Computer Crime Research Center


Techno-Legal Compliance In India: An Essential Requirement

Date: July 19, 2006
Source: Computer Crime Research Center
By: Praveen Dalal

... behind the corporate personality. The court will break through the corporate shell and apply the principle of “Lifting of the corporate veil”. The court will look behind the corporate entity and take action as though no entity separate from the members existed. In other words, the benefit of separate legal entity will not be available and the court will presume the absence of such separate existence. The Companies Act, 1956 contains certain provisions , which empower the courts to lift the veil to reach the persons who are in fact responsible for the culpable or wrongful act. The corporate veil can be lifted in the following cases:
(1) Where the doctrine conflicts with the Public policy,
(2) Where corporate veil has been used for fraud or improper conduct,
(3) Where the corporate facade is only an agency instrumentality,
(4) For determining the real character of the company,
(5) Where the veil has been used for evasion of taxes,
(6) In quasi-criminal cases,
(7) For investigating the ownership of the company,
(8) For investigating the affairs of the company ,
(9) Where the company is used as a medium to avoid various welfare and labour legislations,
(10) In case of economic offences,
(11) Where the company is used for some illegal and improper purpose, etc.

The following provisions of the Companies Act, 1956 provide that the Members or the Directors/officer(s) of a company will be personally liable if:
(1) A company carries on business for more than six months after the number of its members has been reduced below seven in the case of a public company and two in the case of a private company. Every person who was a member of the company during the time when it carried on business after those six months and who was aware of this fact, shall be severally liable for all debts contracted after six months ,
(2) The application money of those applicants to whom no shares has been allotted is not repaid within 130 days of the date of issue of the prospectus, then the Directors shall be jointly and severally liable to repay that money with the prescribed interest ,
(3) an officer of the company or any other person acts on its behalf and enters into a contract or signs a negotiable instrument without fully writing the name of the company, then such officer or person shall be personally liable ,
(4) The court refuses to treat the subsidiary company as a separate entity and instead treat it as only a branch of the holding company ,
(5) In the course of winding up of the company, it appears that the business of the company has been carried on with intent to defraud the creditors of the company or any other person or for any fraudulent purpose, al those who were aware of such fraud shall be personally liable without any limitation of liability .

Thus, the protection of separate legal entity cannot be claimed in these cases and the limited liability of the shareholder becomes unlimited if he is engaged in these activities. The concept of “limited liability” restricts the liability of a shareholder to the nominal value of the shares held by him. If he has paid the entire amount which is payable towards his shares, he cannot be held liable for the debts of the company, even if he holds almost the entire share capital of the company. This rule, however, does not apply if the court lifts the corporate veil and finds the shareholder responsible for the wrongful act.

Liability under the IT Act, 2000

The companies are expected to act within the framework of statutory laws. Thus, accountability and reasonableness requirements are safeguarded by affixing liability of the companies under almost all the statues that are enacted from time to time. It is ensured by incorporating a provision in the respective statue making the company liable for the wrong for which general public has also been made liable. For instance, under the environmental laws, taxation laws, etc the companies are also made liable for the respective wrong committed under these statutes. An interesting aspect of these provisions is that the language used in these statutes is virtually similar in all of them. This is a normal and well- acceptable practice, which is uniformly followed by the “legislature”. The degree of reasonableness and accountability is same in all these statues and hence while interpreting the provisions of a particular statute, support and aid can be taken of the judicial precedents given under other statutes. For instance, Section 85(1) of the IT Act, 2000 provides that where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder is a Company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of business of the company as well as the company, shall be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. The proviso to section 85 (1) provides that such person will not be liable for punishment if he proves that the contravention took place without his knowledge or that he exercised all due diligence to prevent such contravention. Section 85(2) provides that where a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. The explanation to section 85 provides that the expressions “company” means any body corporate and includes a firm or other association of individuals and the expression "director", in relation to a firm, means a partner in the firm. The language of the section is not alien to our legal system and it is surprising that a lot of hue and cry has been raised recently regarding the “due diligence” requirement. It is strange that people are demanding to take aid of the American System, whereas the matter has authoritatively and conclusively decided by the Supreme Court in various cases that arose under different statutes. The accountability, reasonableness and due diligence requirement are incorporated in all the statutes so that the Fundamental and other rights of the people are safeguarded in their widest and truest perspectives. The law expects every person to act fairly, reasonably and diligently. That is why deviations from these standards are made punishable by the law. One cannot in the zeal of earning profit or in the sense of indifference take the law casually. There are certain well-recognised cardinal principles of criminal laws, which need to be discussed before proceeding further. These are:
(1) The ignorance of law is no excuse,
(2) The “presumption of innocence” continues until the guilt of the accused is proved,
(3) The guilt of the accused must be proved “beyond reasonable doubt”,
(4) No person is guilty of an offence unless it is accompanied by both an act/ omission and the guilty intention for the same,
(5) The law may presume the guilty intention if the commission of the act is proved. This is known as “strict liability offences”, and
(6) The law may fix the liability of certain individuals on a “notional basis”. This usually happens where a company is involved in the commission of an offence or wrong. The imputation of criminal liability to certain “natural persons” is logical because a company, being an artificial person, cannot operate automatically. Thus, to conduct the affairs of the company certain natural persons are required, who alone can be saddled with the liability of the wrongs committed by the company. It requires common sense to understand that a company, being a non-living entity, cannot commit any wrong and in the ultimate analysis some natural person is responsible for the wrong. That is why the liability can be fixed upon a living person only. As a corollary, only that person can be held liable for the wrong who was responsible for the conduct of the business at the time when the wrong was committed. This practice has the support of logic and common sense because the supreme authority, on whose orders and directions the company is bound to act, can safely be presumed to have the “express” as well as the “constructive knowledge” of the wrong committed by the company. He cannot escape his liability by merely “pleading’ either ignorance of the law or ignorance of the “factum of the wrong”. If the supreme authority was in charge of the day-to-day affairs of the company at the relevant time and the commission of the wrongful act was within his powers, competence, authority and reach, then the law can safely presume that its commission had a backing of that authority. This is, however, a rebuttable presumption that can be rebutted at the trial stage. Till then the law will consider the authority as the responsible person. This approach also seems to be just and fair because if the supreme authority cannot prevent the commission of the wrong then none can prevent such wrong. It would be wrong to presume that a subordinate staff can take decisions in the active presence and participation of the supreme authority. In fact, when the matter pertains to involvement of government departments/institutions, then the “head of the department/institution” is held liable for the wrong. Thus, there cannot be any...

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2008-08-24 00:37:54 - I Agree. What would you do with hard disks... Manoj
2006-11-27 05:32:43 - ciao io sono amina volio asere tu amica ciao amina
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