The Indian government
has decided to replace almost six decades old company law governing the
companies in India, i.e., the Companies Act, 1956 ("CA1956")
by new law, viz., the Companies Act, 2012 ("CA2012"). The
CA2012 has already been passed in line with company law of the developed
countries in view of the global economy and changed social-economic
environment. This article has made an attempt to analyse and compare the
duties/liabilities of the directors of Indian Companies and indemnity to the
directors by companies under the CA1956 and the CA2012 and emphasis on the role
and responsibility of the director for his adherence on related compliances.
2. DUTIES/LIABILITY OF
DIRECTORS, AND INDEMNIFICATION BY COMPANIES, UNDER THE CA1956
2.1. The CA1956 has not
codified the law relating to duties of directors but in all cases all directors
must ensure compliance with the provisions of the CA1956 and other applicable
laws. Further, under the CA1956 the directors of Indian companies are subject
to common law duties. Thus, a director has fiduciary duty towards the
company.
2.2. As per s.5 of the
CA1956, for violation of the provisions of the CA1956 the managing director/
whole time director (director who is in whole time employment of the company) /
manager (who is so appointment in accordance with the provisions of the CA1956)
and the company secretary, if any, are responsible in first instance. In the
absence of aforesaid categories of officers, prosecutions should be against all
other directors of the company unless the directors have authorised any other
person to make compliance with that provisions of the CA1956 and such person
has accepted any such authorisation. The Master Circular No. 1/2011 dated 29
July 2011 of the Ministry of Corporate Affairs, Government of India ("MCA")
consolidating the provisions relating to prosecution of directors under the
CA1956 has clarified that Registrar of Companies should take extra care in
examining the cases where following directors are also identified as 'officer
who is in default' under s.5 of the CA1956:
- For listed companies
(companies of which shares are listed at Indian stock exchange), Securities and
Exchange Board of India requires nomination of certain Directors designated as
Independent Directors.
- For public sector
undertakings, respective Government nominates directors on behalf of the
respective Government.
- Various public sector
financial institutions, financial institutions and banks having participation in
equity of a company also nominate directors to the board of such companies.
- Directors nominated by
the Government under s.408 of the CA1956.2.3. It is pertinent to note that
s.201 of the CA1956 restricts a company to indemnify its directors.
According to s.201 of the CA1956 a company can indemnify its directors of any
liability incurred by him in defending civil or criminal proceedings only
if he is acquitted or discharged. Except as aforesaid, s.201
of the CA1956 renders void all the provisions in the company's constitution or
in any agreement indemnifying a director against any liability that would
attach to him in respect of any breach of duty or trust or negligence. It
is noted that if premium of D&O policy to protect the directors is paid by
a company, then also directors will be covered by s.201 of the CA1956 and may
not be entitled to benefit of D&O policy.
- The MCA has also
directed the Registrar of Companies that none of the above directors shall be
held liable for any act of omission or commission by the company or by any
officer of the company which constitute a breach or violation of any provision
of the CA1956 which occurred without his knowledge attributable through board
process and without his consent or connivance or where he has acted diligently
in the board process. The MCA did however not say that such directors
should not be prosecuted at all and rightly so. Consequently, all the
directors of a company may be liable for any violation of CA1956 unless they
prove that they acted diligently and violation took place without their consent
/ knowledge / connivance.
3. DUTIES/LIABILITY OF
DIRECTORS, AND INDEMNIFICATION BY COMPANIES, UNDER THE CA2012
3.1. The CA2012 has like
other modern laws codified the duties of the director of Indian companies. The
proposed s.166 of the CA2012 mention the duties of the director as under:
- A director shall act in
accordance its constitution document, i.e., articles of association.
- A director shall act in
good faith in order to promote the objects of the company for the benefit of
its members as a whole, and in the best interests of the company, its
employees, the shareholders, the community and for the protection of
environment.
- A director shall
exercise his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment.
- A director shall not
involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.
- A director shall not
achieve or attempt to achieve any undue gain or advantage either to himself or
to his relatives, partners, or associates and if such director is found guilty
of making any undue gain, he shall be liable to pay an amount equal to that
gain to the company.3.3. The CA2012 has no provision corresponding to s.201 of
the CA1956 meaning thereby that there is no restriction on the companies to
indemnity its directors under the CA2012. The only reference to the provisions
of indemnity to directors is given in s.197 of the CA2012 stating that the
premium paid on insurance policy shall be treated as part of the remuneration
of the officers only if such officer is found guilty.
