Advisory Services
Audit
Consulting
ESG Advisory
RBI Registration
SEBI Registration
IRDA Registration
FEMA Advisory
Compliances
IBC Services
VCFO Services
Growing
Developing
ME-1
ME-2
EU-1
EU-2
SE
Others
Select Your Location
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:
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:
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.
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
I am a driven and meticulous professional who completed B.Com BL (Hons) from Tamil Nadu Dr. Ambedkar Law University and completed Master of Laws in specialization (Criminal Law with Cyber Crimes). I have extensive experience in Criminal Litigation and want to utilise my legal knowledge in writing also I have proficiency in writing legitimate content with comprehensive research. My core areas of interest are Business Law, Intellectual Property Rights, and Cyber crimes.
The Financial Action Task Force, i.e. FATF (the Force), is the global money laundering and terr...
Advance tax refers to the payment of the tax liability before the end of the relevant financia...
On 11.12.15, the Hon’ble Delhi High Court (HC) pronounced a landmark judgement in the case ti...
Money laundering can be defined as the process of illegal concealment of the origin of money ob...
Every assessee in India is obligated to file an income tax return and make the timely payment o...
In the recent past, India has seen burgeoning demand for internet and smartphones. The rapid ri...
The Securities and Exchange Board of India (SEBI), the capital markets regulator, has recommend...
The objective of the enactment of the Prevention of Money-laundering Act, 2002, i.e. PMLA (the...
Tax planning is a continuing effort and a management strategy for ensuring the minimization of...
On 18th May 2023, the Securities Exchange Board of India (SEBI) released a Consultation Paper o...
Are you human?: 6 + 5 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
We are looking at the significance of ESI registration in this article but before that let’s understand its meani...
22 Jul, 2017
Every company is required to file an annual return with the Registrar of the Companies at the end of financial year...
26 Nov, 2019
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!