Individual Liability in Cartel Cases

               


Section 48 of the Competition Act, 2002 (as amended) (Act) empowers the Competition Commission of India (CCI) to impose penalties on individuals employed by a company that has contravened the provisions of the Act. In practice, while such penalties are imposed on individuals, the CCI makes a fine distinction between Sections 48(1) and (2) before coming to its decision. In this piece we elaborate on the distinction between Sections 48(1) and (2) of the Act, and then discuss their scope in the context of CCI’s practice. Thereafter, we provide certain key takeaways for both individuals and companies.

Understanding the distinction — Section 48(1) v. Section 48(2)

Section 48(1) of the Act states that, if a company is found to have contravened the provisions of the Act, then, every person who is in charge of and responsible for the company’s conduct shall be deemed to be guilty of the contravention, and shall be liable to punishment according to the provisions of the Act. However, the proviso to Section 48(1) provides that nothing contained in Section 48(1) shall apply, if the relevant individual can prove that the company’s contravention was without his/her knowledge or that he/she had exercised due diligence to prevent the commission of such contravention.[1]

On the other hand, Section 48(2) of the Act states that, if a contravention of the Act has been committed by a company, and it is proved that the contravention of the Act has taken place with the consent, connivance or is attributable to the neglect on the part of any director, manager, secretary or other officer of the company, then such persons shall also be deemed to be guilty of the contravention, and shall be liable to be punished according to the provisions of the Act.[2]

In this regard, the essential distinction between Sections 48(1) and (2) of the Act is that, Section 48(1) presupposes guilt only on the relevant individuals who were in charge and responsible for the conduct of the company at the time of the contravention of the Act. S. 48(1) also allows this presumption to be rebutted, if relevant individual(s) can demonstrate that the infringing act was committed without their knowledge, or that they had exercised due diligence to prevent such contravention. In contrast, under Section 48(2), the consent, connivance, or neglect of the relevant individuals is established by their de facto involvement, and is therefore not rebuttable. Additionally, Section 48(2) extends to any individual or person that has been involved with the company’s contravention, and is not limited to persons in charge of the company at the time of such contravention.

CCI’s practice and jurisprudence

Despite the CCI’s powers under Section 48 of the Act being in force since the inception of the competition law regime in India, penalties have been imposed on individuals only since 2014. In Bengal Chemist and Druggist Assn., In re (BCDA case)[3], the CCI found the Bengal Chemists and Druggists Association (BCDA) guilty of anti-competitive practices for directly/indirectly determining the sale price of drugs and controlling the supply of drugs in a concerted manner. Although the CCI had earlier found individuals guilty for contravening the Act, in this case, for the first time, the CCI found the office-bearers of BCDA to be guilty under Section 48, and imposed a penalty under Section 27 of the Act at 10% of their average income for three preceding financial years. However, in this case, the CCI did not delve into and discuss in detail the scope and distinction between Sections 48(1) and (2) of the Act.

More recently, in the Battery case[4], the CCI held individuals to be specifically liable under either Section 48(1) or Section 48(2) of the Act, thereby discussing and distinguishing the scope and nature of the provisions. Specifically, the CCI held that a company’s contravention of the Act could not have been possible without the Managing Director’s knowledge and implicit approval, given that the contravention was for a long period of time. Additionally, the CCI held that the Managing Director has been “overall in-charge” of the affairs of the company, and not been able to thoroughly demonstrate that the company had contravened the Act without his knowledge. Therefore, used Section 48(1) of the Act to deem that the Managing Director was liable. On the other hand, in the same case, the CCI used Section 48(2) of the Act to hold the executive assistant of the joint Managing Director to be liable. In this regard, the CCI held that despite the person’s designation/role, there was enough evidence to prove that the assistant took part in the anti-competitive conduct of the company.

Additionally, and more clearly, in Sports Broadcasters case, the CCI explicitly held certain key managerial personnel (such as Managing Directors and Chief Executive Officers) to be liable under Section 48(1) of the Act, solely because such individuals were “persons in-charge for the conduct of business” at the time of the company’s contravention of the Act. Additionally, the CCI has also held individuals liable under both Sections 48(1) and (2) on grounds that such an individual was not only in charge of the company, but was also “actively” involved in the company’s contravention of the Act’s provisions.[5]

Once the CCI finds individuals to be liable under Section 48, a penalty under Section 27 of the Act is imposed on such individuals. The maximum penalty that can be imposed on individuals associated with a company’s cartel conduct under Section 27 is 10% of his/her income for each year during the continuance of such a conduct by the company. However, in practice, on most occasions, the CCI has computed penalties by applying a rate of 10% to the individuals’ average income for three preceding financial years.

