Any business or organization has to comply with the civil rules in the country. Every company has to maintain the norms and regulations stated by the Companies Act to avoid getting penalized. The forms of penalties can be different. There are fines of varying amounts, and in some cases, the accused individual (in charge of the company) can be put in jail. There are different forms of civil punishment for which the corporates and businesses have to function carefully. The high-ranked officials have to ensure that the company runs rightly without violating any laws or standards.
How does the D&O policy work?
The Director and Officers’ liability insurance is a policy that caters to the supreme rank holders in a company or business. The directors and officers have varied duties and, responsibilities that help in the company’s running and ethical functioning. If there is any violation in the duty and performance of the high-rank holders, they can get legally charged. In such times, the D&O policy pays for the legal expense incurred due to defense action and other losses.
The reasons for the legal charges can be many. The one-liner explanation for this matter would be a mismatch in the actions and pre-defined duties of the officials. It can be misconduct, mismanagement, non-compliance of laws, misleading statements, discriminations, disregard of corporate practices, etc. In some cases, there can be civil interference, wherein the public regulatory bodies can look into the matter. They can charge penalties for the wrongful actions which the individual or the company has to bear, in order to function normally in the business. The D&O policy comes as a rescuer in mitigating the risks and pays for the fines.
Reasons for penalty
There can be numerous reasons why a company can get penalized for the action of the Director or executive officer. The following are the most common penalty causes encountered by companies in India –
- Tax liability – If the company fails to pay the taxes within time, they have to pay a fine. As per the income tax act in India, if the business or organization defaults in the annual tax payment for the previous year(s), the Directors can be legally charged and penalized.
- False statement – If the Director of the organization makes a false statement or misleads with their statement, they can get legally sued and penalized. The employees, consumers, and anyone facing a financial loss as a consequence of the misleading statement can bring legal charges.
- Violation of corporate laws – The corporate laws in India are strict and require diligent adherence by the companies. If the organization does not comply with the stated corporate laws, it can get penalized and have to pay a fine to run the business.
- Employment practices – Unfair employment practices or harassment can lead the Director or high-ranked officials into legal troubles. If the employee legally sues the individual, there can be high penalties. In fact, in some cases, the Director may get imprisoned.
- Irregularities in accounting – Mismanagement of accounts and finances in the business can cause greater losses. In such cases, the employees, consumers, and stakeholders can take the path of law and penalize the executive rank holder.
- Fraudulent business conduct – Embezzlement of finances, assets, and intellectual property of the business or clients can bring legal fines. These can be put into the category of corporate criminal actions. The penalty is heavy in such cases, and, often the blamed executives are charged with serious legal allegations, putting them behind the bars.
- Liabilities under the companies act – There can be a penalty on the company and the Director if there is a disregard or negligence of corporate liabilities and responsibilities. The penalty amount can range from fifty thousand to a seven-figure digit, depending on the wrongful and negligent acts.
- Dishonored cheques – There can be imprisonment and penalty for dishonored cheques containing the company’s name. The issuer of the cheque and the company can get imposed with a penalty and legal allegations.
- Environmental law offenses – A violation of environmental laws and the Environment Protection act is punishable. There can be a combined punishment of penalties and imprisonment. The Director and the topmost executive officers can get accused with legal charges for such wrongful actions.
- Corporate discrimination – Discrimination in India is a punishable offense as per the constitution and, the corporate world holds no exception. If the Director or officer gets charged with corporate discrimination (based on any discriminating aspects), they can be imprisoned, alongside a heavy penalty imposition.
The risks associated with it
There are too many risks associated with the mentioned actions and penalties. It not only brings an ill-reputation to the company but also leads to a complete shutdown of the business or company. The Directors or officers associated with the wrongful action can get into trouble with such penalties and imprisonment possibilities. So, it is better to find the right way to deal with such mishaps.
Does the policy cover all the fines?
The Companies Act in India has several defined rules, regarding corporate penalties and charges. The D&O liability policy has a few exclusions when it comes to covering all the civil penalties imposed for the alleged wrongful actions. For example, the D&O policy will not support payment for fraudulence charges. It is against the defined norms and agreements of the D&O policy and varies with the insurer. However, there can be reimbursement for reputation damage and management. But it is subjective to the selected liability insurance provider.
The ideal way of knowing if the D&O policy supports the penalty or fine you are concerned with is by seeking the assistance of the insurance expert.
PlanCover – Bringing the solutions for you.
With PlanCover, get all the answers to your queries. PlanCover is a renowned insurance broker selling D&O policies to companies. You can get clarifications on every aspect related to liability insurances with their responsive and responsible team. Get in touch with the efficient team of PlanCover and find out the answers before buying the policy.