In the wake of recent corporate scams and initiation of legal proceedings against several company directors including independent director, it becomes very important for the directors to understand their duties and liabilities as a directors in Indian corporate regulatory environment.
It is very important to understand that, a person is appointed as a director under the Companies Act, however, his / her liabilities as a director are not just limited to the offences committed under the Companies Act but he is also liable for the offences committed under the various other statutes like the Negotiable Instruments Act, 1881, Labour Laws, GST Act, Income-tax Act etc.
Section 166 of the Companies Act, 2013, mentions about the fiduciary duties of the directors which inter-alia includes that the director shall exercise his duties with due and reasonable care, skill and diligence and should not attempt to achieve or attempt to achieve any undue advantage either to himself or to any of his relative. If the director takes the undue advantage, then, it shall be held liable to pay an amount equal to that gain to the company and he shall be liable to pay fine which may extend to Rs. 5,00,000/-.
Liability of Director under the Companies Act, 2013
Statutory Liabilities
This kind of liabilities are statutory in nature like any governmental authority can initiate legal proceedings against directors or company. For e.g: Non filing of statutory documents, RoC can impose penalty on directors and company. This kind of liabilities are specifically set forth in the Companies Act, 2013. These could either be a civil liability requiring directors to make payments of fine / penalty or criminal liability resulting in fines or imprisonment. Criminal liability arise in case of fraud. As per Section 447 of the Companies Act, 2013, fraud means as any act or abuse of position committed with an intent to deceive, to gain undue advantage from, or to injure the interests of a person, company, shareholders or creditors whether or not there is wrongful gain or loss then the person shall be liable for imprisonment upto 10 years.
Non-statutory Liabilities
The kind of liabilities could arise from claims made against the directors either by the company or the shareholders for breach of directors’ duties. Section 245 of the Companies Act, 2013 allows a group of shareholders constituting a minimum of 100 shareholders or those holding 10% shares in the company to bring an action on behalf of all affected parties, which includes claims for compensation from directors for any fraudulent, unlawful or wrongful act or omission or misconduct on their part which are commonly called as “Class action suit”.
Vicarious Liability of the Company and Directors
Generally, a person is liable for his own wrongful acts or omissions. However, in Vicarious Liability, person is responsible for the acts or omissions of another person. The concept of vicarious liability have been evolving since the evolution of law of torts starting from the liability of the employers for the tort committed by its employee subject to the act done within the course of his employment.
Vicarious Liability for Indian Companies (Corporate Criminal Liability)
Corporate criminal liability can be defined as a crime which has been committed by individual or association of individuals who for pursuing a common purpose or make business gain in course of their occupation commit such acts or omission which is forbidden by law and with guilty mind where it is for the benefit of the corporation or any individual out of the association of individuals.
Way forward
Directors and officers can mitigate the risk of personal liabilities through various safeguards like they may insist on the indemnification clause in the shareholders agreement or employment agreement. This will help the directors and KMPs to safeguard themselves in case of any claim arising from any third party due to their bonafide actions in the company.
They can insist
the company to obtain the Directors and Officers Liability Insurance in the
company to hedge against any pecuniary liability arising on the directors and
liability
of the company. Further, while taking part of the board meeting, directors must
dissent to any activity or business which they feels violative and they should
keep in mind that his dissent must be recorded in the minutes also.