ICICI

Arresting MD under GST evasion: Whether Legal?

CA Varun Kumar 
on 20 June 2019


This article discusses the various requirements of the law to be considered while resorting to arrest the head of the Company. The authors try to analyse the criminal liability under various laws vis-à-vis Companies Act, 2013 the parent law for evolving corporate criminal jurisprudence.

It has been a matter of record that various arrests have taken place across the country and also the pre-arrest bail have been denied in various cases leading to a slew of arrests wherein the GST evasion have been alleged. Further, the Managing Director of companies have also been arrested along with other key management personnel. This is a threatening trend as Corporates have an administrative setup of various levels and tomorrow in case the allegation supposedly comes against some listed companies, then the same cannot be expected to be arresting the MD/Group KMP because it is alleged that some of the invoices appears to be fake or the chain of transactions appears to be fraud.

Concept of 'Officer in default'

The term 'officer who is in default' has been defined under Section 2 (60) of the 2013 Act as:

or the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:-

(i) whole-time director;

(ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

(v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

(vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer It is pertinent to note here that the term ‘officer in default' now seeks to implicate every director (including nominee director) who is aware of the contravention. He need not even participate in any meetings of the board, but if the information as to a contravention is contained in any of the proceedings of the board received by him, he is deemed liable. Also, in view of the aforesaid provisions, a director needs to ensure that any objection raised by him at a board meeting is duly recorded in the minutes.

Administrative setup: Hierarchy

Usually in case of the listed companies there is hierarchy and the management assigns the duty of finance, accounting and taxation to a department and also the Chief Financial Officer takes care of these. Further, the company also takes measure to follow and declare the quarterly results.

Appointment of Key Managerial Personnel (KMP)

As per Section 203 of the Companies Act, 2013 read with the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the following class of Companies, namely

  • Every listed company, and
  • Every other public company having paid up share capital of Rs. 10 Crores or more

shall have the following whole-time key managerial personnel,—

(i) Managing Director, or Chief Executive Officer or manager and in their absence, a whole-time director;
(ii) Company secretary; and
(iii) Chief Financial Officer 

Role of CFO

Chief Financial Officer has been defined under Section 2(19) of the Companies Act, 2013 as 'a person appointed as the Chief Financial Officer of the Company'.

Under Section 128 of the Companies Act, 2013, CFO need to ensure that company prepares and keeps at its registered office books of account and other relevant books and papers and financial statement for every financial year giving true and fair view of the state of affairs of the company. Relevant provisions of Section 128 (6) is reproduced herein below :

' (6) If the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with the duty of complying with the provisions of this section, contravenes such provisions, such managing director, whole-time director in charge of finance, Chief Financial officer or such other person of the company shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or with both.'

It is thus clear from the above that the primarily it is responsibility of the CFO and thereafter Director-in-charge of finance usually as the MD may not be aware of every financial transaction wherein alleging GST invoicing shall be far fletched. However, there may be case wherein the MD may be directly involved in accounts in small companies.

Liability under Other Criminal laws

Cheque bouncing case

The provisions of Section 138 of the Negotiable Instruments Act, are quasi criminal in nature with the intent of infusing trust in cheque transactions. The concept of vicarious liability has also been incorporated by Section 141 of the Negotiable Instruments Act, making the director, manager, secretary, and other officers of the Company liable if the offence is attributable to any neglect on their part, thereby, incorporating the concept of vicarious liability.

The issue has also been settled by the Hon'ble Supreme Court in line with judgments which state that Directors are liable under Sections 138 and 141 of the Negotiable Instruments Act. But since the offence is bailable, they generally seek bail as a matter of right, which respite them from rigours.

Resignation of Director

As soon as the news broke about the alleged GST evasion the follow on news of Independent director resigning from the Company. Recently, the news of MD getting arrested of one of the leading beverages company broke wherein the MD was arrested alongwith CFO and the price of the company shares dived more than 20%.

Independent directors generally are resigning as the recent judicial trends have shown that the brunt also comes on the Independent directors and therefore they generally resign to damage control. Courts have in recent orders of Amrapali, Jaypee Infra and ILFS made them accountable and also restricted their foreign travel too.

Company Name

Resigned Director

Issue as per Media reports

Reason given

Gitanjali Gems

Mr. Anil Umesh Haldipur

PNB scam

Personal Reason

Manpasand Beverages

Mr.Chirag Doshi

GST evasion allegation

GST evasion allegation press release by GST department

Tata Global Beverages

Analjit Singh (Max Group Chairman emeritus )

