IMPOSITION OF INDIVIDUAL PENALTY UNDER COMPETITION LAW:UNDERRATED TOOL IN THE HANDS OF THE REGULATOR
Author: S. Bhargav, IV year B.A.,LL.B(Hons.) From Tamil Nadu National Law University.
The Competition Commission of India (CCI) has been empowered to impose penalties on persons or enterprises engaging in anti-competitive practices. It is also empowered to impose monetary penalty on individuals associated with companies involved in anti-competitive practices.
The CCI has clearly noted that the purpose behind imposition of individual penalties is 2 fold: to reflect seriousness of offence and to deter future infringements from the entity. Such individual penalty must of course follow the principle of proportionality: it must balance the competing interests of punishing offender causing harm to society and ensuring that penalty is not arbitrary with regards to seriousness of the act itself.
Taking the above spirit of competition law into consideration, Section 48 has introduced 2 types of Individual liability as a part of competition law in India:
Liability arising out of position- Section 48 (1)
This is a case where individual liability arises out of the position occupied by the person in question during the time when the company/association of persons engaged in the competitive conduct. The conditions for imposition of liability under this subsection are:
Contravention should have been committed by the company
Persons “in charge of and responsible to company for conduct of business” at the time when contravention occurred.
This is a deeming provision which places liability on those who occupied key or important roles in the company while the anti-competitive activity took place or decision was made. From the side of regulator, it is enough to show they had a considerable deal of power and oversight over the functioning of the company. The burden of proof is shifted on those who held such positions to show that contravention took place “without their knowledge or due diligence was exercised to prevent such commission”.
The defense of lack of knowledge is quite ambiguous because it does not cover instances where those offering key positions in the company were unaware of activities of their employees or decisions being made by their subordinates. Presumably, this is because the knowledge on the part of individuals can include personal as well as constructive knowledge.
Black’s Law Dictionary defines personal knowledge as “knowledge gained through firsthand observation or experience” whereas constructive knowledge is defined as “knowledge that one using reasonable care or diligence should have and therefore is attributed by law to the person”. Since this liability is centered on the position occupied and control exerted over the company in question, competition law presumes that those occupying key positions in the company possess a certain level of awareness about what is going on in the company. In one instance, the CCI has warned that attending meetings of trade associations where prohibited activities take place might lead to liability under the act. It opined that it was in fact obligatory for a party to recuse from such meetings and immediately report it to the CCI as “responsible corporate citizens”.
Liability arising out of active role in Anti-Competitive conduct- Section 48 (2)
This is a case where individual liability arises out of active role of certain specified individuals during the time the contravention was committed. The conditions for imposition of liability under this provision are:
Breach of Competition law committed by company
It has been proved that contravention has taken place with “consent, connivance or neglect” of individuals such as director, manager, secretary or other officers of the company.
It is pertinent to note that unlike Section 48 (1), this is not a deeming provision which provides for reversal of burden of proof. It is the regulator who should prove the involvement of individual in the anti-competitive conduct of company.
The act does not define terms such as consent, connivance or negligence. Black’s Law Dictionary defines consent as concurrence of wills or voluntarily yielding to the proposition of another whereas connivance is more of a secret cooperation or indirect consent to the commission of an unlawful act.
From existing application of this provision, what is considered essential is the participation of the individual in ensuring that anti-competitive conduct takes place. Actively engaging in anti-competitive conduct by devising, preparing and submitting collusive bids and tenders is considered to be punishable under this provision. Taking into account the context, engaging in a phone call, sending E-mails, attending meetings can also be punished under this provision.
It is pertinent to note that individual penalties are being recovered rarely under this provision and there are several hurdles to the effective imposition of individual penalty under Section 48. Therefore following solutions suggested to remedy this situation:
Need for Legislative Clarifications under Section 48
Even though Section 48 has been made with good intentions, it suffers from certain legislative defects and parties have tried to escape liability by using the same. The first defect is with regards to the provision that contravention should have been committed by company for officers/ individuals responsible to be held liable. Using this condition, the officers/ individuals have claimed that separate proceedings need to be carried with regards to the company first and then proceedings should be carried out under Section 48 separately. Further, as the provision mentions that the officer/ individual shall be “punished accordingly” reference has to be made to Section 27 which only uses turnover as the criteria for deciding monetary penalty. This is usually a term associated with artificial entities rather than individuals. The above contentions have been rejected by 2 Division benches of the Delhi High Court (here and here) and an appeal on the same is pending before Supreme Court.
