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Independent Directors – Roles and Liabilities

By September 17, 2019 November 22nd, 2019 No Comments

Independent directors in India are governed by the
Companies Act, 2013 (“Act”). Every listed public company is required to
have at least one-third of the total number of directors as independent
directors[1] in the board of directors
of the company. Every unlisted public company fulfilling the following criteria
is required to appoint a minimum of 2 (two) independent directors:
(a)             
a public company having a paid up
share capital of ten crore rupees or more;
(b)             
a public company having a turnover of one
hundred crore rupees or more; or
(c)             
a public company which has, in aggregate,
outstanding loans, debentures and deposits, exceeding fifty crore rupees.[2]
The Act provides a criterion applicable to independent
directors appointed in accordance with the Act[3]. The Act further provides
the following roles and responsibilities of an independent director:
(a)             
An independent director is
required to attend the first board meeting of the company and every first meeting
of the board thereafter for each financial year;
(b)             
An independent director is
required to attend board meeting called at shorter notice[4] and in the event, the
independent director is not able to attend the board meeting called at a
shorter notice, the decision taken at such meetings shall be final only on
ratification by an  independent director[5].
(c)             
An independent director is
required to provide a declaration confirming his/ her independence at the first
board meeting, after his/ her appointment, in which he/she participates as a
director. Thereafter, such declaration is required to be provided by the
independent director in every financial year or as and when changes occur which
affects his/her status as an independent director.
In addition to the provisions of the Act, the
independent directors are required to abide by the Code of Independent
Directors[6].  The Code of Independent Directors sets out
the basic guidelines which the independent directors are required to adhere to
during their appointment.  While the
aforesaid code is directive in nature, it provides the following duties of an
independent director:
(a)             
To undertake appropriate
induction and regularly update and refresh their skills, knowledge and
familiarity with the company;
(b)             
To strive to attend all
meetings of the Board of Directors and of the Board Committees of which he/ she
is a member;
(c)             
To keep themselves well
informed about the company and the external environment under which it
operates;
(d)             
To ensure adequate
deliberations are held before approving related party transactions and assure
that the same is in the interest of the company;
(e)             
To report concerns about
unethical behavior, actual or suspected fraud of the company’s code of conduct
or ethics policy;
(f)              
Not to disclose confidential
information including commercial secrets, technologies, advertising and sales
promotion plans etc. unless such disclosure is approved by Board or by law;
(g)             
seek appropriate clarification
or amplification of information and, where necessary, take and allow
appropriate professional advice and opinion of outside experts at the expense
of the company;
(h)             
participate constructively and
actively in the committees of the Board in which they are chairpersons or
members;
(i)              
where they have concerns about
the running of the company or a proposed action, ensure that these are
addressed by the Board and, to the extent that they are not resolved, insist
that their concerns are recorded in the minutes of the Board meeting;
(j)              
not to unfairly obstruct the
functioning of an otherwise proper Board or committee of the Board;
(k)             
ascertain and ensure that the
company has an adequate and functional vigil mechanism and to ensure that the
interests of a person who uses such mechanism are not prejudicially affected on
account of such use;
(l)              
acting within his/ her
authority, assist in protecting the legitimate interests of the company,
shareholders and its employees.
Liability of an Independent Director
The liability of an independent director can be
ascertained through the roles and responsibilities undertaken by such director
during the course of his/ her appointment. The liability of a director depends
upon the circumstances in which the director undertakes any action. In a case
wherein the court interpreted the meaning of an ‘officer in default’, the court
held that the process of determining the liability cannot be done mechanically
without applying mind to the facts of the case and the provision of the law[7].
The court has also held on various cases[8] that unless a complaint
discloses a prima facie case against the accused of their liability and
obligation as principal officers in the day to day affairs of the company as
directors, the accused cannot be prosecuted for the offences committed by the
company unless it can be proved that specific matters were brought to the
attention of such director.
In a case wherein the disbursement of the loan was
made without obtaining a sanction, the court had to determine whether a
director who has signed the balance sheet of the company can be said to have
knowledge with respect to disbursement of the loans and that the disbursement
was without sanction. The court opined that the aforesaid director was a practicing
advocate and solicitor and therefore, could only act as a non-executive
director. Therefore, the liability of a principal or active director cannot be
fixed on him.
Effect of Companies (Amendment) Act, 2019 on
Independent Directors
The Companies (Amendment) Act, 2019 (“Amendment Act”)
came into effect on July 31, 2019. It considered the changes brought to the Act
by the Companies (Amendment) Ordinance, 2018, the Companies (Amendment)
Ordinance, 2019 and the Companies (Amendment) Second Ordinance, 2019.
Section 212 has been amended by the Amendment Act. It deals
with the investigation into the affairs of the Company by serious fraud
investigation office. The Amendment Act provides that in case of an
investigation under this provision, any director, key managerial personnel,
other officer of the company or any other person or entity who has taken an
undue advantage, whether in form of any asset, property or cash or in any other
manner, the Central Government may file an application before the Tribunal or
appropriate orders with regard to disgorgement of such asset, property or cash
and also for holding such director, key managerial personnel, other officer or
any other person liable personally without any limitation of liability.
This insertion has broadened the scope of Section 212
and has attempted to include any person (including an independent director)
under the purview of this provision. 

[1]      Section
149(4) of the Act.
[2]      Rule
4 of The Companies (Appointment and Qualification of Directors) Rules, 2014.
[3]     Section
149(6) of the Act.
[4]     First
Proviso to Section 173(3).
[5]     Second
Proviso to Section 173(3).
[6]     Schedule
IV of the Act.
[7]      Atul
B. Munim v. Registrar of Companies & Ors, 2000(102(2))BomLR288
[8]      Homi
Phiroz Ranina & Ors. v. State of Maharashtra & Ors. 2003BomCR(Cri)793;
Rajendra Shah v. State of Maharashtra Writ Petition 1528 of 2016.

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