The civil and criminal liability of managers of Iranian companies (Part 2)

The civil and criminal liability of managers and board members of Iranian companies (Part 2)

This article is about the civil and criminal liability of managers and board members of Iranian companies. If you have not read the First Part, Please click on the below link:

The criminal and civil liability of managers and board members of Iranian companies (Part 1)

 

What is Criminal Liability under Iranian law?

In general, the obligation of an individual to be held accountable for assault on other persons, whether to protect Individual Rights or to defend society, is referred to as criminal liability or criminal accountability.

However, in none of the criminal laws, both today and in the past, has the legal nature and definition of criminal responsibility been explicitly stated by the legislature. Criminal liability is a kind of personal commitment to respond to the adverse effects and consequences of a criminal phenomenon or crime.

The civil and criminal liability of managers and board members of companies are as follows:

 

The criminal liability of the CEO and managers in joint stock companies

In addition to the civil and criminal liability of managers, it should be mentioned that in criminal liability, the principle is personal punishment and no one can be punished instead of the person who committed the crime. Managers and CEOs of the company may commit acts during the performance of their duties that can be criminalized, like the crime of fraud in the Islamic Penal Code, and dealt with by way of criminal prosecution.

However, in other cases, due to the insufficient penalties provided for in the Commercial Code, the legislator has provided a section entitled Penal Regulations (including Articles 243 to 269 of the Commercial Code); in these cases, criminalization is taken into account and the consequent punishment is provided for in the law. Some of the most important items in this regard are as follows:

 

The Penal Regulations of Articles 258, 265 and 266 of the Commercial Code

Article 258: The following people will be sentenced to disciplinary imprisonment from one to three years.

Clause 3: The chairman and members of the board of directors and the CEO of the company who use the property or credits of the company for personal purposes against the interests of the company and/or for another company or institution in which they have profits directly or indirectly.

Clause 4: The chairman and members of the board of directors or the CEO of the company who intentionally use their powers against the interests of the company for personal gain or for the sake of another company or institution in which they are directly or indirectly involved for gaining profits.

Article 265: The chairman and members of the board of directors of any joint stock company who in case of loss of more than half of the capital of the company, due to sufferings, do not convene the general meeting of shareholders for a maximum of two months to discuss the dissolution or survival of the company, and also do not register and advertise the decision of the said assembly for a maximum of one month, will be sentenced to imprisonment from two months to six months or a fine from ten thousand to one hundred thousand Rials, or both.

Article 266: Anyone (directors and CEO of the company, relatives of the director and CEO up to the third degree of the first and second class, the incapacitated, bankrupts and people sentenced to punishment by court verdict) who intentionally, despite the legal prohibition, accept the position of inspector in the joint stock company and practice it, will be sentenced to a disciplinary imprisonment of two months to six months or to a fine of twenty thousand to one hundred thousand Rials, or both.

 

Some other cases in civil and criminal liability of company managers

The following items can also be considered as the civil and criminal liability of company managers:

1. The failure to demand the unpaid parts of the par value capital stock in the company on time or not convene an extraordinary general assembly (EGM) to reduce the company’s capital to the paid amount (taken from paragraph one of Article 246 of the Trade Law Amendment Bill).
2. The failure to prepare the list of the participants present in the General Assembly in accordance with Article 99 of the said bill (taken from Article 255 of the Amendment Bill).
3. The failure to convene the General Meeting of Shareholders, intentionally, at any time that the election of the company inspectors is to take place, or the failure to invite the company   inspectors to the General Meetings of Shareholders (taken from Article 259 of the Commercial Code Amendment Bill).
4. The intentional disruption in the performance of duties of company inspectors (taken from Article 260 of the Amendment Bill).
5. The issuance and distribution of new shares or share parts before the registration of the corporate capital or in cases where the registration of the capital increase is done fraudulently or without observing the necessary legal formalities (taken from Article 261 of the Commercial Code Amendment Bill).
6. The deprivation of priority right of shareholders over the subscription for shares and the company new shares purchase, except for the cases provided in the bill of 1347 of the Commercial Code (taken from paragraph 1 of Article 262 of the Commercial Code Amendment Bill).
7. Non-observance of the rights of holders of bonds interchangeable with company shares and issuance of new bonds that can be exchanged or converted into company shares (taken from paragraph 2 of Article 262 of the Trade Law Amendment Bill).
8. Giving false information, with full knowledge that this information is incorrect, to the General Assembly to deprive the shareholders of the right of precedence over the subscription of new shares (taken from Article 263 of the Trade Law Amendment Bill).
9. The failure to comply with the provisions of Article 262 of the Amendment Bill on reducing the capital of the company.

