The Investigation of Individuals under the Competition Act: An Unsettled question
Keywords: Competition Act, Competition Commission of India, Contravention by Companies, Individual Culpability, Investigation
It has been almost thirty years since India ushered towards market liberalization. This led to an influx of foreign investments which infused many Indian companies with capital, resulting in the diversification of business. As a result, many companies established themselves as ‘dominant’ players.[i] However, like most jurisdictions, India is no stranger to corporate malpractices. Be it Satyam, the IPO scams, or the Cement Cartel case, there have been numerous instances where the management of the company was directly responsible for contravening the law. This prompted the Government to address the issue of individual culpability in cases where the management of the company was directly responsible.
One of the key concepts of The Companies Act, 2013 is recognising the ‘officer in default’.[ii] In doing so, the liability for default by a company has been imposed on the officer who was in default at the time of contravention. Similarly, under The Competition Act, 2002 (the Act), personal liability is imposed on the directors when the company is found guilty of contravening the Act. Section 48 of the Act states that the Commission shall have the power to investigate the persons in charge of the company. The rationale for implementing such provisions is to maintain a fiduciary duty of the management towards the government, the shareholders, and the public in general. It was only in 2014 that the Commission decided to start penalising the individuals of the company.[iii] Since then numerous orders have been passed by the Commission on the issue of individual culpability.[iv] The Commission’s approach to the issue of individual culpability and penalty has been to create a greater deterrent effect, as enshrined in the CCI’s governance. This was a welcome move as the Commission aimed for higher corporate governance standards for Indian companies. However, the bone of contention in this regard is the stage at which the Commission can order an investigation under Section 48 of the Act.
Delineating Section 48 of the Act
The first part of Section 48 of the Act empowers the Commission to prosecute every individual who was in charge of the enterprise at the time of contravention. The second part requires the Commission to prove that the contravention has taken place with an active knowledge or negligence[v] by the persons in charge of the company.
In the case of contravention, individual liability is civil in nature. The Commission can impose a penalty up to 10% of the average income of the individual for the last three preceding years.[vi] If an individual fails to comply with the order passed, they could be exposed to an additional risk of penalties or imprisonment extending up to three years or both.[vii]
Investigation under Section 48: A two-way interpretation
Section 48 of the Act is akin to the concept of piercing the corporate veil.[viii] The initiation of an investigation against the individuals of a company can be ordered in two ways.
1. A separate investigation can be ordered against the individual’s after the Commission finds the company guilty for contravening the provisions of the Act.
2. A simultaneous investigation against both the company as well individual can be made for contravening the provisions of the Act.
However, the procedure for ordering an investigation under Section 48 has been a matter of dispute for many years. Many judgments have tried to settle this question of law with contradictory rulings which will be discussed below.
In A.N Mohana Kurup & Anr. v. CCI & Ors.[ix], the tribunal held that the Commission does not have the power to pass a ‘hybrid’ order under Section 26 directing the Director General (DG) to investigate the company as well as the role of individuals. This essentially meant that the role of an individual in an anti-competitive case can only be investigated if the Commission first returns with a positive finding of contravention by the company. The reason for this was that Section 48 of the Act postulates guilt against every person and the word “committed” in both the sub-sections makes finding the contravention a pre-condition to establishing any personal liability.
Further, the imposition of penalties on the directors and the key personnel of the company under the Act has not gone unchallenged.[x] The order of an investigation by the Commission to DG as per Section 48 of the Act has also been challenged in the case of Cadila Healthcare Limited v. Competition Commission of India.[xi] In this case, it was pleaded by Cadila before the Delhi High Court that unless the Commission or other competent authority finds any contravention of the Act, an investigation order under Section 48 cannot be made. Since Section 48 of the Act uses the term ‘contravention’ and not ‘alleged contravention’, any order of simultaneous investigation under the proviso would be erroneous.
