INTRODUCTION

Claw-back provision is a general principle of English contract law that the parties should be held to the bargains that they enter into. Claw-back provisions have become ever more common since the financial crisis as a result of

regulation in the financial services sector. One of the arguments that are given by individuals when faced with a demand to repay a bonus is that the claw-back obligation is an unlawful penalty. It is based upon the idea that

someone who breaches a contract should be required to pay a sum much greater than the usual damages available for breach of contract.

WHAT IS A CLAWBACK PROVISION?

ALL ABOUT CLAW-BACK PROVISION

Claw back is a contractual provision under which money that has already been paid out, must be return to the employer or the firm. It is a special clause, use mostly in financial firms, for money pay for services to be return

under special circumstances or events as stated in the contract. Aims at striking a balance between economic and community development and corporate welfare. It is mostly use in securing tax incentives, abatements, refunds, and grants.Most claw back provisions are non-negotiable. Claw-back is typically use in response to misconduct, scandals,

poor performance, or a drop in company profits. and involves a penalty, making them different from simple repayments or refunds.

The aim of this provision is to prevent managers from using incorrect accounting information. It has been observe

that after the provision of claw back is include, investors developed more confidence in a firm’s financial statements. Most companies use claw back policies in employee contracts for incentive-based pay like bonuses. They are often use in the financial industry.

HOW DO CLAWBACKS WORK?

ALL ABOUT CLAW-BACK PROVISION

Suppose, the annual reports of a company shows that the CEO worked hard to keep the company profitable and the company wants to reward his efforts and a contract is signed, stating that if the sales of the company increase by at

least 10% within the next two years, then the CEO will be pay a bonus of $200,000. The corporate financial statement

shows that the company register a profit of 13% in the two years and as a result, the CEO is reward with the promised amount.

After audit of the company, it was find that the profits were over-report and the profit was actually 9.5% and not 13% as stated in the previous report. Thus, under the claw back provision, the company can take back the bonus amount previously paid out to the CEO. Depending on the specific claw back clause, the CEO may also have to pay a

penalty because the original financial reports submitted were flawed.

LAWS GOVERNING CLAW BACK PROVISION

The first federal claw back law was the Sarbanes – Oxley Act of 2002. It provides for the reclamation of bonuses and other incentive-based rewards paid to the company in case of staff misconduct that leads to discrepancies in financial

statements and low financial achievements.

Another law is the Emergency Economic Stabilization Act of 2008. It is implement in situations where business’ reporting is inaccurate, regardless of whether there was any fraud or misconduct. The statute only refers to companies that got the Troubled Asset Relief Program(TARP) funds.

Indian Perspective – In India, currently, there is no law that specifically governs or prohibits inclusion of claw back provisions. The Reserve Bank of India, in 2012 and 2019, issued guidelines that provided inclusion of claw back clauses

in relation to variable and deferred remuneration of whole-time directors, chief executive officers (CEO) and

other risk takers. However, these guidelines apply only to private-sector and foreign banks.

The Companies Act of 2013 restrict directors from deriving profit (other than those provided by the company) during the course of the performance of their duties owed to a company, without the knowledge and consent of the company and imposes a duty on the directors to refund the amount unduly gained or empower the company to seek refund/ recovery of the amount given. Additionally,Section 199 of the Act enables the company to recover the remuneration

received by any past or present managing director or whole-time director or manager or CEO, in case of fraud or non-compliance, which require a restatement of the financial statements, and if the remuneration pay are find to be in

excess of what is reflect in the restate financial statements.

USES OF CLAW BACK PROVISIONS

Medicaid recovery: Medicaid is the payment make in advance for the healthcare of Medicaid recipient, it is allow to be recover under claw back provision in case the recipient has die, and no longer needs the care. All states aim to recover Medicaid money spent in advance on long-term care such as nursing homes.
Mortgage lending: this provision is use by banks to recover money from unprofitable home loans.
Life insurance: In case of cancellation of a policy, a provision of claw back allows for the benefits and payments previously receive to be repay.
Executive pay agreements: In case of any breach of an agreement by an executive, or if he or she goes on to work for a competitor or a rival company within a specified number of months as stated in the contract, then according to the claw back provision, the executive might be required to reimburse the company that previously employed them.
Pensions: Pensions can be claw back if it is find that there has been some fraudulent activity and suppression/ adulteration of information.
Dividends: Under certain circumstances, such as bankruptcy, dividends can be clawed back.
Government contracts: If the contractor did not meet specify quality standards or if the requirements of the contract are not fulfill, then the provision of claw back may be exercised upon the contractors.

CONCLUSION

ALL ABOUT CLAW-BACK PROVISION

Thus, a claw-back provision is a tool that safeguards a company from frauds against its employees. Claw-back provisions are a significant part of the strategy because they help rebuild the trust and loyalty of investors and society

to a business. Claw-back provisions also prevent people from using incorrect information and are use to put a

balance between community development and corporate welfare.