Personal Liability of Directors under the Payment and Settlement Systems Act, 2007

 

Professional Legal Analysis 

Personal Liability of Directors under the Payment and Settlement Systems Act, 2007

 I.  Statutory Framework for Director Liability

 

The Payment and Settlement Systems Act, 2007 (PSS Act) establishes strict liability regimes for non- compliance, extending to directors under specific circumstances. The primary provisions governing personal liability are embedded in Sections 26, 27, and 30.

 

1.  Section 27: Offences by Companies

 Section 27(1) stipulates that when a contravention under the PSS Act is committed by a company, every individual who was "in-charge of, and responsible to the company for the conduct of its business" at the time of the contravention is deemed guilty, alongside the company. The proviso creates a presumption of liability unless the individual demonstrates either (i) lack of knowledge of the contravention or (ii) exercise of "all due diligence" to prevent the contravention.

Section 27(2) introduces vicarious liability for managerial personnel (directors, managers, secretaries, or other officers) if the contravention occurred with their consent, connivance, or negligence. This provision imposes liability regardless of their direct involvement in day- to-day operations, focusing instead on their governance role.

 

2.  Section 26: Penalties for Contraventions

 

Directors may face personal penalties under Section 26 for violations linked to unauthorized payment systems (Section 4) or failure to comply with authorization conditions (Section 7). Penalties include imprisonment (1 month to 10 years) and fines up to ₹1 crore, escalating for continuing defaults. Directors could also face liability under sub- sections (2)-(6) for false statements, non-compliance with information requests, or unauthorized disclosures.

 

3.  Section 30: Power of RBI to Impose Fines

 

The Reserve Bank of India (RBI) may impose monetary penalties under Section 30(1) for contraventions falling under Section 26(2) or Section 26(6). While initially targeting the company, directors may bear personal liability if the contravention is attributable to their actions under Section 27(2).

 

4.  Overriding Effect (Section 32)

 

The PSS Act’s provisions override conflicting statutes, ensuring its liability framework takes precedence over general corporate law principles.

II.  Legal Principles Governing Liability

a)  Vicarious Liability (Section 27):

 

Directors are not automatically liable for corporate acts. However, the PSS Act inverts the burden of proof, presuming liability unless directors prove due diligence or lack of knowledge. This shifts the evidentiary onus to directors to demonstrate their role did not contribute to the contravention.

 

b)  Due Diligence Defense:

 

The defense under Section 27(1)(proviso) requires directors to document proactive measures: Formal governance frameworks for compliance oversight.

Regular audits of payment system operations.

Training programs for employees on PSS Act obligations. Timely reporting of irregularities to regulatory authorities.

 

c)  Consent, Connivance, or Neglect (Section 27(2)):

 

Liability attaches if directors knowingly permitted the contravention (consent), intentionally overlooked violations (connivance), or failed to exercise reasonable oversight (neglect). For example, ignoring RBI directives requiring system upgrades to prevent fraud could constitute neglect.

d)  Directors’ Liability Under Allied Statutes: Companies Act, 2013:

Section 166 (Duties of Directors): Directors must act with due care and avoid conflicts of

interest. Breach of these duties under Section 166 could compound liability under the PSS Act.

Section 447 (Fraud): If a contravention under the PSS Act involves fraud (e.g., false statements to RBI), directors may face imprisonment and fines under Section 447.

Limited Liability Partnership Act, 2008 (LLP Act):

Section 30 of the LLP Act imposes unlimited liability on partners/directors for fraudulent acts, potentially supplementing penalties under the PSS Act.

III.  Application to Director Liability

 

Hypothetical Scenario: A company operates a payment system without RBI authorization (contravention of Section 4). The directors reviewed compliance reports but failed to act on warnings from internal auditors about the lack of authorization.

Analysis:

 

Section 27(1): Directors presumed liable unless they prove due diligence (e .g., documenting corrective actions).

Section 27(2): Failure to act on audit reports constitutes neglect, making directors liable.

Penalties (Section 26(1)): Imprisonment up to 10 years and fines up to ₹1 crore.

IV.  Recommendations for Directors

Proactive Compliance: Implement RBI-mandated audits and real-time monitoring of payment systems.

Documentation: Maintain records of board resolutions addressing compliance and corrective measures.

Legal Training: Regular workshops on PSS Act obligations for directors and operational staff.

