The Supreme Court vide its Order on January 20, 2020, accepted the proposal of the Centre to take over the management control of embattled realty firm Unitech Limited. A bench headed by Justice D Y Chandrachud gave two months to the new board of Unitech to prepare the resolution framework of the company and sought its report. In a very fermenting manner the directors so appointed are called as directors nominated by the Government. But a question which arises here is what is the status of such directors – are they functional directors, are they nominee directors, are they independent directors and so on.

Section 2(10) of the Companies Act, 2013 (the Act) states that “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company. Further, in terms of section 2(34) of the Act, “director” means a director appointed to the Board of a company.

Section 167(1)(e) of the Act provides that the office of a director shall become vacant in case he becomes disqualified by an order of a court or the Tribunal. Section 167(3) provides that where all the directors of a company vacate their offices under such disqualification, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.

In terms of section 149(6) of the Act, the independent director means a director other than a nominee director. Explanation to section 149(7) provides that “nominee director” means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests.

Thus what follows is that a nominee director can be appointed under statutory powers even if there is no provision in the Articles of Association of the company and even if number of directors increase beyond the limit prescribed in Articles. Such nominee director does not retire by rotation and he is not counted for purposes of number of directors liable to retire by rotation. He need not hold any qualification shares. His presence is counted towards quorum at the Board meeting. He has to disclose his interests in other companies, firms etc. He is required to sign prospectus, register of contracts like any other director. He is entitled to sign other documents as director like any other director e.g. balance sheet, advertisement for public deposits, returns etc.

The following discussion now will throw a light on the judicial precedents in this regard as well as the duties of such directors.

In Union of India v. Satyam Computer Services Ltd. [2009] 89 SCL 393 (CLB), considering the larger public interest at stake and to create confidence in the minds of all those connected with the company in any capacity and also to assure that regulatory/judicial mechanism in India is alive and active to take immediate and positive steps in case of needs, it was ordered that:

“(i)  The present board of directors stands suspended with immediate effect. None of the present directors shall represent himself to be a director of the company and shall also not exercise any powers as a director.

(ii) On the authority of this order, in the name and on behalf of this Board, the Central Government shall immediately constitute a fresh Board of the company with not more than 10 persons of eminence as directors. The Central Government may also designate one of them as the Chairman of the Board. This Board shall be entitled to exercise and discharge all powers vested in the Board by the Articles and the Act. The said constitution shall be notwithstanding anything contrary contained in the Articles, the Act, Listing Agreement or any other law/regulations relating to the constitution of the board of a listed company. The said Board will continue till further orders.”

Further, Union of India v. Satyam Computer Services Ltd. [2010] 97 SCL 49 (CLB), it was held that since, the above-mentioned directors have been appointed in the name and on behalf of this Board, they are like court officers and therefore every State or Central Government entity is bound to assist and support them in their endeavours, more so, when they have joined the Board as a measure of public service.

Further in the matter of IL&FS, the Union of India approached the NCLT for reliefs under sections 241 and 242. The Tribunal vide order dated 1-10-2018 allowed the said prayers and suspended the Board of Directors of IL&FS, and appointed the newly constituted Board to conduct the business as per the Memorandum and Articles of the companies.

Ministry of Corporate Affairs has issued Master Circular No. 1/2001 dated 29-7-2011 (earlier circular No. 8/2011 dated 25-3-2011) to Regional Directors, ROC and Official Liquidators giving guidelines on prosecution of directors. The clarifications are as follows –

  • All directors should not be arrayed in prosecution. Differentiation should be made in ‘officer in default’ and other directors.
  • Extra care should be taken while initiating penal action against nominee directors of Government, PSU, BIFR, banks and Public Financial Institutions and independent directors appointed as per SEBI requirements. Action should be taken against them only if offense was with their consent or connivance or where he did not act diligently.

In Madhavan Nambiar v. ROC (2002) 1 Comp LJ 280 (Mad HC), it was observed that there cannot be blanket immunity in favour of directors who have been nominated by Government either as ex officio or otherwise. There is no distinction between whole-time or part-time director or appointed or nominated director and liability for acts of omission or commission is equal, so also the treatment for such violations as stipulated in the Act. The director is bound to discharge the functions of a director and should take all diligent steps and care in affairs of the company.

A person who is nominated as director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or State Government shall not be liable for prosecution for dishonour of cheques under section 138 of Negotiable Instruments Act – Second Proviso to section 141(1) of Negotiable Instruments Act, inserted by Amendment Act, 2002. It may be noted that the exemption is only to those who are employees of Central/State Government or Financial institutions controlled by Government. Thus, other nominee directors of Government/FI who are not employees of Government/FI are not exempted.

Duties of director: Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company – section 166(1) of Companies Act, 2013.

A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company, its employees, the shareholders, the community and for the protection of environment – section 166(2) of Companies Act, 2013. Explanation to section 149(7) of Companies Act, 2013 used the term ‘nominee director’ is a person appointed by FI/Government or any other person to ‘represent its interests‘. This is incorrect since even a nominee director has to take care of interests of the company and not interest of the institution it represents. This is clear from duties of directors as specified in section 166 of Companies Act, 2013.

A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment – section 166(3) of Companies Act, 2013.

A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company – section 166(4) of Companies Act, 2013.

A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates. If such director is found guilty of making any undue gains, he shall be liable to pay an amount equal to that gain to the company – section 166(7) of Companies Act, 2013.

A director of a company shall not assign his office and any assignment so made shall be void – section 166(6) of Companies Act, 2013.

Conclusion:

The directors appointed on the Board of Unitech Limited are in the status of nominee directors and they have to perform such duties as enshrined in the Act read with the Articles of the company. In this regard, it is important to note that such directors are not having blanket immunity to various acts and hence the directors and officers liability insurance (D&O) cover may be considered for having protection to the personal fortunes of the directors/officers if they are indicated on account of their actions. Up to the limit of liability chosen in the policy, the insurer pays for the damages awarded against the directors/officers and also the cost awarded by the court. Regulation 91 of Model Articles of company limited by shares as contained in Table-F of Schedule I of Companies Act, 2013 even states that every officer for the time being of the company shall be indemnified out of the assets of the company against any liability incurred by him in, defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in which relief is granted to him by the court/Tribunal.

(The author of this write up is a Chartered Accountant and an Insolvency Professional. He can be reached at ipkamalgarg@gmail.com)

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