Guest Post: Directorship in a Company: Cap of Thorns

[The following
post is contributed by Nidhi Bothra
and Abhirup Ghosh at Vinod Kothari
& Co. They can be contacted at nidhi@vinodkothari.com
and abhirup@vinodkothari.com
respectively]
The Companies Act, 2013 (CA, 2013) brings
about a sea change in the way the charter guiding corporate India will look
like. The existing Act of 1956 has been the guiding force for nearly 60 years
now but the overhaul was felt necessary with the changing times. In the urge to
update the laws with the changing times the new Act brings a lot of
responsibility on the directors to act with greater wisdom and prudence and to
ensure that they act in the best interest of the companies than merely being
status heads sitting on the board. For instance, independent directors now need
to be aware of the decisions taken by the company in the meetings in which they
attend and those which they do not attend as well.
With this greater responsibility instilled on
the directors comes greater accountability and liability as well. CA, 2013 is
filled with such stringent penal provisions which did not feature in the
earlier Act. While from the view of protecting the interest of the stakeholders
tighter vigilance is welcomed but from the provisions of CA, 2013 it seems it
shall be more of a burden for directors to hold office. The article weighs the
onus of holding office and the far reaching implications on the directors.
Defaulter
by keeping silent
Directors are the ones who are responsible
for carrying out the business and management of the company. So this is an
implied rule that the directors should act to the best interest of the company
and its stakeholders and carry out their duties diligently. It is a very common
thing under various Indian laws to hold the directors liable for the defaults
on the part of the company as they are ones who are responsible for such
default. It was a commonality to see the definition of “officers in default”
under section 5 of the 1956 Act to include directors of the company chargeable
for offences for non-compliance with the provisions of the Act. Similarly, CA,
2013 also has the definition of “officers in default” under section 2(60) which
now includes such directors who become aware of the contraventions by default
by receiving the proceedings of the meetings or where attending the meeting
have not objected to the connivance or contravention was taking place. The
relevant extract of the section is as below –
“officer who is in default”, for the purpose of any
provision in this Act which enacts that an officer of the company who is in
default shall be liable to any penalty or punishment by way of imprisonment,
fine or otherwise, means any of the following officers of a company, namely:—
(vi) every director, in respect of a contravention of
any of the provisions of this Act, who is aware of such contravention by virtue
of the receipt by him of any proceedings of the Board or participation in such
proceedings without objecting to the same, or where such contravention had
taken place with his consent or connivance
XXX
This means that the director is not only in
default if s/he was party to the contravention by attending the meeting but
also in default where s/he receives the proceedings to the minutes of the meetings
and does not object to such a contravention. Also the director now needs to
ensure that is objection to any decision is recorded in the minutes
appropriately.
Duties
of Directors
The duties of the directors of a company
have been implicitly known to be working in the best interest of the Company
and ultimately for the stakeholders of the company. For the first time CA, 2013
spells out the duties of the directors in section 166 of the CA, 2013 and the
duties include a) acting in good faith to promote the objects of the company,
b)  exercise duties with diligence and
independence, c) not involve in a situation where there would be conflict of
interest with the company, d) not attempt to attain undue gain or advantage either
personally or to affiliates, e) not assign office and such other duties that
the articles may prescribe.
Contravention to compliance of the section
attracts fine of minimum Rs. 1 lac and may extend upto Rs. 5 lacs. The duties
of the director were never before laid down in the statute and the need for
defining the role by the statute is least understood. So the onus is on the
director to prove by conduct and intent that the duties are being fulfilled at
all the times.
Compliance
burden
The filing requirements under u/s 117 of
the CA, 2013 provide for filing of certain resolutions passed by way of board
resolutions (reference to section 179 (3) of the CA, 2013). Section 179(3)
along with the draft rules lists down some 22 new items for filing and includes
approval of quarterly statements, appointment of key managerial personnel (KMP)
and senior management, one level below the KMP. The compliance burden is
increased manifold and it seems that the proceedings of the board do not remain
private anymore and will be available for public viewing. The compliance burden
is much felt when such administrative filing requirements attract fines on the
company and each office in default of the company. There is a fine between Rs.
1 lac to Rs 5 lac on every officer in default of the company for non-compliance
of the filing requirements.
Further, section 134 (5) of CA, 2013 with
regard to Board’s Report and furnishing of Directors’ Responsibility Statement
(DRS) requires the directors to state that the directors have devised proper systems to ensure compliance
with the provisions of all applicable laws and that such systems were adequate
and operating effectively