V. Related Statutes & Provisions

 

1.  The Companies Act, 2013:

 

Section 166 (Director Duties) Section 447 (Fraud)

Section 184 (Conflict Disclosure)

 

2.  Limited Liability Partnership Act, 2008:

 Section 30 (Fraudulent Conduct)

While specific judicial precedents directly addressing director liability under the PSS Act are limited, the following cases provide insights into the application of the Act:

 1.  M/S Barclays Bank Plc vs. Raj Kumar Sharma (2011): This case involved a complaint under Section 25 of the PSS Act concerning the dishonour of electronic funds transfer. The court examined the applicability of provisions related to the dishonour of electronic payments.

 

2.  Moneywise Financial Services Pvt. Ltd. vs. Pranjali Trikha (2021): In this case, the accused was acquitted under Section 25 of the PSS Act due to insufficient evidence establishing the offence of dishonour of electronic funds transfer.

Application to Director Liability

Hypothetical Scenario:

A company operates a payment system without RBI authorization (contravention of Section 4). The directors reviewed compliance reports but failed to act on warnings from internal auditors about the lack of authorization.

 

Analysis:

-    Section 27(1): Directors presumed liable unless they prove due diligence (e.g., documenting corrective actions).

-  Section 27(2): Failure to act on audit reports constitutes neglect, making directors liable.

-  Penalties (Section 26(1)): Imprisonment up to 10 years and fines up to ₹1 crore.

Recommendations for Directors

-    Proactive Compliance: Implement RBI-mandated audits and real-time monitoring of payment

systems.

-    Documentation: Maintain records of board resolutions addressing compliance and corrective measures.

-  Legal Training: Regular workshops on PSS Act obligations for directors and operational staff.

 

Related Statutes & Provisions

1.  The Companies Act, 2013:

-  Section 166 (Director Duties)

-  Section 447 (Fraud)

-  Section 184 (Conflict Disclosure)

2.  Limited Liability Partnership Act, 2008:

- Section 30 (Fraudulent Conduct)

 

Directors can be held personally liable for offenses committed by a company under specific circumstances, particularly when statutes explicitly provide for such liability or when there is clear evidence of their involvement or negligence. Below is an analysis of relevant legal principles, statutory provisions, and judicial precedents in India concerning the personal liability of directors.

 

📜Legal Principles Governing Directors' Personal Liability

1.  Vicarious Liability in Criminal Law

Under Indian criminal jurisprudence, vicarious liability—holding one person liable for the actions of another—is not generally applicable unless a statute explicitly provides for it. The Supreme Court in Sunil Bharti Mittal v. CBI emphasized that: "Vicarious liability is unknown to criminal law unless the statute specifically provides for it."

 

2.  Statutory Provisions Imposing Liability

 Certain statutes explicitly impose liability on directors and other officers:

 Section 141 of the Negotiable Instruments Act, 1881: Holds directors liable for offenses committed by the company if they were in charge of and responsible for the conduct of its business at the time of the offense.

Section 85 of the Information Technology Act, 2000: Provides for the liability of directors when offenses are committed by companies under the Act.

 

Section 27 of the Payment and Settlement Systems Act, 2007: Specifies that if a company commits an offense, those in charge and responsible for its conduct at the time are deemed guilty unless they prove the offense was committed without their knowledge or they exercised due diligence to prevent it.

⚖ Judicial Precedents

1.  S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr. (2005)

 

The Supreme Court held that merely being a director is not sufficient to attract liability under Section 141 of the NI Act. There must be specific allegations showing that the director was in charge of and responsible for the conduct of the company's business at the relevant time.

 

2.  National Small Industries Corporation Ltd. v. Harmeet Singh Paintal (2010)

 

Reiterated that for a director to be held liable, the complaint must contain specific averments indicating their role in the conduct of the company's business. A mere designation as director is insufficient.

 

3.  Sunil Bharti Mittal v. Central Bureau of Investigation (2015)

 

The Court emphasized that individuals can be made accused along with the company only if there is sufficient evidence of their active role coupled with criminal intent. Vicarious liability cannot be imputed automatically in the absence of statutory provisions.

 

4.  Maksud Saiyed v. State of Gujarat (2007)

 

Held that directors cannot be held liable for offenses committed by the company unless there is a specific provision in the statute creating such liability and specific allegations showing their involvement.

 

🛡 Due Diligence and Defenses

Directors can defend themselves against liability by demonstrating:

 

Lack of Knowledge: Proving they were unaware of the offense.

 

Due Diligence: Showing they exercised all due diligence to prevent the commission of the offense.

These defenses are particularly relevant under statutes like the PSS Act, where Section 27 provides for such exceptions.

 📚 Conclusion

While directors are not automatically liable for offenses committed by their companies, they can be held personally accountable under statutes that explicitly provide for such liability, especially when they are in charge of and responsible for the conduct of the company's business at the time of the offense. Specific allegations and evidence of their role and intent are crucial for establishing such liability.