Company Law | Increased liability is driving away independent directors

Even though the positions for independent directors continue to remain open, not many are willing to take up the role. (Representative Image)

Independent directors are thought to lend a disinterested point of view to discussions at the board. Given they have nothing to gain or lose, their participation in board discussions provides a fresh perspective. At least, that is the desired objective.

However, positions for independent directors in India continue to remain open. Not many are willing to take up these positions. Even those who did participate, ultimately resigned in spades owing to increased liability.

Over a year ago, the Confederation of Indian Industry (CII) submitted a paper to the government proposing amendments to the company law to exempt independent directors from vicarious criminal liability for offences committed by the company. The suggestion was that proceedings against independent directors should not be as a matter of “general course”, but only when evidence was found against them.

In a recent study conducted by the Confederation of Indian Industry and Proviti, it was concluded that a majority of the independent directors stated that they felt that the current safeguard mechanisms in place are inadequate, especially when dealing with reputational damage and unfair prosecution. An alarming 81 percent of the directors who participated in the study cited their dissatisfaction with the current framework. While the government has made an attempt to enrol more independent directors, and even gave extensions for them to register with the online portal of the government, various issues remain.

Some of these issues were recently discussed by the Bombay High Court, in the case of Satvinder Jeet Singh Sodhi vs. State of Maharashtra.

In this case, the Bombay High Court stated that independent or non-executive directors are not liable for the actions of the company, specifically when such actions relate to the day-to-day functioning of the company, of which such independent directors are not a part of. The independent directors of the company had to file an application to excuse themselves from being prosecuted in a case where the company had dishonoured a cheque. Given they were independent directors, and were in no way involved in the day-to-day activities of the company, they were considered to be not liable.

The Companies Act, 2013 states that an independent or non-executive director can only be held liable when the acts in question are directly linked to any of the following: (i) omission or commission occurring with knowledge of director; (ii) act with the consent or connivance of director; and (iii) the director specifically failed to act diligently.

So, what is driving independent directors away? While the judiciary has tried to interpret the law in favour of the independent directors, given that they are only involved in an advisory capacity rather than in a regular administrative capacity, reforms in practical legal application are still needed.

Even today, in the event of a default by a company, notices are sent to all directors of the relevant entity, without taking into account whether they are executive, non-executive, or independent. There is no fact-finding exercise. They are all presumed guilty, and proceeded against as a matter of general course. Often times, we have come across directors who have resigned from the board being sent notices. This usually happens when the entity from which the director has resigned has failed to file the relevant form for resignation with the ROC. Unfortunately, the directors are left unprotected, and open themselves up to prosecution. Legal proceedings are challenging financially, and mentally for all individuals.

The increase in liability and the number of prosecutions being undertaken against independent directors which includes both civil penalties such as fines and criminal penalties such as imprisonment has left most individuals running scared. Unless the practical application of what the law already contemplates, is implemented in spirit, there will be very few takers for independent director positions.

Vijay Kumar Chawla is Associate, and Pritha Jha is Partner, Pioneer Legal. Views are personal, and do not represent the stand of this publication.