. Non-compliance with the provisions of the
section attracts imprisonment for a term of three years or fine of not less
than Rs. 50,000 and may extend upto Rs. 25 lacs or both. This would mean that
the directors while making such a statement in the DRS will have to ensure that
there are adequate systems in the company for ensuring compliance with the
provisions of all applicable laws. So the new Act in essence puts tremendous
compliance burden on the directors of the company.
This is not all, there are several other
issues in the CA, 2013 which attracts penalty of Rupees One Lakh or more like –
if a company fails to deliver the memorandum of association or articles of
association or any other such agreement as requested by the member within 7
days of such request, then the officer in default shall be punishable with a
penalty of rupees one thousand per day of default or rupees one lakh, whichever
is lower. Again if the company fails to intimate timely to the members or
debenture-holders or holders of any other securities regarding the closure of
the register then the officers in default are subject to a penalty of rupees
five thousand per day of default whish shall be subject to rupees one lakh. Even
the silliest of mistakes like failure to give notice of board meeting to the
other directors or failure to appoint the key managerial personnel of the
company in accordance with the provisions of Section 203 or failure to annex
the secretarial audit report with the board’s report would also lead to similar
punishment as above.
We find it very illogical to impose a
penalty of rupees one lakh for a failure to deliver the copy of a document
requested by the member timely. There are several other provisions which
provide for similar kind of penalties and the list is seemingly long.
Routine
issues causes civil and criminal liabilities
While most of the sections of CA, 2013
provide for monetary penalties, certain offences attract fines and
imprisonment. On an average the minimum amount of fine that is imposed under
certain sections is Rupees twenty five thousand while the maximum amount goes
extends up to rupees twenty crores or may be more in certain cases. Most
offences leading to imprisonment under CA, 2013 are non-cognizable in nature,
i.e. it would need a warrant to arrest, but serious offences like those
mentioned under section 212(6) of the Act are cognizable in nature and would
not require a warrant to arrest, some of such offences have been mentioned below:
i.         Furnishing of any false or incorrect
particulars of any information or suppresses any material information in any of
the documents filed with the Registrar in relation to the registration of a
company (Section 7(6));
ii.         Including in the prospectus any statement
which is untrue or misleading in form or context in which it is included or
where any inclusion or omission of any matter is likely to mislead (Section 34);
iii.       Fraudulently inducing persons to invest
any money (Section 36);
iv.        The company makes an offer or accepts
money in contravention of the provisions regarding offer or invitation for
subscription of securities on private placement basis (Section 42(10)).
v.        Where the business of the company has
been conducted for a fraudulent or unlawful purpose (Second Proviso to Section
206(4); Proviso to Section 213);
Apart from such issues, the directors are
also under the burden of ensuring that the debentures are redeemed timely under
section 71 (11) of CA, 2013 else may have to suffer imprisonment for 3 years
apart from fine. Of course needless to add that this imprisonment is apart from
the disqualification they may suffer from being directors in a company u/s 164
of CA, 2013.
Further u/s 74 of CA, 2013 where a company
does not repay deposits accepted before the commencement of CA, 2013 within the
threshold limit as prescribed for under the section, then u/s 75 of CA, 2013 and it is proved that the deposits were
accepted to defraud the depositors then every officer of the company who was
responsible for acceptance of such deposits 
shall be personally liable under section 447 of CA, 2013 for fraud, without
any limitation of liability, for all the damages and losses that the depositors
may have incurred
.
As is already known section 447 of CA, 2013
is a cognizable and non-bailable section and the onus of proving that the
intent of the company was not to defraud the depositors will be on the company
and its officers. Interestingly the section calls for repayment of deposits
accepted before the commencement of this Act and requires every office of the
company who was responsible for accepting deposit to refund the same, one may
believe that even such directors who are not on the board of the company after
commencement of the Act yet were responsible for accepting deposits will be
included in this section.
While the CA, 2013 mostly lays down
criminal liabilities on the directors, only section 245(1)(g) of the Act
provides for civil liabilities whereby the members or depositors filing class
action suits may claim compensation from the directors for any fraudulent or
unlawful act done on their part.
Conclusion
Considering the quantum of penalty imposed
by the ministry even for the silliest of mistakes, the directors need to carry
out their duties diligently and the make sure that their act’s are in the best
interest of the stakeholders. They cannot afford to be careless any more, if
they do they will simply have to shell money out of their pockets and if they
act a bit too carelessly, they might even find themselves behind bars.

– Nidhi Bothra &
Abhirup Ghosh

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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