948, and various environmental and consumer protection laws. Each of these laws carries its own definition of who is the “deemed person in default” and this frequently includes the directors.
Furthermore, as an increasing number of Indian firms go international, through both inbound and outbound investments, companies and directors are increasingly exposed to risks driven by changes in legislation, regulation, and heightened shareholder activism in their target foreign investment markets. There are also statutes with extra-territorial jurisdiction such as the US Foreign Corruption Practices Act and the UK Bribery Act.
While liabilities may arise under various statutes, the focus here is on liabilities arising under company law. First type of liabilities which are of statutory in nature, being specifically set forth in the Companies Act, 2013 (the 2013 Act). These could be either civil liability requiring directors to make payments to victims or the state, or there could be criminal liability resulting in fines or imprisonment. Higher penalties have been the biggest highlight of the new law. The second set of liabilities could arise from claims made against the directors either by the company or the shareholders for breaches of directors’ duties. Highlighting few control measures through the Companies Act, 2013.
1.Establishment of Serious Fraud Investigation Office (SFIO): They have been empowered to collect information from other regulatory authorities such as the income tax authorities etc, Search in professional or employees places and have the power to arrest in respect of offences which attract the punishment for fraud.
2. Section 447 on Fraud and its impact: Meaning of fraud has been defined unlike other Statues and punishment ranges from Imprisonment for minimum of 6 months and maximum of 10years AND Fine shall not be less than the amount involved, but may extent up to three times of the amount involved (In Matters of Public Interest- Minimum Imprisonment of 3 Years). In casefraudulently inducing persons to invest money, punishment and imprisonment extending up to 10 years with fine can be enforced.
3. Class Action Suits: Shareholder activism has been empowered through Class Action suits. A class action or a class suit is a lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group. The concept that is common in many parts of the world. Claim can be against Company and Directors, Auditors, Expert, Advisor or Consultant.
4. Special Courts: Special Courts has been established for speedy trial of offences by empowering Central Government, to establish or designate by notification as many Special Courts as may be necessary.
5. Re-opening of Accounts: Application can be made by Central Government or any statutory regulatory authorities or any person concerned for re-opening of the accounts if they feel that Accounts prepared in a fraudulent manner, mismanagement in the affairs of the Company and Doubt on the reliability on the financial statement.
6. Vigil Mechanism: Vigil mechanism made mandatory for certain type of companies for better control.
7 .Whistleblower Obligations of Chartered Accountant, Company Secretary, Cost Accountant: Obliged to Central Government in case any fraud by the officers or employees of the company noticed during their audit and it’s mandatory to report to Government along with reporting to the Audit Committee and Board of Directors.
Relevance of Directors’ &Officers’ Liability Insurance (D&O Policy)
D&O liability policies are one of the most popular liability products and have been available in India for many years. Almost every insurer in the Indian market currently offers this solution in its suite of products. Practice of obtaining D&O insurance has already become prevalent in Indian companies, especially among the larger ones, and is only likely to grow in view of the expansive liability regime under the new law. In fact, the 2013 Act implicitly recognizes the ability of the company to incur the premium expense in order to obtain D&O insurance policies. While obtaining adequate level of D&O insurance policies would be prudent for all boards and directors, regard must be had to the fact that policies are usually accompanied by specific exceptions for fraud, willful misconduct and other forms of intentional criminal conduct.
It is important to seek expert advice when purchasing D&O liability insurance and managing a D&Oclaim. As the primary purpose of D&O liability insurance is to protect directors and officers from personal liability, it is important to “stress test” the policy wording on coverage and exclusion clauses, and provisions such as severability and non-rescindability, especially for scenarios where wrongdoingagainst the company is also alleged.
When assessing D&O insurance, it is important for buyers to consider the following points in mind:
1. Choose a broker and insurer : with commensurate geographic representation as the insured.
2. Ensure limits are adequate.
3. Localise the policy form to ensure proper treatment of India-specific issues, such as tax related demands, corporate indemnification, consent orders, compoundable offences, allocation of defencecosts, non-invalidation of cover, and severability of innocent insured etc.Tying in of limits with a global master policy may save some costs; however, at the time of a claim this may create complications with deductibles, exclusions, local tax, insurance, and/or exchange control regulatory authorities.
Moreover, it is important that you satisfy yourself fully beyond the written policy coverage on thebroker and the insurer’s intent, experience, capabilities and track record on handling claims and getting them settled.