Liability of Independent Directors in India

Swetha Dhinesh

29 Apr, 2023

The idea of an independent directorship, as conceptualised and adopted by the Companies Act and the Securities and Exchange Board of India (SEBI) Regulations, has been viewed as a step towards introducing the best practices in corporate governance to India, already widely accepted around the world. A company is a separate legal entity governed by a group of people known as the Board of directors, who oversee the business’s day-to-day operations. But the issue is, “Would they be accountable for the carelessness or violations committed by the company, and would all the directors be liable, or is there a group of people that are vicariously liable under the provisions of law”?

In this connection, we refer to Section 179 of the 2013 Companies Act, which states that the Board of Directors of a company shall be entitled to exercise all the powers and perform all the acts and things that the business is authorised to do.

Who is an Independent Director?

A board member who does not have a material connection to a firm, is not a member of the executive team and is not involved in the daily management of the company is referred to as an independent director in the context of corporate governance.

A director who is not the managing director, a full-time director, or a nominee director is an independent director. In other words, a company’s non-executive director who contributes objectivity and independence to the Board of Directors’ decision-making is referred to as an independent director. The Board of Directors serves as the corporate brain, and when the brain performs at its best, the organisation is considered to operate efficiently. 

A non-executive director, known as an independent director, assists a company in enhancing its credibility and governance standards.

Section 149 of the Companies Act of 2013 should be read with Rules 4 and 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014, which gives provisions pertaining to the appointment of IDs.

Liability of the independent directors

​​A realistic expectation of the Board of any company is that it will demonstrate a variety of actions and viewpoints that are in the firm’s best interests. The company’s Board is primarily responsible for determining the company’s future. The Board is alone in charge of securing and delivering the company’s vision, and it is answerable to the company.

The Companies Act of 2013^[1] outlines the tasks and obligations of independent directors, as also the Code of Independent Directors, which gives guidelines, duties and functions of IDs. Independent directors’ responsibilities include:

1. A proper induction, continuous updating and refreshing of their knowledge, abilities, and familiarity with the business.
2. Seek appropriate informational elaboration or clarification, and, when necessary, follow outside specialists’ professional guidance and opinions at the company’s expense.
3. Aspire to participate constructively and actively in the Board committees in which they are chairpersons or members.
4. Strive to attend all meetings of the Board of Directors and the Board committees of which they are a member.
5. Strive to attend the annual general meetings of the firm;
6. Keep themselves well-informed about the company and the external environment in which it operates.
7. Ensure that any concerns they have about the operation of the company or a proposed action are addressed by the Board and, to the extent that they are not resolved, insist that their concerns be recorded in the minutes of the Board meeting.
8. Not unfairly obstruct the functioning of an otherwise competent Board or committee of the Board;
9. Pay enough attention, ensure sufficient discussions are made before approving related party transactions, and confirm that these are in the company’s best interests.
10. Determine and guarantee that the business has a sufficient and effective vigil mechanism and guarantee that the interests of a person using the mechanism are not adversely affected as a result of such use.
11. Behave within their power and assist in defending the proper interests of the company, its shareholders, and its employees.
12. Raise concerns about unethical behaviour, actual or suspected fraud, or violations of the company’s code of conduct or ethics policy.
13. Not disclose private and confidential information, such as trade secrets, technologies, plans for advertising and sales promotions, or unpublished price-sensitive information, unless the Board has expressly authorised the disclosure or it is required by law.

Notable case laws

In the recent case law settled at the Hon’ble High Court of Maharashtra explored some of these difficulties. In this case, the Bombay High Court ruled that independent or non-executive directors are not responsible for the business’s decisions, particularly where those decisions are related to the regular operations of the company in which they are not involved. The firm’s IDs were required to submit an application to be excused from prosecution when the company bounced a cheque. They were deemed exempt from liability because they were independent directors and had no involvement in the business’s day-to-day operations.

As per the 2013 Companies Act, an independent or non-executive director can only be held accountable when the alleged acts were caused by one of the following: 

1. An omission or commission that occurred with the director’s knowledge.
2. An act that was done with the director’s consent or knowledge; or 
3. A specific failure to act diligently on the part of the director.

Recent actions in the Bombay High Court against independent non-executive directors of Tecpro Systems Limited reviewed the liabilities of independent directors. Under the Negotiable Instruments (NI) Act of 1881, criminal proceedings were commenced against independent non-executive directors in a bounced cheque case. However, the Court noted that “Simply being a director of a company does not make a person liable under the NI Act” after assessing the daily functions of the IDs. Only those individuals who were in control and in charge of the company’s operations at the time the offence was committed will be held criminally liable. A director would not be held accountable for an offence under Section 141 of the NI Act if they were not in charge of or responsible for the company’s business operations at the relevant time.

Actually, the Companies Act of 2013 contains safeguards for independent directors that state they can only be held accountable for corporate acts of omission or commission that occurred with their knowledge, were attributable to Board procedures, with his consent or connivance, or where they had not acted diligently if he was neither a promoter nor a key managerial person.

In the case of Chintalapati Srinivasa Raju v. Securities and Exchange Board of India, the Hon’ble Supreme Court ruled that independent or non-executive directors cannot be held accountable unless they play a significant role in the company’s decision-making process.

Problems Faced by Independent Director

Reforms in the actual legal application are still required, notwithstanding the judiciary’s efforts to interpret the legislation to the independent directors’ advantage, provided they only serve in advising rather than a regular administration role.

However, the position for independent directorsin India is still open. Few people are eager to fill these posts. Even those who did engage eventually left in spades because of the added liability.

Even today, notices are sent to every relevant entity’s directors in the case of corporate default, regardless of whether they are executive, non-executive, or independent. There is no investigation of the facts. They are all treated as though they are guilty and generally prosecuted. We frequently see notices being addressed to directors who have resigned from the Board. This typically occurs when the organisation from which the director departed neglects to submit the appropriate resignation form to the ROC. Sadly, the directors are left defenceless and expose themselves to legal action. All people find it difficult financially and mentally to participate in legal proceedings.

Conclusion

The majority of people are now fleeing in fear due to the rise in liability and the number of charges brought against independent directors, which can result in both civil (fines) and criminal (imprisonment) consequences. There won’t be many applicants for independent director seats unless the law’s existing practical provisions are implemented in their entirety.

Read our Article: Role of the Independent Directors in India