prpri Indemnification under Companies Act, 2013 Indemnification under Companies Act, 2013

The Board is the primary management body of any company and having a fiduciary duty to the company. It is expected from the Board to act in good faith and to promote the best interests of all the stakeholders. Directors are exposed to liabilities as a consequence of a breach of their duties.

Liabilities may arise under various statutes, but discuss herein only liabilities arising under the company law. The first set of liabilities is statutory in nature, being specifically set forth in the Companies Act, 2013 (CA 2013). These could be either civil liability requiring directors to make payments to victims or the state, or they could criminal liability resulting in fines or imprisonment. The second set of liabilities could arise from claims made against the directors either by the company or the shareholders for breaches of directors’ duties. Since directors owe the duties to the company, at the outset it is the company that can bring a claim. Where the company is unable or does not wish to do so, it is open to the shareholders to bring a derivative claim on behalf of the company to recover monies for breach of directors’ duties.

The directors are personally liable to pay losses suffered by the company following an act which is wrong, negligent, outside the company’s authority, beyond their power, or which evidences insufficient skill and care in managing the company’s affairs. The liability of the directors, in such cases, is joint and several.

There are certain relief or safe harbour provisions. For instance, in any proceedings, a director could seek relief on the ground that he or she acted honestly and reasonably and that having regard to all the circumstances of the case, such director ought fairly to be excused. This relief available under the Companies Act, 1956 (CA1956) has been continued in the CA 2013 Act as well.

Chapter XXIX (Section 447-470) of the CA 2013 deals with the provisions related to miscellaneous. Section 463 of CA 2013 provides for power of court to grant relief in certain cases. The provisions of Section 463 are effective from 12th September, 2013.

Section 463(1) of the CA 2013 provides that

“(1) If in any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against an officer of a company, it appears to the court hearing the case that he is or may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused, the court may relieve him, either wholly or partly, from his liability on such term, as it may think fit:

Provided that in a criminal proceeding under this sub-section, the court shall have no power to grant relief from any civil liability which may attach to an officer in respect of such negligence, default, breach of duty, misfeasance or breach of trust.

(2) Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a court before which a proceedings against that officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section (1).

(3) No court shall grant any relief to any officer under sub-section (1) or sub-section (2) unless it has, by notice served in the manner specified by it, required the Registrar and such other person, if any, as it thinks necessary, to show cause why such relief should not be granted.”

Section 463 of CA 2013 provides for the power of the court to grant relief in certain cases. But, courts power to grant relief under this section is limited. The High Court also has the power to grant relief in cases where such proceedings are reasonably apprehended by the officer. In such cases the High Court has the same power to relieve him as it is court before which a proceeding against that officer. But the power under this section of the CA 2013 will not be applicable in cases of prosecutions involving any criminal liability. This means that the provisions of Section 463 of the CA 2013 will not help in any way to wholly or partially relieve the officer of a criminal liability in a prosecution. In such cases the power to quash the proceedings can be found only under Section 482 Cr.P.C.

Investor Director in Board of Company

It is general in the market that at the time of negotiation of funding in the business, investors often ask for a seat in the Board which may be known as an Investor Director position. The investor’s demand for director in the Board, is only to check and balance qua their investment in the business. Simultaneously, investor do not want to take the directorship risk in respect of other directors’ act which is wrong, negligent, outside the company’s authority, beyond their power, or which evidences insufficient skill and care in managing the company’s affairs. Therefore, they also demand protection to their director against any liabilities which may be arisen due to above wrong act. In view of the above the legal provision in respect of indemnifying the directors of the company is become very crucial.

It is notable that Section 201 of the erstwhile CA 1956 had restricted a company from indemnifying the directors of the company whereas the new CA 2013 does not have any such restriction. Therefore, directors can now be indemnified by companies against such liabilities. Thus, for the acts of director before 01.04.2014, the Company cannot indemnify the director. Due to no corresponding provision under the CA 2013, it may allow greater flexibility to directors to ask for such indemnities from the company especially where no fault could be attributed to them. Such protection may be provided to them by incorporating an indemnity provision in the constituent documents, or by issuing a letter of indemnity to individual directors, as is the case with several companies in India.

Section 201 reads as:

Avoidance of provisions relieving liability of officers and auditors of company.

“(1) Save as provided in this section, any provision, whether contained in the articles of a company or in an agreement with a company or in any other instrument, for exempting any officer of the company or any person employed by the company as auditor from, or indemnifying him against, any liability which, by virtue of any rule of law, would otherwise attach to him in respect of any negligence, default, misfeasance, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void;”

Provided that a company may, in pursuance of any such provision as aforesaid indemnify any such officer or auditor against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favor or in which he is acquitted or discharged or in connection with any application under section 633 in which relief is granted to him by the Court.”

Directors’ and Officers’ Liability Insurance

Moreover, there is a provision for taking Directors’ and Officers’ Liability Insurance as per section 197(13) of the new CA 2013 for liabilities of negligence, default, misfeasance, breach of duty or breach of trust.

Section 197(13) reads as:

“Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel.

Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration.”

Remark: As there is no bar under the existing provisions of the CA 2013, directors must insist on the indemnification clause in the shareholders agreement and also in the appointment leer issued by the Company. This will help the directors to safeguard themselves in case of any claim arising from any third party due to their bonafide actions in the company. Further, director can push 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. Accordingly, a company may provide certain indemnities to its directors for any liability arising out of any act done in his professional capacity, excluding intentional criminal conduct.

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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