In the wake of recent corporate scams and initiation of legal proceedings against several company directors including independent director, it becomes very important for the directors to understand their duties and liabilities as a directors in Indian corporate regulatory environment.
It is very important to understand that, a person is appointed as a director under the Companies Act, however, his / her liabilities as a director are not just limited to the offences committed under the Companies Act but he is also liable for the offences committed under the various other statutes like the Negotiable Instruments Act, 1881, Labour Laws, GST Act, Income-tax Act etc.
Section 166 of the Companies Act, 2013, mentions about the fiduciary duties of the directors which inter-alia includes that the director shall exercise his duties with due and reasonable care, skill and diligence and should not attempt to achieve or attempt to achieve any undue advantage either to himself or to any of his relative. If the director takes the undue advantage, then, it shall be held liable to pay an amount equal to that gain to the company and he shall be liable to pay fine which may extend to Rs. 5,00,000/-.
Liability of Director under the Companies Act, 2013
The Companies Act, 2013 contain a set of liabilities for the directors and key managerial persons. The Companies Act also criminalizes various kinds of activities in the course of the economic life of the company, chief among them being fraudulent activities committed by the company through its employees.
This kind of liabilities are statutory in nature like any governmental authority can initiate legal proceedings against directors or company. For e.g: Non filing of statutory documents, RoC can impose penalty on directors and company. This kind of liabilities are specifically set forth in the Companies Act, 2013. These could either be a civil liability requiring directors to make payments of fine / penalty or criminal liability resulting in fines or imprisonment. Criminal liability arise in case of fraud. As per Section 447 of the Companies Act, 2013, fraud means as any act or abuse of position committed with an intent to deceive, to gain undue advantage from, or to injure the interests of a person, company, shareholders or creditors whether or not there is wrongful gain or loss then the person shall be liable for imprisonment upto 10 years.
The kind of liabilities could arise from claims made against the directors either by the company or the shareholders for breach of directors’ duties. Section 245 of the Companies Act, 2013 allows a group of shareholders constituting a minimum of 100 shareholders or those holding 10% shares in the company to bring an action on behalf of all affected parties, which includes claims for compensation from directors for any fraudulent, unlawful or wrongful act or omission or misconduct on their part which are commonly called as “Class action suit”.
Vicarious Liability of the Company and Directors
Generally, a person is liable for his own wrongful acts or omissions. However, in Vicarious Liability, person is responsible for the acts or omissions of another person. The concept of vicarious liability have been evolving since the evolution of law of torts starting from the liability of the employers for the tort committed by its employee subject to the act done within the course of his employment.
Vicarious Liability for Indian Companies (Corporate Criminal Liability)
Corporate criminal liability can be defined as a crime which has been committed by individual or association of individuals who for pursuing a common purpose or make business gain in course of their occupation commit such acts or omission which is forbidden by law and with guilty mind where it is for the benefit of the corporation or any individual out of the association of individuals.
Earlier corporation was not held liable for any criminal act as it is an artificial legal person, so it could not be imprisoned, and corporation not being natural person there was absence of mens rea. The debate on vicarious liability in India has been dominated by the debate on whether a company can be held criminally liable for the actions of its employees where the law is silent on this question.
The Supreme Court in “Iridium India Telecom Ltd. v Motorola Inc.” case considered the issue of a company being criminally responsible for the actions of its employees. Motorola Inc. sold a technology product to Iridium that was accompanied by assertions and promises by Motorola that allegedly turned out to be false. Iridium brought a case of cheating against Motorola. The case was brought not against Motorola’s employees but against Motorola itself. Under the provisions of the Indian Penal Code, cheating requires an intention to deceive. Motorola argued that a corporate body, being an artificial person, is not capable of a mental state and therefore cannot be held criminally liable for offences such as cheating. Motorola’s arguments were rejected by the Supreme Court after it considered the modern approach to the problem of corporate criminal liability in the English courts. The company held vicariously liable for the acts committed by its employees if it is done in the course of its employment.
