John 03 October 2016

Urgent: breached cmpny fiduciary duties, fraud and cheating

My fellow director and his friend started a partnership firm where my fellow director has a high chances to be a important share holder or may be indirectly (Benami) involved since last one year (early 2015). Their company obtained a authorized distribution with the support of the area manager from the same company and becoming a dangerous competition while my fellow director is still in my company in a capacity of director. And my company or me did not know about this in for a very long time. Within this time my fellow director was actually working in that partnership firm against the good faith and duties towards company and that fellow director owes to my company. To my surprise and as per my checks, all this time all the important, strategic, financial, clientele and confidential mail and files with information were being accessed from the computers and being downloaded from the IP address belonging to the competition company started by my fellow director and his friend secretly, unfairly and without permission from the present company and this explained why there was a downfall in growth and billing for the past year.

My fellow director arranged contact numbers in a manner with his number being in the first contact with listings with some of the online marketing platforms and hijacked almost all prospective clients to his competition partnership firm. This was confirmed by a leading online business listing platforms representative recently. And after changing this I've started to get leads as before.

Lately my fellow director started to take out stock from my go down frequently without records, any invoices or dispatch notes as per rules by providing some false and lame reasons to the staffs present. This stock was reaching the competition partnership firm when they were out of stock as they are not able to purchase and hold huge stocks like my company. Most of them were returned later at odd times when the competitive partnership firm was able to acquire some stocks. This fraud has helped them to grow at the cost of my company because new distribution companies are not given any credit and stock were billed on cash and carry basis. The confirmation of stocks reaching their office was witnessed by my staff couple of times and he did not understand this at that point time and he realized recently that was a competition firm and was a grave act of fraud and cheating .

My fellow director was taking off large fuel and travel expenses without proper bills while 98 % of his effort and time was spent over in the partnership firm that they have created.

Now it seems that his intentions is to secure his own partnership firm with his friend at the cost of the my private limited company and to kill off once they have archived their stability with partnership firm with the help of that area manager of the company that we are distributors. This manager was aware of all this all along and is a key person in facilitating all the help needed to the unfair establishment and survival of the partnership firm created by my fellow director and his friend.

This manager and fellow director started to kill off my company by creating financial situations by restricting flow of stocks to my company by not honoring recent purchase order and invoicing with very low stock of critical stock items and invoicing huge quantities of non essential stock which does not have market and will expire in no time.

Very recently found out that my fellow director and my friend is trying to dispose some properties of his friend to secure some huge capital which is very essential to transfer all my existing clients and to prepare for purchasing hue stocks compared to their nascent stage, this information was gathered by my friends by posing as potential buyers for the online listing they have put up to dispose properties.

Till now my fellow director may some doubts of my understanding of these situations as I became strictly monitoring all aspect of business and stocks. May be he may not be aware or assuming that his secret endeavors are safe and I may not have a full understanding and he is mistaken.

As his intention is to kill of this company for his unfair gains by means of fraud, cheating and unlawful means, I pray for a solution to tackle this situation so that the company stays alive and me, my depended families and my staffs and to provide due justice which may seem fit. As per some research I came to know that there are provisions under law to initiate criminal legal actions against the partnership firm and even my fellow director. I came to understand that my fellow director took unfair advantage to my company, performed acts of fraud and cheating, also breached fiduciary duties to the private limited company and his friends being a known and informed accomplices in this.

Please provide me with solutions, suggestions and guidance for saving my company and depended souls. My depended families will be financial destroyed including my child's future .

Desperately awaiting for hope,

John.

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2 Replies

adv.bharat @ PUNE (Lawyer) 04 October 2016

John ur fellow director can be punished underIPC, FEMA act & IT act 2000 for making cheating with the company.

If u like my solution then will you give THANK on my LCI profile.

Ms.Usha Kapoor (CEO) 04 October 2016

Your brother A A DIRECTOR IS LIABLE FOR FRAUD, BREACH OF FIDUCIARY DUTY AND AVPIDING CONFLICT O FINTEREST, FRAUD, CRIMINAL BREACH OF TRUST AND CHEATING, FO RWHICH HE CAN BE PROSECURTED WITH IMPRISONMETN AND FINE AS HAF OF THESE CRIMES ARE NONCOMPOUNDABLE AND EVEN I FSOME OF THEM ARECOMPOUNDABLE FOR THOSE OFFENCES ALSO HE CAN BE PROSECUTED AN DPUNIAHED WITH FINES AND IMPRISONMENT. iF YOU APPRECIATE THIS ANSWER PLEASRE CLICK THE THANK YOU BUTTON ON THIS FORUM. i'M REPRODUCING A DIRECTORS DUTIES AND RESPONSIBILITIES FO R BREACH O FWHICH they can be prosecuted and punished and inclur civil liabilities also..

Companies Act, 2013 – Pitfalls And Safeguards

Last Updated: 18 July 2016

Article by Seema Jhingan, Neha Yadav and Saniya Kothari

LexCounsel Law Offices

Do you have Mutual Contacts with the Author

Co-authored by Mr. Anupam Sharan, Director, American Express

1. Duties and Responsibilities of Directors.

1.1. The erstwhile Companies Act, 1956 ('CA 1956') contained no statement of statutory duties of directors, and acts of directors were usually reviewed in the context of their powers in terms of section 291 of the CA 1956 (which dealt with general powers of the board) and other applicable laws, and their established roles under common law as laid down in several judicial precedents1.

