INTRODUCTION
The board of directors is the decision-making body of the company that makes the leading decisions for the well-being of the organization. Sometimes they might make biased decisions in the board meeting and to avoid those circumstances independent directors play an effective role in the decision-making due to the reason that they are not attached to the company. They are also the one who helps the company to improve its corporate credibility and standards. An independent director is also meant to be a non-executive director who is not attached to the organisation as the executive directors can make an independent decision in the board meetings. In India, the concept of independent directors was first recommended in 1999 by the Kumar Mangalam Birla committee, and followed by that the recommendations were also made by the Naresh Chandra committee and the Narayana Murthy committee in the year 2002 and 2003 respectively[1]. Then in year 2002 SEBI started a committee to assess the corporate governance practice and to suggest some improvements. Later, In the year 2008, SEBI amended clause 49 of the listing agreement.
SEBI is the one who has the resume of these independent directors who are being approached by the organisations due to the reason of binding to the laws. Apart from taking the big decisions during a board meeting, meetings some responsibilities for the independent directors being hired, and this addition of independent directors are been proved in the meeting with shareholders. Some of the roles that are being accomplished by the independent directors are as follows:
bringing a logical attitude to the company’s analysis of the management and board’s performance.
- Checking up on the accuracy of financial information and making sure that the systems of financial control and risk management can be defended.
- Ensuring the balance in the interest of the shareholders.
- keeping track of the performance report.
- Examining the management’s performance in achieving the set goals and objectives.
- facilitates opposing and fighting off owner pressure[2].
Even though the independent directors are not attached to the organisation there are some conducts which are to be followed by them. The ultimate goal of the board of directors and the board meetings is to ensure the growth of the organisation.
LEGAL FRAMEWORK AND REGULATION OF INDEPENDENT DIRECTORS
The Companies Act, of 1956 did not mention the definition of independent directors during its enforcement but then later as mentioned in the introduction about the recommendation by Kumar Mangalam Birla committee in 1999 and also other recommendations resulted in the amendment made by SEBI in listing agreement in the year 2008.
Clause 49 of the listing agreement[3] defines the definition of independent directors. It defines the independent directors as: The expression ‘independent director’ shall mean a non-executive director of the company: – which contains 7 subclauses along with this section.
Section 149(4) of The Companies Act, 2013 deals with the minimum number of independent directors should be present in a listed public company. It states that “Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies”[4].
Section 149(6) of the Companies Act, 2013[5] defines the term independent directors as “an independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director, and also it further defines it in the subclauses from (a) to (f).
Section 149(7) of the Companies Act, 2013 deals with the declaration of independent directors and it states that “Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6)”[6].
LIABILITY UNDER COMPANY LAW
Section 149(12) of the Companies Act, 2013 explains the legal liability of independent directors. It states “that Notwithstanding anything contained in this Act,—
(i) an independent director;
(ii) a non-executive director not being promoter or key managerial personnel,
shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently[7].”
This section about the liability of independent directors under the Companies Act, 2013 explains that until and unless the act is committed by the independent directors or the involvement of the independent director is not proven, they can’t be stated as a reason for the mismanagement and make them liable. If the prosecution proves that the omission or commission was acted with the knowledge of independent directors which has caused the fault in the management then the independent directors are held liable for the act committed by them.
The directors can also hold liable or not and that can be proven with the help of the presence of certain factors in an act. They are:
- any omission or commission acted by the independent director.
- Consent of the director in the committed act.
- The director was part of the failure act.
In the case of Chintalapati Srinivasa Raju v. Securities and Exchange Board of India, the Hon’ble Supreme Court ruled that independent or non-executive directors cannot be held accountable unless they play a significant role in the company’s decision-making process[8].
So, the action of the independent director made an eventuate result in the management, then they would be liable for the wrongdoing. But that doesn’t mean that the presence of the directors in the company was proved on the day of fraud or mismanagement occurred by someone in the course of their actions or decisions, then the director is not legally liable.
JUDICIAL INTERPRETATION
In the case of Somendra Khosla v State[9], the Delhi High Court agreed with the petitioner’s claim that the defendant in issue, who was an independent director, was in charge of the company’s daily operations. As a result, they didn’t want to drop the claim against the independent director. “The court relied on the Supreme Court decision”
In the case of Standard Chartered Bank v State of Maharashtra[10], the Supreme Court had authorized calling the company’s daily business-operating directors into court. The accused company’s chairman, managing director, executive director, full-time director, and authorized signatories were nonetheless parties to that litigation.
Similarly, In the case of Chitra Sharma and Ors v Union of India and Ors[11], the Supreme Court did not distinguish between the executive directors and independent directors of JIL when it issued orders regarding the protection of home buyers’ interests in projects introduced by Jaypree Infratech Limited, placing restrictions on them regarding leaving the country without the court’s permission and on the alienation of the directors’ and their families’ properties and assets.
In the case of Sunil Bharti Mittal vs. Central Bureau of Investigation & Ors.[12] the Hon’ble Supreme Court held that only where there is adequate proof of a director’s active involvement or when the statutory framework falls within the theory of vicarious responsibility may a director be held accountable.
Even though the Companies Act of 2013 contains provisions like S149(12) that shield independent directors and non-executive directors from potential liability, the effectiveness of such statutes depends greatly on how the court interprets the relevant facts and circumstances in each case.
CONCLUSION
The independent director may not be part of the company’s day-to-day activities or operations but they are one of the board members who are part of board meetings to make a biased decision. As they are not attached to the company doesn’t mean that they might not held liable for the mismanagement of the company. Through the observation of the precedents on the liability of independent directors, it can be concluded that section 149(12) made a clear explanation with the help of the expression in the sentences stated in the Companies Act, 2013. If the independent director has committed any of those factors that are being mentioned in clause 12 of section 149 under the Companies Act, 2013 then they are legally held liable. In case it has been proven that the director has not committed any of those factors in clause 12 then the directors cannot be stated as they are legally liable for the mismanagement or corporate fraud in the company.
Author(s) Name: Anbarasan E (Alliance University, Bangalore)
References:
[1] Shinoj Koshy, ‘THE RESPONSIBILITIES, REWARDS AND LIABILITIES OF INDEPENDENT DIRECTORS WILL BE TRANSFORMED BY THE NEW COMPANIES ACT’ (India Business Law Journal, January 2014) <https://www.nishithdesai.com/Content/document/pdf/ResearchArticles/New_directions.pdf>accessed 16 August 2023
[2] ‘ROLE OF INDEPENDENT DIRECTORS AND THEIR APPOINTMENT’ (Indian Law Offices) <https://www.indialawoffices.com/legal-articles/role-of-independent-directors-and-their-appointment>_accessed 7 August 2023
[3] Listing Agreement, c 49.
[4] Companies Act 2013, s 149(4)
[5] ibid
[6] ibid
[7] ibid
[8]Chintalapati Srinivasa Raju v. Securities and Exchange Board of India (2018) SC 2411
[9] Sh Somendra Khoslan Srinivasa Rao v. State and Ans (2019) 6 SCC 62
[10] Standard Chartered Bank v. State of Maharashtra and Ors. Etc. (2016) 6 SCC 62
[11] Chitra Sharma and Ors. v. Union of India and Ors. WP (C) 744/2017
[12] Sunil Bharti Mittal v. Central Bureau of Investigation SLP (Crl) 2961/2013