From the foregoing it seems that the CCI ascertains the level involvement of an individual in the company’s conduct based on the following broad parameters: (a) role held by such an individual and whether such a position would in itself raise a strong presumption of knowledge of the company’s acts [i.e. Section 48(1)]; and/or (b) whether such an individual participated in infringing acts of the company [i.e. Section 48(2)]. These parameters seem to have been intentionally left open ended, thus enabling the CCI to manoeuvre their decisions based on the facts and circumstances of each case.

In the Alkem case[6], the CCI not only imposed a penalty of 10% on the individuals’ average income for the past three preceding years, but also specifically directed the All Kerala Chemists and Druggists Association (Akcda) to disassociate its management, governance and administration from two of its office-bearers for a period of two years. Therefore, besides imposing monetary penalties on errant individuals of organisation, the CCI has wide powers under Section 27 of the Act to pass any other order “it may deem fit”.

In case of companies, a similar risk (as highlighted above) would exist if the CCI were to order, suspension or removal of directors, key managerial personnel or other officers from the services of a company. In the context of directors at least, an order of the CCI categorically directing the company to disassociate itself with a director is likely to trigger disqualification and vacation of office under the Companies Act.[7] Having said this, the CCI has not passed any order till date disqualifying a director of a company, therefore this remains a theoretical risk for now.

Key takeaways

The CCI’s practice and jurisprudence suggests that an individual who is part of a company’s key managerial personnel, or who is in charge of the affairs and conduct of the company is never outside the purview of Section 48 of the Act. Despite the ability to rebut the presumption of guilt vide the proviso to Section 48(1) of the Act, companies and individuals must note that the burden to disprove this presumption is considerably high. This is especially because, the CCI is not required to prove its case “beyond a reasonable” doubt, prior to imposing liabilities on individuals.[8] The standard of proof to convince the CCI is a mere “preponderance of probabilities” test[9], thus allowing the CCI to assign individual liability on mere grounds such as “implicit approval”, as held in Battery case (discussed above).

From the previous cases[10], it can be inferred that the standard for implicating MD’s and CEO’s with the acts of their peers and subordinates is the fact that they were in-charge and responsible for the conduct of the business of the company. Thus, the risk of poor compliance and not thwarting such actions is as high as being actively engaged in an anti-competitive conduct. Therefore, it is essential for companies to conduct regular competition compliance seminars and audits to ensure that all stakeholders are sensitised to the potential ramifications for contravening the provisions of the Act.

 

Kirthi Srinivas, Senior Associate with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at kirthi.srinivas@cyrilshroff.com. Dhruv Rajain, Senior Associate with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at dhruv.rajain@cyrilshroff.com and Balaji Venkatakrishnan, Associate and can be contacted  at balaji.venkatakrishnan@cyrilshroff.com with the Competition Law Practice at Cyril Amarchand Mangaldas.

[1] S. 48(1), Competition Act, 2002 (as amended).—“Where a person committing contravention of any of the provisions of this Act or of any rule, regulation, order made or direction issued 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 the business of the company, as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly:

          Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the contravention was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such contravention.”

[2] S. 48(2), Competition Act, 2002 (as amended).—“Notwithstanding anything contained in sub-s. (1), where a contravention of any of the provisions of this Act, or of any rule, regulation, order made or direction issued 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 that contravention and shall be liable to be proceeded against and punished accordingly.”

[3] 2014 SCC OnLine CCI 39.

[4] Cartelisation in respect of zinc carbon dry cell batteries market in India, In re, Suo Motu Case No. 2 of 2016, Order dated 19-4-18 (Battery case).

[5] Cartelisation by broadcasting service providers by rigging the bids submitted in response to the tenders floated by Sports Broadcasters, In re, 2018 SCC OnLine CCI 58 (Sport Broadcasters case).

[6] P.K. Krishnan, In re, 2015 SCC OnLine CCI 187 (Alkem case).

[7] S. 164 of the Companies Act, 2013 (as amended) (Companies Act) delves into disqualification of a director, whereas S. 167 of the Companies Act discusses about vacation of office. Both Ss. 164 and 167 of the Companies Act allow disqualification or vacation of office on account of an order of a court or a Tribunal.

[8] Ambuja Cements Ltd. v. CCI, TA(AT) (Compt) No. 22 of 2017, decided on 25-7-2018 (Nclat order in the Cement Cartel case).

[9] Nclat order in the Cement Cartel case, TA (AT) (Compt.) No. 22 of 2017, decided on 25-7-2018.

[10] Battery case — Suo Motu Case No. 2 of 2016, order dated 19-4-2018; Sports Broadcaster case, 2018 SCC OnLine CCI 58.

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