1.2. The Companies Act, 2013 ('CA 2013') for the first time has laid down the duties of directors in unequivocal terms in section 166. In summary, the general duties of directors under the CA 2013 are as follows:

to act in accordance with the articles of the company, in other words, to act within powers;
to act in good faith in order to promote the objects of the company for the benefit of its members as a whole;
to act in the best interest of the company, its employees, shareholders, community and for the protection of environment;
to exercise due and reasonable care, skill and diligence and independent judgment;
to avoid direct or indirect conflicts of interest;
to avoid undue gain or advantage either to himself or relatives, partners or associates; and
not to assign his office to any other person;

1.3. A Director is part of a collective body of Directors called the Board, which is responsible for the superintendence, control and direction of the affairs of the company. Under common law rules and equitable principles, director's duties are largely derived from the law of agency and trusts (i.e., set of contractual, quasi-contractual and non-contractual fiduciary relationships with the Company). Under the law of agency, duties of skill, care and diligence are imposed on directors. On the other hand, law of trusts impose fiduciary duties on directors. Accordingly, directors are the trustees of the company's money and property, and also act as agents in the transaction which they enter into on behalf of the company. Directors are liable as trustees for breach of trust, if they misapplied the funds or committed breach of byelaws of the company. A director is expected to perform his duties as a reasonably diligent person having the knowledge, skill and experience both of as person carrying out that director's function and of that person himself. A director, therefore plays various roles in the company, may that be of an agent, an employee (when appointed on the rolls of the company), an officer and/or a trustee of the Company.

2. Liabilities of Directors under CA 2013.

2.1. Under CA 2013, directors may be held liable as "officers" of the company. The word "officer" has been defined to include, inter-alia, directors of the company. CA 2013 contains the concept of an 'officer who is in default' for the purposes of affixing liability on such person in respect of any contravention of the provisions of the CA 2013 by the company. The ambit of 'officer who is in default' is quite wide and includes, inter alia:

every whole-time director;
every Key Managerial Personnel ('KMP');
if no KMP then such director(s) as specified by the Board in its behalf or all directors, if no director is so specified;
any person who is charged with any responsibility by the board or any KMP, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent any default;
any person in accordance with whose advice, directions or instructions the Board of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity; and
every director, in respect of a contravention of any of the provisions of the CA13, 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.

2.2. A director can also be made liable for fraud. "Fraud" in relation to affairs of a company 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".

2.3. Limited Liability of Independent director and non-executive directors: CA 2013, however, limits the liability of an independent director or of non-executive directors (not being a promoter or KMP), who are to be held liable, only in respect of such acts of omission or commission by a company, which (i) occurs with his knowledge, attributable through board processes, and (ii) with their consent or connivance or where they had not acted diligently.

3. Nature of Contraventions under CA 2013 – Compoundable vs. Non-Compoundable.

3.1. Compoundable Offences: Many of the contraventions under CA 2013 are in the nature of non-compliances (such as failure to file annual return, contravention of provisions with respect to related party transactions, acceptance of deposits, giving of loans to directors etc. by the company) which attract either fines (or in some cases are punishable with fines or imprisonment or both). Such offences can be remedied or compounded, subject to relevant provisions in the Act, by paying late fees/penalties/fines as applicable.

3.2. Non-Compoundable Offences: There are, however, a few serious contraventions which are punishable with imprisonment only or with imprisonment and with fines (such as offences of fraud) where officers of the company who are in default or persons concerned with formation of the company or the management of its affairs become liable and cannot be remedied/compounded merely by depositing fines/penalties. These liabilities can be imposed on the directors if they are in default (including non-executive directors) regardless of the fact that they are the executive directors of the company or not.

4. Liability under certain other legislations.

4.1. Be Being designated as a director in a company, also has a cascading effect with respect to exposure of the director to liabilities under various other legislations. From a brief study of a few other legislations, we note that the duties and liability thereof, for non-compliances by a company typically vests with the person in charge of the conduct of business/management of the company.

4.2. Other directors/officers (whether executive or non-executive) of the company can also be held liable in certain cases:

where the offence has been committed with the consent/connivance of, or is attributable to, any neglect on the part of such director; or
such director has been designated by the company (as notified to the concerned authority) to be in charge of the management of the company and responsible for compliances (as occupier/owner) under certain legislations which allow for such nomination, failing which all directors of the company.

4.3. As the liability under such legislations would typically fall on persons who are in charge of, and responsible to, the company for the conduct of the business of the company, as a safeguard, companies often designate (and notify the relevant government authorities) a specific person to be in charge for compliances of relevant unit/factory with respect to certain legislations, (such as designating such person as an occupier or manager for compliances under the Factories Act, 1948).

5. Safeguards – Adopt a Precautionary Approach.

5.1. To safeguard their interest and avoid undue liability, it is advisable that directors adopt a precautionary approach. A few of the safeguards that can be considered and implemented are as follows:

To attend meetings regularly;
To be inquisitive and peruse agendas for unusual items and seek additional information in writing, if necessary;
To ensure that disagreements/dissenting views are recorded in the minutes;
To act honestly and with reasonable justifications;
To report concerns about unethical behaviour, actual or suspected fraud or violation of the company's code of conduct or ethics policy;
To seek professional advice, establish audit committees, engage external agencies, if situation demands;
To engage external agencies for addressing whistleblowing issues. The Company may consider appointing an external agency for whistleblowing reporting;
To provide requisite disclosures of interests/conflicts, consider excusing oneself from participation in proceedings in cases of conflict;
For ongoing and day to day compliances, have a competent compliance team and establish committees (for regular internal audits etc.); and
To include indemnity provisions in the letter of appointment and seek Directors & Officers Liability insurance from the company to protect against malicious acti

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstancess

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