Ratan Tata and Cyrus Mistry

Crtisicsed the oust of Cyrus Mistry

Yes Bank

Mr. R Chandrashekhar

Dispute between Kapoor family erstwhile promoters

Lack of Governance in handling issues

Jet Airways

Mr.Vikram Mehta

Sudden fall, operations suspended due to losses and cash crunch

Personal reason

Escorts Limited

Mr.Ravi Narain ,Ex-Chief of NSE

NSE Algo scam

Order passed by SEBI in NSE case

The Hon'ble Delhi High Court, in case of  Kamal Goyal Vs.  United Phosphorus Ltd 2010 (2) JCC [NI] 121 (Delhi),, has relied upon Form No.32 to establish cessation of a person as a Director of the Company. Considering certified copy of Form 32 is a public document authenticity of which had not been disputed, it could be considered in proceedings under Section 482 of the Code of Criminal Procedure, Hon'ble Court also relied upon the decision of the Hon'ble Supreme Court in  All Carogo Movers (I) Pvt. Ltd. v. Dhanesh Badarmal Jain and Anr. (dated 12.10.2017 SC) An analysis of the above mentioned judgments establishes that if the certified copy of Form No.32 is brought on record of the case – it establishes that the person has resigned as a Director.

In case the offence has been committed after the date of cessation as a Director, that person cannot be arrayed as accused person in the criminal complaint by the complainant by invoking the principle of vicarious liability.

It is clear that resignation will not absolve the independent directors from criminal liability which may arise before resignation. However, the resignations appear to be further damage control, if any.

Liability of Directors under Indian Penal Code.

In the matter of GHCL Employees Stock Option Trust vs. Kranti Sinha the Managing Director and Joint Managing Director, Company along with its Directors were prosecuted for the offences punishable under Sections 120-B,415 and 409 r/w Section 34 of the Indian Penal Code. Process was issued by the learned Metropolitan Magistrate against all the accused including the Managing Director. The Managing Director and Directors filed a petition before the High Court of Delhi challenging the issuance of summons against the Company, the Managing Director of the Company, Company Secretary and Directors of the Company.

The High Court of Delhi quashed the process issued against the Managing Director, Company Secretary and Directors of the Company and upheld the order of process issued against the Company. Hon'ble Supreme court confirmed the same.

In the case of N.K. Wahi vs. Shekhar Singh & Others, (2007) 9 SCC 481, the Hon'ble Supreme Court held that:

'To launch a prosecution, therefore, against the alleged Directors there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are in-charge and responsible for the conduct of the business of the company. The description should be clear. It is true that precise words from the provisions of the Act need not be reproduced and the court can always come to a conclusion in facts of each case. But still, in the absence of any averment or specific evidence the net result would be that complaint would not be entertainable.'

Principle of 'alter ego'

A company acts through persons in charge of its affairs and the intent of such person is the mens rea in an offence by the company.  The Hon'ble SC has clarified that the 'principle of attribution' can be used to impose liability only on the companies and not the officers of the Company. The liability of the officers would have to be established independently by way of specific incriminating evidence against them together with mens rea.

In the case of Sunil Bharti Mittal vs. Central Bureau of Investigation, (2015) 4 SCC 609 the Hon'ble SC held that the magistrate issued process against the directors without ascribing any incriminating role to them, but solely on the basis that their companies were accused in this case and they being 'Alter-Ego' are vicariously liable on account of their position in the company. The Court therefore, clarified that the 'principle of attribution' can be used to impose liability on the companies and not the officers of the company.

In the matter of Maksud Saiyed Vs. State of Gujarat , (2008) 5 SCC 668 it is held that in the matter of IPC do not provide for the vicarious liability on the part of MD directly and therefore cannot be implicated unless some allegations are against him specifically.

'The Indian Penal Code does not contain any provision for attaching vicarious liability on the part of the managing director or the directors of the company when the accused is the company. The learned magistrate failed to pose unto himself the correct question viz. as to whether the complaint petition, even if given face value and taken to be correct in its entirety, would lead to the conclusion that the respondents herein were personally liable for any offence. The bank is a body corporate. Vicarious liability of the managing director and director would arise provided any provision exists in that behalf in the statute. Statutes indisputably must contain provision fixing such vicarious liabilities. Even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability.'

Liability under GST law before Arrest

It is very difficult to implicate MD directly as criminal complaint against the company will have to be thoroughly investigated and specific allegations against involvement of the MD will have to be established. Provisions of Section 70 of GST Act,2017 will have to be complied for preliminary enquiry and the statements made by the accused have to be incriminating to arrest him. It is unlikely that the head of the company will be able to depose about lakhs of transaction happening daily and also the information to be provided will require reasonable time.

Conclusion

The recent arrest of MD directly is a matter of concern and the intent of the policy makers which has been to remove tax terrorism doesn't gel well. Legally the matter will have to be examined on case to case basis as the challenge to Powers of arrest is matter of debate under GST law. Making purposive interpretation with Parent law i.e Companies Act, 2013 is must and the jurisprudence developed till now in the celebrated cases discussed above will have to be seen in juxtaposition with Indian Penal Code as the substantive law is IPC and CrPC which shall have to be ultimately followed.  Otherwise, the day will not be far when the MD will have to take bail for any anticipated offence under GST law.


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