It is opined that this is clear case of frivolous litigation before the courts to escape implementation of Competition Act 2002. The issue was soundly dealt with in Pran Mehra vs. CCI where a single judge bench opined that separate proceedings in respect of company and then the individuals involved would be “ineffacious and inexpedient”. It is submitted that such a perverse intention would make the aspect of individual liability unworkable. If such dual (or split) proceedings become the norm, the parties will simply appeal the finding against the company involved which would make it impossible to take action against the individuals involved until the decision of appellate bodies. The CCI would then need to initiate separate inquiry, notice and give a separate decision on individual liability under Section 48 which would again be subject to multiple appeals. It is a highly undesirable situation inconsistent with the spirit of speedy and timely resolution of matters under regulatory bodies.
It is a positive step that the proposed 2022 Amendment to the CCI Act 2002 seek to explicitly mention that individual penalty under Section 48 will be determined on the basis of “income” of the individuals. However, there exists a need to clarify that Section 48 does not envisage separate proceedings against the company first and then against the individuals involved next. There is no denying the settled position that commission of offence by the company is a condition precedent to attract vicarious liability of individuals involved. At the same time, there is no bar to holding simultaneous proceedings to fix the liability on company involved and the individuals as well. The officers/ directors can present their defense on individual liability under Section 48 in the same proceedings. There is need for legislative clarification in this regard.
Provision for Disqualification of Directors for being involved in anti-competitive conduct should be introduced
It is submitted that the imposition of monetary penalty alone is not sufficient to deter anti-competitive conduct on the part of directors. It must be coupled with other administrative penalties such as director disqualification. This refers to legally imposing a prohibition on directors from working or representing any company if they are found guilty of anti-competitive conduct. There are provisions under securities law for instance under which the regulator could ban the director from interacting with the stock market essentially imposing a director disqualification penalty. Such a kind of administrative penalty is found in other competition law jurisdictions. For instance, Section 86E of Australian Competition and Consumer Act 2010 provides for disqualification of a person from “managing a corporation” for a period of time that the court considers appropriate if:
The court is satisfied that the person has contravened or attempted to contravene provisions of competition law
The court feels that the disqualification is justified which is determined based on the person’s conduct in relation to management and other factors the court considers to be appropriate.
Similarly, in the United Kingdom, Section 204 of the Enterprises Act 2002 provides for a Competition Disqualification Order (CDO) if:
The Company of which he is a director has committed breach of competition law.
The court finds the director to be “unfit” for management of company.
It is pertinent to note that unfitness is a mixed question of law and fact where the following is covered: conduct contributing to breach, not taking steps to prevent the breach and in cases where the director ought to have known that conduct of company constituted a breach of competition law.
As far as India is concerned, it is Section 164 of the Companies Act 2013 which provides for disqualification of directors but it covers only cases where the director has been disqualified by a court or tribunal. Hence, this provision does not include orders passed by the CCI with respect to anti-competitive conduct by the directors. Incorporating such a provision into Indian law is essential to deter anti-competitive conduct as well as to protect the public from future occurrences. The CCI should consider issuing such Director Disqualification orders especially when there has been deficient appreciation of competition law or overt participation of the director in the anti-competitive conduct.
Companies should be prohibited from indemnifying officers for individual penalties imposed for anti-competitive conduct
Black’s Law Dictionary defines indemnification as an assurance or contract whereby one party agrees to compensate or reimburse another party for any loss or damage arising from some act of the other party.
It is pertinent to note that Section 201 of the erstwhile Companies Act 1956 prohibited the employer from indemnifying officers in respect of any liability arising out of negligence, breach of trust or duty and misfeasance. It only allowed indemnification if the officer was acquitted or discharged of the liability. However the 2013 Companies Act does not contain such a provision and hence there is no restriction on companies to indemnify directors for fines they might be asked to pay as a part of their individual liability. Such a provision is deathblow to individual liability under competition law and emboldens directors to engage in anti-competitive conduct in hope that they would be compensated for any penalty they might be asked to pay for the same.
Recognizing the above, jurisdictions such as Australia have prohibited indemnification of officers in respect of “fines or legal costs imposed” for anti-competitive conduct under Section 77A of the Australian Competition and Consumer Act 2010. It is the suggested that a similar provision is required in India to improve the effectiveness of individual liability under Section 48 of CCI Act 2002. The D-G could be asked to examine the employment contract or covert agreements where such indemnification is provided to officers of the company.
Bringing in necessary legislative changes, coupling monetary penalties with director disqualification and prohibiting indemnification of officers of company in respect of competition law offences is essential to ensure effective imposition of individual penalty under Section 48 of the CCI Act 2002.