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May 12, 2017

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Debarring Directors: A New Deterrent In Competition Law?


- Anshuman Sakle, Partner [ Cyril Amarchand Mangaldas ]
- Bharat Budholia, Partner [ Cyril Amarchand Mangaldas ]

Anshuman Sakle & Bharat Budholia

Recently, the Competition and Markets Authority of the United Kingdom secured an undertaking from a director of a company, to the effect that the person would not act as a director of any UK-based company for a period of five years, as the Authority had found that the concerned company had been engaged in a price-fixing cartel. While the Authority’s power to apply for a competition disqualification order against the directors of companies engaging in anti- competitive conduct has been in the rule book since 2003, this is the first instance where such an undertaking has been furnished. In the event the undertaking was not furnished, the Authority would have had the power to seek an order from a court, which may have also resulted in additional costs for the director.

Under Indian law, the Competition Commission of India (CCI) is endowed with the power to impose the highest economic penalties amongst all regulators in India. It is also empowered to proceed against and penalize individuals responsible for the conduct of a company’s business, such as directors, managers, secretaries, or other officers. The Competition Act provides that in case of a contravention by a company, in addition to the company itself, every person who at the time of the contravention was in charge and responsible to the company for its conduct would be deemed to be responsible for such contravention and be liable to be proceeded against and penalized. Under the Indian competition law regime, the CCI can impose a penalty of up to 10% of the average turnover for the last three years on the enterprise in question as also individuals in-charge at the time of the contravention.

In one of the cases in India where the CCI dealt with individual liability, it was held that an anti-competitive decision or practice could be attributed to the members of a trade association who were responsible for its affairs and actively participated in giving effect to anti-competitive decisions taken by the association. The trend of penalizing responsible officers has become increasingly common as the CCI has started to direct the Director General, the investigative arm of the CCI, to investigate the role of responsible individuals in-charge of the affairs of the enterprise in parallel with an investigation into the conduct of the enterprise itself. However, this endeavor of the CCI to commence simultaneous proceedings against individuals contemporaneously with finding a contravention by the enterprise has been met with serious challenges. Questions have been raised as to whether the CCI can legitimately proceed with investigating the role of individuals without first having found the enterprise itself in contravention or whether such an investigation is simply premature. The issue has found itself mired in controversy, more so on account of the established principles of jurisprudence under other legislations that nearly mirror the provisions of the Competition Act.

Since 2014, when the CCI began imposing penalties on individuals, it has been seen that such penalties range from one to ten percent of an individual’s earnings from the last three financial years. This has resulted in penalties of a few thousand to lakh rupees being imposed on individuals. It goes without saying that such penalties also cause significant reputational damage. Another potential repercussion that would be faced by such a person is that under the revised Companies Law in India, such a person would not be eligible for appointment as a managing director, whole-time director, or manager of a company.

In addition to monetary penalties and reputational damage, the CCI has powers to pass any such orders and directions as it may deem fit. Under this wide residuary power made available, the CCI may also be inclined to pass orders that are, in effect, similar to the one seen recently in the United Kingdom. The CCI’s fines and directions are meant to be a deterrent not only for the actual violator but also for the public at large, and an order that would result in a person being barred for a considerable period as a director from all companies would certainly act as a heavy deterrent.

The only possible solution for avoiding such high monetary and reputational risks is strict compliance with the rule book. It is imperative that directors and key managerial personnel of companies and office bearers in trade associations organize regular checks on the manner in which business is being conducted. Competition compliance audits enable responsible people to be aware of any wrongdoings that may result in their personal liability. A strict competition compliance code that directs employees to act only in a manner which would be in line with the law is the need of the hour. Such a code is important for all players in the market, be they large or small. While the procedural issues with respect to individual liability would get resolved in the near future, the only resolution to avoid risks under competition law remains stringent compliance.

Disclaimer - The views expressed in this article are the personal views of the author and are purely informative in nature.

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