Independent Directors –

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How immune?

The Companies Act, 1956 makes it mandatory that the Board of Directors of a public company have 50%

representation by independent directors and the company is a listed company then 1/3rd of the total number of directors are required to be independent directors, this is also envisaged in Clause 49of the listing agreement. However, in practice few companies are able to meet this criteria not because of non-availability of responsible people to act as independent directors but more because people do not want to get implicated in all sorts of limitation, more particularly criminal litigation even though they are not involved in the day to day activities of the company, neither are they the officer-in-charge of the transaction for which they are being implicated.    

Companies Bill 2009 provides a broad disclosure regulations to improve corporate governance in the country. One notable provision of the said Bill also provides that company should inform the Registrar of Companies about the resignation of a director within 30 days from the date when the resignation accepted by the company so if further any issue regarding liability arises then court would be able to determine as to whether the retired director was in charged of the business at the relevant time.

Supreme Court and various High Courts have time & again laid down parameter must be fulfilled before imputing liability on the directors of the company .Provision that the independent director would only be liable if they are incharge and conduct day to day business in the new Companies Amendment Bill 2009 is a benevolent provision and if it become Act would smoothen the corporate governance in the company.

 

Board of Directors exercises the powers of the company & act on behalf of the company by virtue of section 291 of the Companies Act 1956.Civil & Criminal Liability for any commission or omission of a particular act. Section 5 of the Companies Act provide an exhaustive list of the Officers of the company which may be held liable for violation of provisions of Companies Act if the concern officer falls within the definition of Officer in Default. Section 5 defines the word 'Officer in default' under which various company personal are chronologically mentioned.

In addition to that Directors or Officers of the Company can be held responsible and liability can be imputed if the specific provision of the liability is given in particular statute i.e. Negotiable Instrument Act 1881, Customs Act, Payment of Bonus Act 1932, and Employee State Insurance Corporation Act, etc.

Section 5 of the Companies Act 1956, provides an exhaustive list of officers who are in default. In one of the landmark case of Ravinder Nrayan & Ors. Vs. Registrar of Companies 1994(81 ) CC 925 

Rajasthan High Court construed the interpretation of section 5 of the Companies Act that the definition of the 'officer in default' makes it clear that a director (s) of the company fall within the said definition if the company does not have any of the officers specified in clause (a) to (c ) i.e. Managing Director (s), the whole time director (s) and manager and held that the accusation made against the directors of the company is liable to be quashed since at the time of offence Mr. X was the managing director therefore directors would not fall within the definition of officer on default.

It has been seen in past cases that whether it relates to cheque bouncing, or relating to default in the product of the particular company in each and every case parties used to unnecessarily prosecute directors of the company along with the company.

Even though despite of catena of judgments magisterial courts in criminal cases are inclined to summon the Directors without looking into the merits of the case and it was observed in various case that the liability is imputed merely on the ground of being holder of an office in the company.

However there are some recent and past judgments of Supreme Court and Various High Courts which have laid down the certain criteria before imputing the liability on the directors of the company.

There has to be a prima facie case against the directors or officers of the company and it is the responsibility of the complainant that the allegation against the officers or directors of the company must be specifically pleaded and also set out that the concerned accused (officer of the company) was incharge of day to day and conduct of the business of the company, the above view was expressed in case of Homi Phiroz Ranina & Ors. Vs. State of Maharashtra 2003 (3) M.L.J.34.

It was seen in past cases that complainant used to make directors party to the litigation without specifying any clear averments as to how the director or officer is liable in a particular matter. Moreover, Magistrate were also not bothered to read the averments in the complaint and coerced officer or directors to appear before the court. This ambiguity is now settled and complainant required to make specific allegation that the particular director was responsible for the said offence.

It was held in case of Monaben Ketanbhai Shah & Anr. Vs. State of Gujarat 2004(7) SCC 15.

Supreme Court held that the primary responsibility is on the complainant to make necessary averments in the complainant so as to make accused vicarious liable. For fastening the criminal liability , there is no presumption that every partner knows about the transaction. The obligation of the appellant to prove that at the time of the offence was committed they were not incharge of and were not responsible to the firm for the conduct of the business of the firm would arise only when first the complainant makes a necessary averments in the complaint and establishes that fact. 

Another responsibility lies on the shoulders of the Magistrate that he must apply his mind on the facts and averments made against the directors or officers of the and then only summon the concern officers or directors of the company since summon in criminal matter is serious matter and criminal law can not be set into motion as a matter of course.The above view was uphold by the Supreme Court in the matter of M/s Pepsi Foods Ltd. Vs. Special Judicial Magistrate 1998 (5) SCC749.

It was also observed in case of Punjab National Bank Vs. Surendra Prasad Sinha AIR 1992 SC 1815 by the Supreme Court that there lies responsibility and duty on the magistracy to find whether the concerned accused should be legally responsible for the offence charged for only on satisfying that the law casts liability or creates offence against the juristic person or the persons impleaded, would process be issued. 

The new Companies Amendment Bill 2009 provides that independent director would protect against the civil and criminal liability if the independent directors are nor involve in the day `to day business of the company .This was held by the Supreme Court in case of K.K.Ahuja Vs.V.K.Vora & Anr. CDJ 2009 1340 that the liability arises from being incharge of and responsibility for the conduct of business of the company at the relevant time when the offence the offence was committed and not because on the basis of merely holding designation or office in a company"

Indian Penal Code do not recognize vicarious liability on the part of the person. For impute liability on the officers of the company only on the basis of legal fiction,specific averments in the complaint must be made and the officer can not be held liable only on the ground that he is holder of the office in the company. The above parameter was held by the Apex Court in case Keki Hormusji Gharda and Ors. V. Mehervan Rustom Irani & Anr. (2009)6 SCC 475 following the judgment of Pepsi Food Ltd. 

Board of Directors plays pivotal role in corporate governance of the company by make important policy decisions. However it has seen that directors unnecessarily involved in various criminal litigation in which they do not have any involvement. Consequently they waste valuable & important time in court litigation. which otherwise they would have used in the policy making of the company. Even independent directors are not completely immune from the vicarious liability of the company for the acts of which they haven't done. There are certain provisions in the new Companies Bill 2009 which immune Independent Directors from unnecessary litigation unless the directors are not involve in day to day business of the company.

Companies Act makes it mandatory that the board of directors of public limited company must have 50% representation of the independent directors if chairman of the board of director is executive and if chairman is non executive then board must comprise of 1/3rd independent directors of its total strength as per the Clause 49 of the Listing Agreement. However, in practice few companies fulfill this criteria because not  of dearth of independent director(s) but for the reason qualified independent directors do not want to be involved in unnecessary criminal litigation, that is they get implicated only by virtue of being a Director of the Company. 

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