A Non-Executive Director (NED) has nowhere been defined in Companies Act 2013. However a Non-Executive Director is also called an external director, who aren’t directly involved in management issues, which allows them the opportunity to focus solely on board matters.
OFFICERS IN DEFAULT
Section 2(60) of the Companies Act 2013 defines ‘Officers in default’ to include the following:
**Directors of the company include Independent Directors (IDs) and Non-Executive Directors (NEDs).
However, MCA recently vide its circular dated March 02, 2020 reiterated Section 149(12) of the 2013 Act and clarified that NEDs (non-promoter and non-KMP) should not be implicated in any criminal or civil proceedings under the Companies Act 2013, unless they were a part of a default/non-compliance committed by the company. A default/non-compliance would include such acts of omission or commission by a company which had occurred with the knowledge of the NEDs attributable through Board processes with their consent or connivance or where they did not act diligently.
It also provides that-
“ The nature of default is crucial for arraigning officers for defaults committed under the Act. All instances of filing of information/records with registry, maintenance of statutory registers or minutes of meeting or compliance with orders issued by Statutory authorities under the act are not the responsibility of NEDs, unless specific requirement is provided in Act or in such orders,as the case may be. The responsibility of NEDs, ordinarily arise in such cases, where there are no WTD & KMPs.”
In Nutshell, a Non-Executive Director (NED) should be held liable only in respect of any contravention of any provisions of the Act which had taken place with his/her knowledge (attributable through Board processes) and where he/she has not acted diligently, or with his/her consent or connivance.
However, if non-executive director does not initiate any action upon knowledge of any wrong, such director should be held liable and knowledge should flow from the processes of the Board. Additionally, upon knowledge of any wrong, follow up action / dissent of such non-executive directors from the commission of the wrong should be recorded in the minutes of the board meeting.