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India – Impact of Companies Act, 2013 On Insurance Claims.

11 November, 2013

 

 

The law relating to companies is witnessing a significant overhaul with the enactment of the Companies Act, 2013. Alongside fulfilling its mandate of amending the existing company law, the 2013 Act is also expected to have an impact on the insurance industry. Directors’ & Officers (D&O) insurance and commercial general liability lines are expected to see new products, increase in business and correspondingly insurance claims may also witness an increase.


Set out below are some of the provisions which are likely to impact these markets:

 

  • More senior employees to be ‘officers in default’. Like the Companies Act, 1956 Act (1956 Act), and now the 2013 Act, most laws in India provide for a person in charge of the company to be prosecuted for offences committed by the company. The 2013 Act has gone a step further as it broadens the term ‘officer who is in default’ to expressly include the CEO, CFO, share transfer agent and merchant banker within its ambit
  • Increases directors’ accountability and the quantum of penalties for their breach. While the duties of a director are not specifically codified under the 1956 Act, the 2013 Act categorically lists the duties of a director, breach whereof can entail a minimum fine of INR 100,000 extending up to INR 500,000
  • D&O insurance has been accorded statutory recognition. It particularly ensures that the amount paid for such insurance is deducted from director’s remuneration, in case the director or other officer is found guilty of negligence, default, misfeasance, breach of duty or breach of trust. This is a drastic shift from the position under the 1956 Act, which made any provision indemnifying the officers for any liability in case of action against them void, unless such director was proved innocent in the relevant proceedings, bringing the legislation in line with the market practice
  • Introduction of class actions suits. In line with the intention of the legislature to strengthen the enforceability of rights of shareholders, is the introduction of the concept of class actions suits. The members and depositors have been conferred with the right to file suits against the company, its directors, auditors or any expert, advisors or consultants, on behalf of a group of shareholders or depositors, to protect their rights and claim compensation. Yet another instance of this intention is increased powers of the registrar of companies with respect to inspection, inquiry and investigation of the records of a company, and the power of search and seizure, establishment of Serious Fraud Investigation Office
  • Impact on GCL market: As the 2013 Act seeks to make not only the directors and officers, but also the companies more accountable to their shareholders and other stakeholders, it would not be out of place to expect a rise in the general commercial liability of companies. Consequently, akin to the impact on PI, the GCL insurance of companies can also be expected to rise in the wake of a more accountable legislative regime
 

The provisions under the 2013 Act will be phased in. Straightforward definition clauses and some other sections became operative on 12 September 2013, but it is not clear when the provisions noted above will be in force.


This 2013 Act further integrates India into the global market. The change in the manner in which courts view tortious acts by directors and professionals associated with companies is likely to result in demands for greater accountability from them, thereby perking up the demand for appropriate insurance cover.

 

     

 

For further information, please contact:

 

Sakate Khaitan, Partner, Clasis Law
[email protected]

 

Satyendra Shrivastava, Clasis Law
[email protected]

 

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