3.2. The CA2012 has
widened the definition of the 'officer who is in default' to include key
managerial personnel (chief executive officer and chief financial officer) and
shadow directors. Interestingly, the CA2012 has proposed that every Indian
company must have at least one director who stayed in India for a total period
of not less than 182 days in the previous calendar year. Notably, the CA1956
has no such provision and this proposed change will require the resident Indian
director to be more careful as he will be first one to be caught in case of
violation by an Indian company.
3.3 The CA2012 has no
provision corresponding to s.201 of the CA1956 meaning thereby that there is no
restriction on the companies to indemnity its directors under the CA2012. The
only reference to the provisions of indemnity to directors is given in s.197 of
the CA2012 stating that the premium paid on insurance policy shall be treated
as part of the remuneration of the officers only if such officer is found
guilty.
4. COMPARISON BETWEEN
OLD AND PROPOSED NEW LAW RELATING TO DIRECTORS
4.1. It is noted that
the CA2012 has deleted the phrase "or any other Act" existing in
first proviso to s.291 of the CA1956 dealing with the powers of the board in
corresponding new s.179 of the CA2012. According to a ruling of the Indian apex
court, the existence of the aforesaid phrase in the CA1956 required the board
of director to comply with other applicable laws while they exercise any power
on behalf of the company. Though it is unclear whether the board of directors
is liable to comply with other applicable laws but the deletion of above phrase
makes it clear that the directors cannot be prosecuted under the CA20012 for
non-compliance with the provisions of any law other than the CA2012. It would
be an irony that the company law that gives the board authority to exercise the
power on behalf of a company does not requires the board to comply with the
provisions of other applicable laws while they exercise such a power on behalf
of a company.
4.2. Though the CA2012
has however widened the definition of the 'officer who is in default' to
include key managerial personnel (chief executive officer and chief financial
officer) and shadow directors, but unlike old definition in the CA1956 that
includes 'all the following officers', the new definition says 'any of the
following officers' and thus apparently absolving the liability of other
officers of the Company.
4.3. It is noted that
despite increasing instances of frauds and violation by the companies, the
CA2012 has radically changed the provisions of indemnity to directors by the
companies as now there is no restriction on companies to indemnify its
directors. This change will perhaps make the CA2012 the only law in the world
not restricting the company to indemnify its directors.
5. LIABILITY OF
DIRECTORS OF PRIVATE COMPANIES UNDER THE INCOME TAX ACT, 1961
While discussing the
liabilities of the directors under Indian laws, the provisions of s.179 of the
Income Tax Act, 1961 ("ITA1961") are also noticeable. S.179 of
the ITA1961 is applicable only to private companies. The liability of the
directors of a private company for the payment of tax due from the company is
made joint and several if tax cannot be recovered from the company. This
section however enables a director to establish that the non-recovery of tax is
not attributable to any gross neglect, misfeasance or breach of duty on his
part in relation to the affairs of a company to avoid such a liability. The
burden to establish this rests on the director concerned and only if the burden
is discharged that director can be exempted from the tax liability of a company
imposed on him by s.179 of the ITA1961.
6. CONCLUDING
REMARK: The high-level objectives of the new Companies Act
(as per a DTI presentation to Cabinet, dated 31 January 2007) were to:
- Reduce regulatory burden for small and medium-sized firms
(mostly owner-managed, privately owned)
- Enhance protection of investors through enhanced governance
and accountability (esp. public interest companies), minority protection and
shareholder recourse
- Create a more flexible environment, without comprising regulatory
standards and objectives, to enhance investment.
The effect of the
corporate law reform is clearly that the regulator now regulates with a much
lighter touch, and that companies and directors need to bear responsibility for
their actions. As a consequence, this new regulatory regime allows companies to
take and implement is own decisions much easier and quicker, without having to
wait for approval or a go-ahead by the CIPC. In most instances, mere ‘filing’
and ‘delivery’ will suffice to ensure compliance with the Act. Where documents
are rejected by the CIPC, it does not invalidate the particular company action
– it merely implies that the company needs to improve its administrative game.
Of course the new approach also points to the need for directors to carefully
consider their decisions and actions, and to take into account the wider
context and impact of such decisions. The Act clearly made it easier for
companies to conduct business and has upped the ante for directors.
The
content of this article is intended to provide a general guide to the subject
matter. Specialist advice should be sought about your specific circumstances.
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