[The following guest post is contributed by Suprotik Das, a 3rd year law student at the Jindal Global Law School, Sonepat, Haryana.
This is a follow-up to a previous post “Whistleblowing and Confidentiality Agreements”.]
KBR, a US company, required employees and former employees to sign confidentiality agreements when they were being interviewed for internal compliance issues with regard to violation of federal securities laws. These confidentiality agreements imposed certain restrictions on the employees before they intimated the SEC, thereby rendering their whistleblowing provisions insignificant. In a final settlement with the SEC, KBR agreed to pay a sum of $130,000 as a penalty to settle and revise its confidentiality agreements.
What if there is a KBR-like confidentiality situation in India and the internal whistleblowing policy of a company is rendered nugatory? What if a member of the audit committee or a director is engaged in nullifying the effect of a company’s whistleblowing policy? What is the relief available to an employee apart from intimating the audit committee?
The answer lies in section 206(1) of the Companies Act, 2013, specifically with the phrase ‘…any information received by him…’. This enables a shareholder or an employee to inform the Registrar of Companies about any malpractice the company may indulge in. In accordance with section 206(2), it is the duty of the company and its officers to supply information or give an explanation to the best of their knowledge and power and to produce the documents to the Registrar within the time specified or extended by the Registrar.
Under section 206(4), if the Registrar is satisfied on the basis of information furnished to him or on a representation made to him by ‘any person’ that the business of a company is being carried on for a fraudulent or unlawful purpose or not in compliance with the provisions of the Act or if the grievances of investors are not being addressed, then the Registrar may, after informing the company of the allegations made against it by a written order, call on the company to furnish in writing any information or explanation on matters specified in the order within such time as he may specify and carry out an inquiry as he deems fit after providing the company a reasonable opportunity of being heard. Here, ‘any person’ could mean a shareholder or an employee.
The second proviso to this section is of particular importance. Where business of a company is being carried on for a fraudulent or unlawful purpose, every officer of the company who is in default shall be punishable for fraud in the manner as provided in section 447. The explanation to Section 447 mentions that ‘fraud’ includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. The punishment for fraud is that any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.
In accordance with section 206(7), if a company fails to furnish any information or explanation or produce any document required under this section, the company and every officer of the company, who is in default, shall be punishable. The penalty may extend to one lakh rupees and in the case of a continuing failure, an additional fine which may extend to five hundred rupees for every day after the first during which the failure continues, if the company fails to furnish any information or explanation or produce any document required under this section.
Section 207 is a follow up to section 206. It stipulates that when the Registrar or inspector calls for the books of account and other books and papers under section 206, it shall be the duty of every director, officer or other employee of the company to produce all such documents to the Registrar or inspector and furnish him with such statements, information or explanations in such form as the Registrar or inspector may require and shall render all assistance to the Registrar or inspector in connection with such inspection. Non-compliance with this section will render the director liable to punishment with imprisonment which may extend to one year and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees under section 207(4)(i).
Now, suppose the Registrar/Inspector deems that further investigation is required, it can submit a report to the Central Government stating its reasons in writing. Section 210 is a follow up of section 208 which allows the Central Government to investigate into the affairs of a company on the receipt of the report of the Registrar or Inspector under section 208 or in public interest.
Further, section 212(1) refers to investigation into the affairs of a company by the Serious Fraud Investigation Office:
1. Once a report of the Registrar or inspector under section 208 has been received, as per S. 212(1)(a).
2. In public interest, as per S. 212(1)(c).
This again amounts to giving the Central Government an immense amount of power to usurp the functioning of a company. As per S. 212(14), on receipt of the investigation report, the Central Government may direct the SFIO to initiate prosecution against the company and its officers or employees or any other person directly or indirectly connected with the affairs of the company. Here, ‘any other person’, can include a director, who is part of the Audit Committee.
The most obvious common thread that runs through these provisions is providing a safe route of communication which ensures anonymity between the whistleblower and the RoC/Central Government/SFIO. Perhaps this is a concern that Parliament can consider while amending the Companies Act in the future.
Thus, one can see that if a KBR-like situation arises in India, there is a safeguard provided for in the Indian Companies Act. This situation also resurrects an archaic principle of statutory law over-riding provisions of a non-disclosure agreement.
- Suprotik Das