Definition:
Corporate Fraud refers to the illegal and unethical activities undertaken by any company or individual which is mostly done to gain a competitive advantage over other corporations in the industry. This may also be done to showcase a better identity of the company in the market in order to attract better investors also. This can involve actions such as misrepresentation of financial statements, embezzlement, insider trading, bribery, and other forms of deceit to achieve unfair advantages or to hide losses or liabilities.

Introduction:
Directors have a legal and ethical responsibility to prevent and address corporate fraud. They are expected to exercise due diligence, oversee financial practices, and implement internal controls to detect and prevent fraudulent activities within the company. Failing to fulfill these duties can result in legal consequences, including personal liability and potential criminal charges. It's essential for directors to prioritize transparency, accountability, and the best interests of the company and its stakeholders.

In the intricate realm of corporate law, the concept of director's liability takes on significant importance, particularly when it comes to cases of corporate fraud.

This blog post delves into key legal sections and provisions that outline the potential liabilities directors may face in such situations:
Provisions under the law:

1. Section 149(12): Independent Directors: Independent directors, as per Section 149(12) of the Companies Act, 2013, are equally liable in cases of fraud if it is proven that they did not exercise reasonable diligence in their roles. Independent directors cannot be made directly liable if the alleged acts occurred without their knowledge. It was explained in the case of V. Selvaraja vs. State Bank of India:
   • Facts of the case: The petitioner was a retired IAS officer working as a non-executive independent director of the said company, which was involved in the business of hiring, leasing, etc. The petitioner joined the company as a Non-executive Independent director in 2012. In 2013, RBI during its annual inspection found accounting malpractices in the company and issued certain actions against the company in public interest. The petitioner also mentioned that a software was developed by the managing director to create fictitious data entries.
      
   • Judgment: The Madras High Court relied on Section 149(6) and Section 149(12) of the Companies Act, 2013, and also Clause 2.5 of the master circular of RBI. It was clear that the petitioner was acting as an independent director particularly for 7 months and during the said period, he participated in 4 board meetings of the company. However, there was no evidence on record that the petitioner was involved in the day-to-day affairs of the company or that the discrepancies occurred with his knowledge or connivance. Therefore, according to Section 149(12), which states that the Independent Director should only be held liable in acts of commission or omission of the company that occurred with his knowledge, connivance, or consent, the petitioner in this case was absolved from the charge of 'wilful defaulter' and no penalties against him shall lie.
      
2. Section 164: Disqualification of Directors: Under Section 164 of the Companies Act, 2013, directors can be disqualified if they are convicted of fraud and certain other offenses. This provision acts as a deterrent against directors engaging in fraudulent activities where the company fails to pay interest on deposits, if the director has applied for insolvency adjudication, etc.
    
3. Fiduciary Duty: Directors owe a fiduciary duty to the company and its stakeholders. This responsibility is enshrined in various corporate laws, such as Section 166 of the Companies Act, 2013. Under this section, directors are mandated to act in good faith, promote the company's best interests, and exercise due care, skill, and diligence.
    
4. Section 177: Whistle-blower Protection: Introduced by the Companies (Amendment) Act, 2019, Section 177 places an obligation on directors to report concerns about unethical behavior or fraud within the company. Failure to comply can result in penalties, making it crucial for directors to actively address such issues.
    
5. Section 212: Investigation into Affairs of Company by Serious Fraud Investigation Office (SFIO): Section 212 of the Companies Act, 2013 pertains to the investigation into the affairs of a company by the Serious Fraud Investigation Office (SFIO). This section grants SFIO the power to investigate cases of fraud or other improper activities involving a company. The SFIO has the authority to demand information, summon persons, and access records during the course of its investigation. In instances where corporate fraud is suspected, Section 212 of the Companies Act, 2013 empowers the government to order an investigation into the company's affairs. If the investigation by SFIO reveals that the fraudulent activities were aided or abetted by the directors, they can be held liable under Section 447, which deals with fraud-related offenses. Liability under this section is cognizable and non-bailable.
   • Deccan Chronicle Holding Ltd.: DHCL took a loan of approximately 1230 crores and was unable to repay it. There were also some financial irregularities in the company and many other violations. After investigation, SFIO found that the company made the money available by the sale of non-convertible debentures, and later on, the company was declared a sick company by BFIR.
      
