Rethinking the role, liability of independent directors

Neutrality and professional repute can give a board a new paradigm of thinking through an ‘independent director’. The Board of Directors is in a fiduciary position with respect to the company. The independent director is part of the board, but is disconnected with the daily affairs of the company. This gives rise to the question of extent of his/her liability for collective actions of the board. Courts have now distinguished “connivance” from consent that it does not require the parties to be of one-mind. Additionally, in Chintalapati Srinivasa Raju Vs Securities and Exchange Board of India , the Apex Court recognised the role of independent directors, holding they are not responsible for the conduct of the business of the company. Therefore, there is a window for caveat in legal principal to make an independent director under the exemption from vicarious liability exist.

‘Alter ego’

The Supreme Court in Sunil Bharti Mittal Vs Central Bureau of Investigation had elucidated that the principle of alter ego can only be applied to make a company liable for acts of a person or a group of persons who exercise significant and pervasive control over the affairs of the company. It was further noted that directors of the company can be held responsible for the wrong done by the company only where there is sufficient evidence to prove an active role and a criminal intent or if the relevant statute has specifically imposed liability on them, such as labour and environmental law statutes. Vicarious liability cannot be imposed on any director in the absence of a legislative mandate.

The Confederation of Indian Industry (CII) has recently submitted a paper to the Ministry of Corporate Affairs proposing an amendment to the Company Law to exempt independent directors from vicarious criminal liability for the offences committed by the company. The increasing liability was leading to resignations and flight of talented pool from the board. The suggestion coming forward is that the proceedings against independent directors may be initiated only when there is prima facie evidence of their possible involvement in the matter, rather than as a matter of course.

An independent director under the law can be held liable only for those acts of omission or commission that occurred with their knowledge, attributable through Board processes, and with their consent or connivance, or where the directors did not act diligently (section 149(12) of the Companies Act, 2013). The CII suggested that as a general principle, penalties ought to be limited to fines instead of imprisonment on independent directors.

Remuneration benefit

MCA notified recently under Section 32 & 40 of the Companies (Amendment) Act, 2020 that public companies can now remunerate their non-executive directors, including independent directors, even if they are in making losses or have inadequate profits. The Ministry has specified the maximum yearly remuneration that could be paid to them by such companies. The limits of remuneration have been defined in Schedule V.

(The author is an advocate and CEO of Indian Law Watch)

COMMENT NOW