DIRECTORS AND APPOINTMENT UNDER COMPANIES ACT

PART II

This blog post is a continuation of  Part I for Directors and Appointment under Companies Act. The first part describes the types of directors, their respective responsibilities and appointment procedures and the second part, discusses the liabilities of the directors as detailed in the Companies Act, 2013 and under Securities law. 

LIABILITIES OF A DIRECTOR

1. Liabilities under the Act

As discussed above, the directors are responsible for the operations and management of the company and stakeholders put their trust upon the board to protect their interest which makes it essential to govern the conduct of directors and make them accountable for their actions. In India, laws pertaining to liabilities of director have been made robust and stringent to hold directors liable for their misconduct and lack of diligence while performing duties.

It is up to the court of law to make an individual liable as a director in a company on a case-to-case basis, however, now it is more likely that a director may face consequences due to negligence and lack of diligence while performing its functions and managing the operations of the company or for reason including but not limited to fraud and misrepresentation.

The Act does have provisions which may hold directors liable for their conduct and the current regime has made it more difficult to use the company as a separate legal entity which was earlier used as a shield to protect the key managerial personnels.

Liability of a director for an offence under the Act can be either criminal or civil and offence ranges from false statement or misrepresentation in prospectus to non-disclosure of interest while entering into a related party transaction in contravention of section 188 of the Act. Also, the definition of “Officer who is in Default” as per Section 2(60) of the Act, includes whole time directors and every director, in respect of a contravention of the provisions of the Act, who is aware of such contravention by virtue of attending the board meeting or later on becoming aware of the business conducted at the meeting through the minutes of the meeting or upon receipt of notice of the board meeting specifying the business proposed to be carried out at the Board or participation in such meeting without objecting to the same, or where such contravention has taken place with his consent or without objection. The definition is wide enough to cover all types of directors including independent directors, as explained below.

The liability of the directors under the Act could be INR 1,000/- (One Thousand) per day to imprisonment up to 10 years if convicted under Section 447 of the Act. Since Section 447 states that “any person who is found to be guilty of fraud”, which makes the directors along with other key managerial personnels (“KMPs”) of the company, and persons working at levels below the top management, also punishable under Section 447 of the Act.

Also, a company in today’s age is also prone to investigation by the Central Government under Section 210 of the Act in the following situations:

• on the receipt of a report of the Registrar or inspector under section 208, i.e, based on the inspection or inquiry by the Registrar into the affairs of the company; or
• on intimation of a special resolution passed by a company stating that the affairs of the company ought to be investigated; or
• in public interest.

In addition to Section 210, during an investigation under the Act, the inspector may, if necessary, investigate into the affair of the related company and inspect/ question any person who is or has at any relevant time been the company’s managing director or manager or employee, under Section 219 of the Act.

The corporate governance requirements such as notice of the board meeting with agenda, resolutions passed at the board meeting, minutes of meetings, signing of board report and annual reports of the company, makes it difficult for a director to take a defense that he was not aware of the transaction transpired in the company.

An argument that a director did not attend the meeting in which an alleged transaction was approved by the board, does not help a director escape from the liability as well, since he is expected to read the minutes and understand the resolutions proposed to be passed at the meeting and raise the issues where necessary to protect the interest of stakeholders. Failing to do so will be a negligence and lack of due diligence on the part of the director in performing his duties efficiently.

In addition, a director may not get away from the liability even after resignation or termination from directorship, as discussed above, or even when the company is dissolved due to a merger, acquisition, or amalgamation. Section 240 of the Act provides that “Notwithstanding anything in any other law for the time being in force, the liability in respect of offences committed under this Act by the officers in default, of the transferor company prior to its merger, amalgamation or acquisition shall continue after such merger, amalgamation or acquisition.”

The best defense available with a director or officers in default, is to prove that he exercised due care and diligence in performing his duty with no negligence on his part, but that’s difficult to prove than said for the reasons discussed in this article.

2. Liabilities under Securities Law

Apart from the Act, directors of listed companies shall be mindful of the obligations under the SEBI Regulations in their day-to-day operation and management of the company. It will be excessively high expectations from a director, with no legal background, to be acquainted with SEBI regulations, considering the frequency of amendments in the regulations.

However, considering the liability under the Regulations could be up to INR 25,00,00,000/- (Rupees Twenty-Five Crores) or three times the amount of profit, whichever is higher, we have listed down important Regulations under which a director of a listed company could be held personally liable.

• Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015.
• Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015.
• Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2018.

In brief the obligations under the above-mentioned regulations pertain to mandatory disclosures and governance of the company. It could be overwhelming for some individuals after reading this article, however, the intention of the Act and Regulations is more of to ensure the directors and KMP are committed to their office while holding the position in the company and strive to protect the integrity of the company and to ensure that high standard governance practice is in the ethos of the company.

– Faizan Khatri, Associate