Central Government Given Power to Initiate Proceedings Against Directors who are not “Fit and Proper”

The Ministry of Corporate Affairs (“MCA”), on August 14, 2019 has given effect to certain sections of the Companies (Amendment) Act, 2019 (“Amendment Act”). The Amendment Act has amended Section 241 of the Companies Act, 2013 (“Act”). Section 241 of the Act lays down the procedure to file an application before the National Company Law Tribunal (“NCLT”) in the event of oppression and mismanagement in a company.

The Amendment Act has introduced a framework giving powers to the Central Government to initiate proceedings against a director or any person concerned in the conduct and management of a company before the NCLT. This can be done, if in Central Government’s opinion, circumstances suggest that director/ or any person concerned in the conduct and management of a company is not “fit and proper” to conduct the business of the company.

A director/ or any person concerned in the conduct and management of a company will not be considered “fit and proper” to conduct the business of a company in the following cases –

  (i)  If such person is, or has been found guilty of fraud, misfeasance, persistent negligence or default in carrying out his/her obligations under the law.

 (ii)  The business of a company is not or has not been conducted and managed by such person in accordance with “sound business principles” or “prudent commercial practices.”

(iii)  If the management or conduction of business by such person is likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains.

(iv)  If such person is or has conducted business of the company with an intent to defraud its creditors, members, or any other person or otherwise for fraudulent or unlawful purpose or in a manner prejudicial to public interest

A person found not “fit and proper” by the NCLT shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of five years from the date of the decision of the NCLT. Such person will not be entitled to any compensation for the loss or termination of his/her office.

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This provision gives wide powers to the Central Government to initiate cases against managerial personnel of a company. The Amendment Act has provided a vague criterion to determine whether a person is not “fit and proper”; what is meant by “sound business principles” or “prudent commercial practices” is not defined, and in the absence of a clear understanding, these criteria are liable to be misused. It will be helpful if the MCA releases a clarification with respect what constitutes “fit and proper” to bring more clarity.  This provision of the Amendment Act is in force, with effect from August 15, 2019.

Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.