Directors' Duties and Liabilities Under Companies Act, 2013
Directors' Duties and Liabilities Under Companies Act, 2013
Directors' Duties and Liabilities Under Companies Act, 2013
2013
INTRODUCTION
Corporate failures in the recent past such as Satyam, Sahara, Kingfisher brought out
the fact that the Companies Act, 1956 (1956 Act) which existed over a period of
50 years was ineffective at handling some of the present day challenges of a
growing industry and interests of increasing classes of sophisticated stakeholders.
The Companies Act 2013 (2013 Act) has been enacted with a view to meeting the
present day challenges of corporate governance arising from stakeholders
expectations. The 2013 Act has ushered in a new era of corporate governance, by
increasing the roles and responsibilities of the board, protecting shareholders'
interests, bringing in a disclosure based regime and built in deterrence through selfregulation. The 2013 Act has introduced several measures which have the effect of
considerably enhancing the duties and liabilities of directors and imposition of
stringent penal provisions in case of breach of any statutory provisions. While some
of the requirements already existed for listed companies as part of the Listing
Agreement, the new requirements under the 2013 Act apply to all companies. This
article provides an insight on the duties and liabilities of the directors under the
2013 Act and the practical measures which may be adopted by them, for complying
with these duties.
The board is responsible for appointment of whole time key managerial personnel
(Section 203);
The directors are responsible for issuance of notice ad holding of board meetings
and general meetings etc.
INDEPENDENT DIRECTORS
Apart from the duties mentioned above, which are applicable to all directors,
independent directors are also additionally required to comply with code of conduct
specified under Schedule IV of the 2013 Act. The Schedule has stipulated 13
(thirteen) different duties to be performed by an independent director. Some of
these duties include: (a) Regularly updating and refreshing the skills, knowledge and
familiarity with the company. (b) Strive to attend and participate actively in all
meetings of the Board and the committees and general meetings. (c) Keeping well
informed about the company and the external environment in which it operates. (d)
Not to unfairly obstruct the functioning of a proper board or committee. (e) To pay
sufficient attention and ensure that adequate deliberations are held before
approving related party transactions and assure himself that the same are in the
interest of the company. (f) To ensure that the company has an adequate and
functional vigil mechanism and also to ensure that the interests of a person who
uses such mechanism are not prejudicially affected on account of such use. (g) Not
to disclose confidential information, including commercial secrets, technologies,
unpublished price sensitive information, etc., unless such disclosure is expressly
approved by the board or is required by law. Apart from the duties, the Code also
covers other aspects, such as it provides guidelines for professional conduct, role
and functions of independent directors, manner of appointment, reappointment,
resignation/removal, need for separate meetings of independent directors and
evaluation of independent directors by the entire board. As seen from the above,
various duties and responsibilities have been cast on independent directors,
including protecting interests of minority shareholders, harmonizing conflict of
interests of stakeholders, acting as a mediator in cases of conflicting interests etc
considering the importance of their role from a corporate governance perspective.
them for offences committed under the Act. The term officer who is in default has
been defined under Section 2 (60) of the 2013 Act as: officer who is in default for
the purposes of any provision in this Act which enacts that an officer of the
company who is in default shall be liable to any penalty or punishment by way of
imprisonment, fine or otherwise, means any of the following officers of a company,
namely (vi) every director, in respect of a contravention of any of the provisions of
this Act, who is aware of such contravention by virtue of the receipt by him of any
proceedings of the board or participation in such proceedings without objecting to
the same, or where such contravention has taken place with his consent or
connivance. It is pertinent to note here that the term officer in default now seeks
to implicate every director (including nominee director) who is aware of the
contravention. He need not even participate in any meetings of the board, but if the
information as to a contravention is contained in any of the proceedings of the
board received by him, he is deemed liable. Also, in view of the aforesaid provisions,
a director needs to ensure that any objection raised by him at a board meeting is
duly recorded in the minutes.
