Tuesday, March 25, 2014

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


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.


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

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