 

The Article 5 of Anti-Money Laundering Law

Regarding companies and the responsibilities of company managers, it is very important to pay attention to the Anti-Money Laundering Law. The Article 5 of this law states that all legal entities must comply with the regulations approved by the Council of Ministers in the implementation of this law and should consider the following items:

1. The full identification of the client or their lawyers and legal representatives.
2. Submitting information, documents and the papers related to this law to the Supreme Council of Combatting and Preventing Money Laundering.
3. Maintaining the records of transactions, accounts and the customer identification for a specified period.

 

The Criminal liability of the limited liability company (LLC) managers

The criminal liability of the directors of a limited liability company is divided into two categories, namely, criminal liability arising from various criminal provisions other than commercial law, and liability found in commercial law.

 

The criminal liability of the CEO outside the provisions of the Commercial Code

Due to the governance of law on crime and punishment, no manager may be accused of a crime unless it is defined, established and practiced in Code beforehand. For this reason, in various laws, especially the Islamic Penal Code, many crimes have been considered to include all persons, including company managers.

Such crimes have nothing to do with the profession and social status of the persons concerned; whoever commits a prohibited act will be subject to the punishment specified in the Islamic Penal Code. For example, the crime of forgery or using a forged document, regardless of the position and status of the perpetrator, imposes a criminal penalty equally on the doer.

 

The criminal liability of the CEO according to the provisions of the Commercial Code

The only Article on criminal liability dealing with the directors of a limited liability company is Article 115 of the Commercial Code, which includes various persons, including directors. The mentioned article lists criminal responsibilities in three sections. At the beginning of Article 115, the above-mentioned cases are considered as examples of fraud and the perpetrators of those acts are considered fraudsters.

According to this Article, the following people are considered as fraudsters:

1. The founders and managers of the limited liability company who, despite the facts, have stated the payment of the entire share in cash of the company and also the submission of the non-cash share of the company in the papers and documents that should have been submitted to register the company.
2. Managers of a limited liability company who distribute fictitious benefits among partners in the absence of an asset statement or on the basis of a forged asset statement.

For the realization of each of the above-mentioned crimes, two conditions must be met:

The first condition is the absence of an asset statement (balance sheet or financial statements) or the existence of a distorted and unrealistic asset statement, and the second condition mentioned in the Article is the dividend distribution in the absence of an asset statement or on the basis of a fictitious asset statement.

 

The responsibility of the CEO and the board of directors in a co-operative

The responsibility of the board of directors of a company vis-à-vis the company is the same as the responsibility of a lawyer vis-à-vis the client. The similarity of a lawyer with the board of directors of a co-operative is in their representation and, consequently, their possession in trust, but the representation of a lawyer is due to the contract that is concluded between the lawyer and the client. The representation of the board of directors, however, is related to the powers and duties that have been assigned to him/her by law as a result of his/her election to manage the company and the affairs of the co-operative. The responsibility of the board of directors of the co-operative vis-à-vis the co-operative can be summarized as follows:

Whenever the cooperative suffers any damage caused by the fault of the board of directors, they are obliged to compensate it. Those acts of the board of managers that makes the company suffer damages may manifest itself as action and inaction; it is as if the board of directors takes an action that causes damage to the company, or they do not perform their duty and/or neglect to do so, and this causes damage to the co-operative.

 

The responsibility of the board of directors in terms of refusal or negligence

The responsibility of the board of directors, especially in terms of refusal or negligence in performing the related duties, exercising authority and/or observing the interests of the co-operative, is wide-ranging. For example, whenever the board of directors does not comply with the related legal provisions in a transaction done for a co-operative and, as a result, the company suffers damages and losses, the board of directors will be responsible for it. The reason is that observing the legal rules is one of the duties of the board of directors and the negligence of the board in this regard can cause the responsibility of the board, even if it happens due to inattention.

The members of the board of directors are jointly responsible for the damages and losses incurred by the co-operative, and it is the responsibility of a competent court to determine the extent of the responsibility of each of them.

 

Managers’ liability in general liability and proportional liability partnership

The relationship between the manager of these two companies and the company is the same as the relationship of a lawyer with his/her client. The managers of these companies have no general responsibility because the risk of investing in these companies is high and all the personal property of the partners is in danger on the side of third parties. The law does not provide for criminal or civil liability regarding the director of a general liability and proportional liability partnership in commercial law.

According to Article 403 of the Commercial Code, the principle is no joint and several responsibility, unless it specified in law or contract.  Since the mercantile law does not mention the liability of managers as the joint and several liability in general liability and proportional liability partnership, if several non-partner directors are at fault, their liability is considered jointly and not jointly and severally according to the general principles and rules of civil liability.

 

The last word

Finally, it should be noted that the issue of civil and criminal liability of managers and board members of the company is one of the most important issues in the rules and regulations related to companies. However, this is neglected in many cases. If you need more guidance in this regard, please consult our experts and benefit from the specialized suggestions at Iran Best Lawyer.