Vicarious Liability of Directors and Officers of Company
The action and the mental states of the companies’ directors are deemed to be the actions and the mental states of the companies. Can the reverse be true? Suppose a company through its employees commits actions that have criminal consequences. Can the directors of the company be attributed these actions such that they can be held responsible for the criminal consequences? In the context of company law, the vicarious liability provisions have a standard language providing that the “person-in-charge of” and “responsible for” the conduct of the business of the company at the time of the commission of the offence, as well as other officers are liable for that offence.
The Supreme Court in the case of “Sunil Bharti Mittal v. Central Bureau of Investigation” had clarified that the principle of alter ego can only be applied to make a company liable for acts of a person or a group of persons who exercise significant and pervasive control over the affairs of the company and could not be applied in the reverse.
Facts of the case
The central government issued telecommunication licences to a number of companies. The license process came under scrutiny for certain irregularities as a result of which a criminal investigation was launched against various companies including their directors. One of these companies was Bharti Cellular Ltd. (BCL). The special court investigating the licensing irregularities decided to attribute the actions of Bharti Cellular Ltd. to Sunil Bharti Mittal, its Chairman cum Managing Director, and made him an accused in the proceedings. The special court’s directions to make the director of BCL the accused was challenged in the Supreme Court as a mistake of law.
Supreme Court verdict
The Supreme Court held that without statutory backing, the persons in charge of a company cannot be held criminally liable for the actions of a company. The Supreme Court further noted that directors of the company can be held responsible for the wrong done by the company only where there is sufficient evidence to prove that such persons played an active role and they had a criminal intent or otherwise, the relevant statute has specifically imposed liability on them, such as labour and environmental law statutes. Vicarious liability cannot be imposed on any director in the absence of legislative mandate.
Liabilities of Independent Director and Non-executive Directors
Every director is not liable for the actions and conduct of the companies but only those director 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 are liable for action.
Generally, Managing Directors, Whole time Directors, Executive Directors, CEOs are in-charge of day to day business operations and management and hence, they are responsible for any action of the company. However, an Independent Directors and Non-Executive Director can be held liable if following conditions are satisfied:
– Acts of omission or commission by a company which had occurred with their knowledge; and
– With their consent or connivance or where he had not acted diligently.
If the aforementioned conditions are not satisfied then, under no circumstances, the
Independent Directors and Non-Executive Directors can be held responsible.
Recently, the Ministry of Corporate Affairs (“MCA”) issued directions to the Regional Directors, Registrar of Companies and Official Liquidators vide circular dated 2nd March, 2020, directing them not to initiate any civil or criminal proceedings against Independent Directors and Non- Executive Directors (non-promoters and non-KMP) unless sufficient evidence exists against them. Monitoring the day-to-day compliances of the company is not the responsibility of the ID/ NED. Hence an ID/ NED cannot be held liable for acts, which are beyond their control, like failure on the part of the company to maintain and update statutory registers, minutes of meetings, filing of returns, etc. Additionally, it was also clarified that the Registrars are required to follow a standard operating procedure, as prescribed by MCA, while initiating proceedings against ‘officer who is in default’.
Directors and officers can mitigate the risk of personal liabilities through various safeguards like they may insist on the indemnification clause in the shareholders agreement or employment agreement. This will help the directors and KMPs to safeguard themselves in case of any claim arising from any third party due to their bonafide actions in the company.
They can insist the company to obtain the Directors and Officers Liability Insurance in the company to hedge against any pecuniary liability arising on the directors and liability
of the company. Further, while taking part of the board meeting, directors must dissent to any activity or business which they feels violative and they should keep in mind that his dissent must be recorded in the minutes also.
The author of this article is founder of DVG & Associates, Company Secretaries, Mumbai. He can be reached at [email protected]