Liabilities of Non-Executive Director under Companies Act 2013

NON-EXECUTIVE DIRECTOR

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:

• Whole-time director
• Key managerial personnel
• where there is no key managerial personnel, such directoror Directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the Directors, if no director is so specified;
• any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;
• any person in accordance with whose advice, directions or instructions the Board of Directorsof the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;
• 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 had taken place with his consent or connivance;
• in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer;

**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)[2] 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.