Corporate governance plays a pivotal role in a company’s success, particularly underscored by recent corporate scandals like the Satyam and Enron debacles. These incidents have underscored the significance of independent directors, these individuals are those, who devoid of any business affiliations with the company, act as impartial overseers to align the company’s actions with societal and stakeholder interests.
The introduction of the term “Independent Director” in India can be traced back to the 1999 Kumar Mangalam Birla Committee’s recommendations. These recommendations were later incorporated into SEBI’s Clause 49 listing agreement. Subsequent committees, including the Naresh Chandra and Narayana Murthy Committees, further refined this concept.
Following the Murthy Committee’s recommendations in Clause 49, the MCA established the Irani Committee in December 2004. The committee proposed several recommendations, some of which conflicted with the then-existing Clause 49 and the views of the Murthy Committee. The recommendations suggested included, providing exemptions based on company size and public ownership, weakening criteria for independence, reducing the mandatory requirement of independent directors from half to one-third of the board, and abolishing age limits.
The Companies Act of 1956 lacked provisions for the mandatory appointment of independent director or any clear definition of independent directors, and the only definition so provided, was where these directors were considered “officers in default” under Section 539. This highlighted the need for comprehensive legislation, leading to the enactment of the Companies Act 2013.
The Company Act 2013 has incorporated Section 149, specifically addressing the definition, appointment, qualifications,and other stipulations relating to Independent Directors and their role in ensuring good corporate governance, further to ensure good corporate governance and to have adequate transparency, Section 149 of the Companies Act 2013, also mandates that only individuals can serve as directors in a company, excluding companies, firms, or associations from directorship positions. The law also mandates the creation and maintenance of a databank specifically for independent directors, serving as a valuable resource for companies. While companies have the option to select directors from this databank, it is not obligatory. The responsibility for selection lies with the Board of Directors, requiring approval by shareholders during a formal meeting. Entities with expertise are authorized to create and maintain this databank, which should contain essential details about individuals, including their names, director identification numbers, addresses, PAN (Permanent Account Number), educational and professional qualifications, and professional experiences. Further other requirements with respect to the categorisation of the company and the appointment of Independent Directors in them, as per the Companies Act of 2013, are as follows:
- Listed public companies must appoint a specific number of independent directors, constituting a minimum of one-third of the total Board of Directors.
- Private companies achieving listed status due to debt listing must adhere to provisions applicable to listed companies, including the establishment of an audit committee composed of a minimum of three directors, with a majority being independent directors.
The Companies Act of 2013, also outlines key duties of independent directors, including ongoing education, active participation in board and committee meetings, attendance at general meetings, addressing concerns, and staying informed about the company and its external environment.
Directors’ Liabilities in Indian Corporate Law: A Comprehensive Overview
In Indian corporate law, director’s shoulder substantial responsibilities, subject to varying liabilities contingent upon their specific roles. In a typical scenario, directors collectively share liability for decisions made by the board. Nevertheless, independent directors, who do not engage in day-to-day management, are an exception to this rule. The Companies Act of 2013 holds Independent Directors individually responsible for their own failures, distinct from the collective failures of the Board. Liability is imposed on an Independent Director when they fail to act diligently, collude with decision-makers, consent to the default, or possess prior knowledge of wrongdoing.
Diverse Forms of Liability
Under Indian corporate law, directors may be liable in civil or criminal terms. Sections 34 and 35 of the Companies Act of 2013 stipulate criminal liability for misrepresentations within prospectuses. Furthermore, Section 447 of the Act addresses the criminal liability of officers in default, a category that includes directors.
Breach of Duties
Directors in India can face liability when they breach their prescribed duties. Section 166 of the Companies Act of 2013 delineates these duties. If directors act in a manner prejudicial to the company or its stakeholders, legal repercussions may ensue.
Contractual Liabilities
Should a director enter into contracts without proper authorization from the Board or the company, such contracts may be rendered void at the discretion of the Board. If these contracts involve related parties or have directorial endorsements, the implicated directors might be compelled to indemnify the company for resultant losses.
Mitigating Factors
Several provisions help alleviate directors’ liabilities:
- Safe Harbor Provisions: Directors can seek exoneration by demonstrating their honest and reasonable actions in the best interests of the company, taking all circumstances into account. Notably, independent directors have limited liability, as per Section 149(12) of the Companies Act of 2013, encompassing matters directly linked to their roles.
In a case, directors, including independent ones, were held accountable when the board failed to disclose specific records. However, independent directors who opposed non-payment of dividends and resigned without infringing any laws were exempted from liability.
In the Satyam Computers case, independent directors were absolved from liability because they lacked the means to verify manipulated balance sheet information.
In the case of Sunil Bharti Mittal vs. Central Bureau of Investigation, the Hon’ble Supreme Court clarified that the principle of alter ego can be invoked to hold a company liable for the actions of individuals or a group with substantial and pervasive control over the company’s affairs. Moreover, the Court emphasized that directors can be held accountable for the company’s wrongdoing only when there is substantial evidence demonstrating an active role and criminal intent or if specific statutes, such as those related to labor and environmental laws, impose liability upon them.
- Indemnification: The 2013 Companies Act permits companies to indemnify directors, providing them flexibility to seek indemnities when they are not at fault.
- Director’s and Officer’s (D&O) Insurance: Implicitly recognized in the law, this insurance has gained prevalence in Indian companies, particularly larger ones, safeguarding directors against various forms of liability.
- Government Initiatives:To curtail litigation against independent directors (IDs) and non-executive directors (NEDs), the Ministry of Corporate Affairs issued a directive in March 2020. This directive advises registrars of companies not to initiate civil or criminal proceedings against IDs or NEDs without substantial evidence. It outlines a standard operating procedure for such cases and provides for guidance from the Director General of Corporate Affairs when necessary.
Conclusion
As efforts have been made to tackle directors’ liabilities in India, the necessity for more precise legal differentiations between the responsibilities and accountabilities of executive and non-executive directors continues to loom large. This is crucial not only for diminishing unjust harm to one’s reputation and alleviating undue stress but also for instilling confidence in professionals to take up board positions. In navigating the complex landscape of corporate governance, seeking counsel from legal experts can offer invaluable support for individuals concerned about their roles as independent directors in a company.
This article is written and submitted by Advocate Arshnoor Kaur. You can reach out to the author at arshnoor@bnblegal.com