LIABILITY OF DIRECTORS
Contravention of provisions of Section 166 (relating to codified duties) is punishable
with a fine which shall not be less than Rs 1 Lakh but which may extend to Rs 5
lakhs. Further, penal provisions throughout the 2013 Act have been made more
stringent and provide for increased penalties as compared to the 1956 Act. On an
average, 5 the minimum amount of fine that is imposed under certain Sections is Rs
25,000 which in certain cases extends to Rs 25 crores or even more. Set out below
is the list of few contraventions, where the penalties are Rs 1 crore or more:
(a) Violation of provisions relating to not-for-profit companies (Section 8);
(b) Violation of provisions relating to subscription of securities on private placement
(Section 42);
(c) Issue of duplicate share certificates with an intent to defraud (Section 46 (5));
(d) Failure to repay deposits within specified time (Section 74 (3));
(e) Contravention of provisions relating to insider trading (Section 195 (2)).
Apart from monetary penalties, certain offences even attract imprisonment. Most of
the offences leading to imprisonment under the 2013 Act are non-cognizable (that is
would need warrant to arrest) but there are certain serious offences which are
cognizable in nature and would not require a warrant to arrest. These offences are
mainly connected to fraud or intent to defraud. Some of such offences are listed
below: (a) Furnishing of any false or incorrect particulars of any information or
suppressing any material information in any of the documents filed with the
Registrar of Companies in relation to the registration of a company (Section 7 (6);
(b) Including in the prospectus any statement which is untrue or misleading in form
or context in which it is included or where any inclusion or omission of any matter is
likely to mislead (Section 34); (c) Fraudulently inducing persons to invest any money
(Section 36); (d) Default under Section 56 relating to transfer and transmission of
shares with an intent to defraud; (e) Offences relating to reduction of share capital
(Section 66). The company has the right to initiate legal action against directors, in
case of breach of their duties.
Apart from this, the 2013 Act has also introduced the novel concept of class action
suits under Section 245. Under this concept, a group of shareholders (constituting a
minimum of 100 shareholders or such minimum percentage of total shareholders as
may be prescribed) can bring an action on behalf of all affected parties, against the
company and/or its directors, for any fraudulent or wrongful act or omission of
conduct on its/their part. Further, the 2013 Act proposes to set up a National
Company Law Tribunal which is expected to provide speedier and more efficient
remedy. Apart from the 2013 Act, there are several other statutes, such as
Negotiable Instruments Act, Consumer Protection Act, which lay down increased
liabilities on directors. In case of default on the part of the Company, there are
several instances where the complainant as a strategy, would make all the directors
party to the suit, to put pressure on the company. Once a director is made a party,
he will have to go through the time consuming and cumbersome court procedures
to prove his innocence. This will no doubt cause lots of hardship and inconvenience
to an innocent director.
PRACTICAL RECOMMENDATIONS
The 2013 Act has endowed directors with enhanced duties and liabilities, to make
them more accountable and be personally liable in case of wrongs committed by
them. Considering the stringent penal provisions imposed even for not so grave
non-compliances, it is necessary that directors adopt an extra cautious approach.
They will need to ensure that they always act in the best interest of all stakeholders.
Even a slight laxity on their part may be a good reason to put them behind bars.
Here are some of practical recommendations which directors may find useful, whilst
discharging their duties: (a) All directors (including independent directors) need to
attend as many board meetings as possible to ensure that they are fully aware of
the companys business. For improving attendance, they may consider proposing
that the company should at the beginning of each year, tentatively set up agreed
dates, timings and venues for meetings of the board and committees (except in
exceptional circumstances). (b) Directors should read all necessary papers and
relevant background information made available to them for meetings to enable
their meaningful participation and contribution. (c) Directors must ensure that any
questions raised by them in a board meeting or any dissent expressed is properly
recorded in the minutes of the meeting so as to provide prima facie evidence, in
case the role of the director is questioned at any time. (d) Directors (especially new
directors) need to ensure that they receive appropriate training on governance and
directors legal duties. 7 (e) Directors need to ensure that they take legal advice, in
cases of doubt. (f) Directors need to ensure that they have obtained directors and
officers liability insurance to provide them with some degree of comfort.
CONCLUSION
Becoming a company director has become a very serious business and should not
be undertaken lightly or unadvisedly. If you are invited to become a company
director or are already a director, it is very important that you understand your
duties and responsibilities and the potential consequences of their breach.