Adv Hemant Goyal & CS Shagun
In today’s increasingly regulated corporate environment, governance failures are no longer viewed as internal management issues, they are often the subject of full-blown litigation. As regulators, shareholders, and whistleblowers demand greater transparency and accountability, corporate governance litigation is rapidly emerging as a significant area of legal and reputational risk in India and globally.
This article examines the rise in corporate governance litigation, its triggers, the exposure of directors and compliance professionals, and how to mitigate these risks through structured governance practices.
Understanding Corporate Governance Litigation
Corporate governance litigation refers to legal disputes that arise due to lapses in the governance framework of a company. These may include:
- Breach of fiduciary duty by directors
- Non-compliance with statutory requirements under the Companies Act, 2013
- Violations of disclosure norms under SEBI (LODR) Regulations, 2015
- Insider trading or related party transaction failures
- Manipulation or inaccuracies in board records such as minutes
Litigation may be initiated by regulators (SEBI, MCA, SFIO), shareholders (including minority shareholders under Sections 241–242 of the Companies Act), or whistleblowers, and often escalates to forums like the National Company Law Tribunal (NCLT) or even higher judicial bodies.
Why Corporate Governance Litigation is Increasing
1. Enhanced Regulatory Surveillance
Regulators are deploying data analytics and AI-driven surveillance to monitor non-compliance. The MCA21 system flags suspicious filings and triggers automatic inquiries. SEBI’s recent amendments also broaden its enforcement reach across governance and disclosure failures.
2. ESG and Stakeholder Activism
Environmental, Social, and Governance (ESG) parameters are now central to investment decisions. Non-disclosure or inaccurate ESG reporting can lead to enforcement actions under SEBI’s Business Responsibility and Sustainability Reporting (BRSR) framework.
3. Whistleblower Frameworks and RTI Filings
The Companies Act and SEBI regulations require listed entities to have whistleblower mechanisms. Complaints under these systems have led to investigations and litigation. The use of the Right to Information Act to access regulatory filings has also empowered external stakeholders.
4. Increased Digital Traceability
With digital board platforms and e-governance tools, every decision and omission leave a trail. This has enabled regulators and courts to trace back governance failures to specific actions or inactions of board members and compliance officers.
Exposure of Directors, KMPs, and Company Secretaries
Directors and Key Managerial Personnel (KMP), including Company Secretaries and Compliance Officers, may be held liable as “officers in default” under Section 2(60) of the Companies Act, 2013. Offences involving fraud or misstatement attract personal penalties and even imprisonment under Sections 447–449 of the Act.
Common areas of litigation risk include:
- Inaccurate or incomplete board minutes
- Failure to disclose related party transactions
- Delayed statutory disclosures to stock exchanges and regulators
- Inadequate internal controls or failure to detect fraud
- Weak implementation of internal policies, including the code of conduct and whistleblower policy
Recent Indian Case Examples
Several corporate episodes illustrate the legal consequences of governance lapses:
- IL&FS Case – The MCA invoked Section 241(2) to supersede the board on grounds of public interest, citing gross mismanagement.
- Fortis Healthcare – SEBI penalised the company and its promoters for irregular related party transactions, citing governance failures.
- NSE Co-location Case – SEBI barred senior officials for failure to ensure fair access and governance oversight.
- PNB Scam – The fraud by Nirav Modi exposed lapses in board oversight and internal controls, triggering investigations into director liability.
Mitigating Litigation Risk: Key Measures
1. Robust Documentation and Records
Board minutes must be clear, complete, and reflective of the actual discussion. The Secretarial Standards (SS-1) issued by ICSI mandate accurate recording of decisions and dissents.
2. Real-Time Compliance Monitoring
A digital compliance calendar aligned with requirements under Companies Act, SEBI, FEMA, etc., helps ensure timely filings and reduces the risk of omission-based litigation.
3. Periodic Legal and Secretarial Audits
Independent audits highlight gaps in policy implementation and offer a litigation-preventive approach. This is especially relevant in regulated sectors or where there is frequent board turnover.
4. Training for Directors and KMPs
Continuous education on duties under Section 166, related party transactions, insider trading norms, and board liability helps directors discharge responsibilities with due care.
5. Effective Whistleblower Mechanism
Compliance officers and Company Secretaries must ensure the mechanism is active, confidential, and has a proper reporting protocol. Board reporting on such complaints must be documented.
Global Developments: Parallel Trends
- United States: Derivative shareholder suits and SEC enforcement for governance failures are on the rise.
- United Kingdom: Directors face civil liability under the Companies Act 2006 for breach of fiduciary duties.
- OECD Guidelines: Emphasize board accountability and shareholder rights as governance standards.
India is aligning rapidly with these global benchmarks, making litigation a central enforcement tool.
Conclusion
Corporate governance litigation is no longer a theoretical risk, it is a present and intensifying reality. Directors, Company Secretaries, and compliance professionals must shift from a reactive mindset to a preventive governance framework that embeds legal foresight, transparency, and accountability into daily operations.
Robust records, training, compliance systems, and a strong governance culture can not only reduce litigation risk but also serve as a company’s best defence in court or before regulators.
In a world where governance failures no longer remain hidden, being legally prepared is not optional it is essential.
*****
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Author Bio