However, there also have been cases where the courts have taken a contradictory position on the interpretation of Section 48. The Commission has stated that the Act has given them an ample amount of power to conduct a simultaneous investigation of the company as well as their individuals for any anti-competitive concern.[xii] Some of the judicial precedents have supported the Commission’s approach of investigation. In Pran Mehra v. Competition Commission of India [xii], the Hon’ble Delhi High Court stated that the procedure of investigation, namely, the inquiry, subsequent finding of contravention recorded against the company, and if found liable, the investigation of the respective officers-in-charge who are responsible for the business is not necessarily to be done in a particular order. This ratio was further confirmed in the case of Ministry of Agriculture and Farmers Welfare v. M/s Mahyco Monsanto Biotech (India) Limited[xiv], where an order of simultaneous investigation was held valid. However, Monsanto Biotech decided to move against the order passed by the Hon’ble Delhi High Court. The matter is sub judice before the Supreme Court.
A critique of the Commission’s approach
By applying the doctrine of strict construction, it can be construed that contravention of an offence by a company is an express condition precedent to attract the vicarious liability on individuals. It would be erroneous if the Commission directs the DG to investigate the role of individuals when the company is yet to be found in contravention by a competent authority like the Commission. There can be circumstances in which the corporate reputation of a company is affected when a director is investigated. The Commission acts as a quasi-judicial body and it is bound by principles of natural justice.[xv] If the Commission is satisfied with the allegations on the perusal of the DG report, then only should the DG investigate the role of individuals for any anti-competitive concern after inviting objections from opposite parties.
The Commission’s stand on seeking individual culpability after 2014 has received a mixed response where key personnel of the companies might feel that such an initiative is hampering the decision-makers. A company under the scanner of the Commission would have to incur additional regulatory costs if a company is facing dual investigation without the Commission first returning with a positive finding of contravention of the Act. The directors face a real risk considering the rigorous regime brought in by the Commission. This is especially true because, the Commission is not required to prove its case “beyond a reasonable” doubt, before imposing liabilities on individuals. In a scenario where the position of law for investigation under Section 48 of the Act is ambiguous, the Commission’s reluctance on seeking prosecution of individuals can result in unnecessary litigation. After more than a decade of enforcement of Competition Law in India, the question is yet to be settled. With the issue already pending before the Hon’ble Supreme Court, it would be fallacious for the Commission to seek prosecution against the key personnel of the companies for the time being.
[i] Competition Act 2002 § 4 (1). [ii] Companies Act 2013 § 2 (60).
[iii] Bengal Chemist and Druggist Association v. Competition Commission of India, Case No. 2 of 2012 (CCI: 2014). [iv] Eveready Industries India Ltd. v. Competition Commission of India, Case No. 01 of 2017 (CCI: 2017); Mr. G. Krishanmurthy v. Karnataka Film Chamber of Commerce, Case No. 42 of 2017 (CCI: 2017); Alis Medical Agency v. Federation of Gujarat Druggists Associations, Case No. 65 of 2014 & 68 of 2015 (CCI:2018).
[v] Reliance Agency v. Chemists and Druggists Association of Baroda, Case No. 97 of 2013 (CCI: 2013). [vi] Competition Act 2002 § 27. [vii] Competition Act 2002 § 42. [viii] Abir Roy, Competition Law in India: A practical guide §2.14, Wolters Kluwer, (2016). [ix] A.N Mohana Kurup & Anr. v. Competition Commission of India & Ors., Appeal No. 05/2016, 56 (COMPAT: 2016).
[x] Swapan Kumar Karak, Director, Karak Pharma Pvt. Ltd. v. Competition Commission of India and Ors., Appeal No. 42 of 2014 (COMPAT: 2015) [xi] Cadila Healthcare Limited & Anr. v. Competition Commission of India & Ors., 252 DLT, 62 (Delhi High Court: 2018). [xii] Id. [xiii] Pran Mehra v. Competition Commission of India & Ors., W.P. No. 6258/2014, 4 (Delhi High Court: 2015). [xiv] Ministry of Agriculture and Farmers Welfare v. M/s Mahyco Monsanto Biotech (India) Limited, LPA-637/2018, 36 (Delhi High Court: 2018). [xv] Interglobe Aviation Ltd. (IndiGo Airlines) & Ors. v. Competition Commission of India, Appeal No.07 of 2016 (COMPAT: 2016)
This article was coedited by Snehal Dhote (Managing Editor) and Yagnesh Sharma (Associate Editor).
Preferred Citation: Karan Shelke, “The investigation of individuals under the Competition Act: An unsettled question”, Arbitration & Corporate Law Review, Published on 19th June, 2020.