   • Saradha Chit Fund Case: The Saradha Chit fund case involves a major financial scandal in West Bengal, India. The Saradha Group, headed by Sudipto Sen, duped investors through chit fund schemes promising high returns. Instead of investing the money, they used it to pay returns to earlier investors, running a Ponzi scheme. The Serious Fraud Investigation Office (SFIO) investigated the case, uncovering financial irregularities, embezzlement, and breaches of financial regulations. The scam emerged in 2013, causing the group's collapse and leaving countless investors in distress. The investigation led to arrests, raids, and legal action, underscoring the necessity for stricter oversight and regulations in India's chit fund and investment sectors.
      
6. Section 245: Class Action Suits: Section 245 of the Companies Act, 2013 permits shareholders to file class action suits against directors for oppressive actions or mismanagement that affect the company's affairs. If fraudulent activities are proven to be a result of directorial negligence or misconduct, this provision can be invoked by shareholders seeking remedies.
    
7. Criminal Liability: Directors can face criminal liability under various sections of the Companies Act, such as Section 447, which deals with fraudulent actions. Depending on the severity of the offense, directors may face imprisonment and fines.
    
8. Director's vicarious liability and provisions under PMLA: In Sunil Bharti Mittal vs. CBI, the Supreme Court held that an individual can be held responsible if an offence is committed by a company. Firstly, if the individual shows criminal intent and that act is supported by sufficient evidence, and secondly, under laws such as the PMLA where specific liability of directors is mentioned. The Finance Bill, 2018 included corporate fraud as scheduled offenses, meaning 'fraud' under Section 447 is now included in the Schedule List of offenses. This amendment also changed the PMLA, stating that proceeds from corporate fraud will now be considered as money-laundering, giving the ED the power to attach and confiscate such property. Directors can also be arrested if found guilty under this law.
    
9. Section 48 of the Competition Act, 2002: Section 48(1) of the Competition Act states that if a company is found to contravene the law, each person responsible for such contravention shall be liable according to the law's provisions.
    
10. Section 141 of NI Act, 1881: Offences by Companies: If the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and responsible to, the company for the conduct of the business, as well as the company itself, shall be deemed to be guilty of the offence and liable to be proceeded against and punished accordingly. We will try to understand this aspect through a recent case law: Ashok Shewakramani V. State Of Andhra Pradesh, Criminal Appeal No.879 Of 2023
    • Issue: Can a person be held liable if he is managing a company's affairs in a cheque issue matter?
       
    • Judgment: If an offence is committed under section 138 of NI and it is committed by a company then Section 141 of the Act, says that every person who was in charge of, and was responsible to the Company for the conduct of business of the company at the time the offence was committed, will be guilty of the offence. The High Court already didn't quash the complaint against the appellant under section 482 of the Cr.PC. filed by the complainant. The Supreme Court said that the words "was in charge of and " was responsible to the company" should be read conjunctively always.

The most important averment which is required by sub-Section (1) of Section 141 of the NI Act is that the directors were in charge of, and were responsible for the conduct of the company. The appellants are neither the signatories to the cheques nor are whole-time directors. So though the company's director were only involved in the day to day affairs of the company it can not be construed that they were in charge of the company also and accordingly this case doesn't fulfill the criteria of sub-section 1 of section 141 of NI Act. So the directors were not held liable.

Conclusion
In the past few years, the Central Bureau of Investigation (CBI) has also registered multiple cases against companies and their officials for bank frauds, such as Gitanjali Gems and Simbhaoli Sugars. Coupled with such revelations is the response of the government, which has brought the investigative authorities out of their usual course of action.

In conclusion, the legal landscape surrounding director's liability in cases of corporate fraud is multifaceted and encompasses various sections and provisions under the Companies Act, 2013. Directors must navigate this complex terrain by upholding their fiduciary duty, actively participating in ethical governance, and taking steps to prevent and address fraudulent activities within their companies. Staying informed about these legal aspects is essential for directors to fulfill their responsibilities and avoid potential liabilities.

Award Winning Article Is Written By: Mr.Aakash Rai

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