The recent advent of commercial reforms and economic growth witnessed in India tough impressive but have come with their own drawbacks. Amidst, the numerous corporate scams and frauds in India, the ubiquitous problem of corruption coupled with the increasing risk of internal fraud had raised many concerns leading to the seminal shift in the Indian corporate regime with the e nactment of the Companies Act of 2013. However, a Director’s liability is not just limited to his/her duties under the Companies Act of 2013. In this article we examine and provide an overview of the current legal landscape related to Director’s Liability under the various laws in India and understand how the risks to Director’s may be reduced.
“If the person committing an offence under this Act is a company, the company as well as every person in charge of, and responsible to, the company for the conduct of its business at the time of the commission of the offence shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub- section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.
Notwithstanding anything contained in sub- section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or that the commission of the offence is attributable to any neglect on the part of any director, manager, managing agent or any other officer of the company, such director, manager, managing agent or such other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.”
Under normal circumstances and in daily routine Labour Authorities always issue notices to Directors/Chairmen of the company for any violation of any provisions; similarly, the prosecution is almost always filed against the Directors/chairmen as the case may be as the forms filed before labour authorities
Contain the details of the Directors and nominated Managers. It’s a matter of dispute and subject of trial whether director/chairmen is directly taking care of day to day affairs and upto what extent he is involved in such kind of activities.
Contract Labour (Regulation and Abolition) Act, 1970: Director of the Company is liable for the offences committed under this Act. The penalty for contravening the provisions of this Act or Rules made thereunder is imprisonment of upto three months and or Rs. 1,000.
In case of offences by the Company, the company & every person in charge of/ responsible for conduct of business will be liable for punishment. The Director can however avoid the penalty if it is proved that the offense was committed without his/her knowledge or that he exercised due diligence to prevent such offence. Even though the complaint may be filed against the Director or other official of the company (like HR Manager), a petition u/s 482, CRPC can be moved before High Court to quash the criminal proceeding levying the penalty (upto 3 years and or fine).
The Chairmen or the Director of the company cannot be held guilty under CLRA if he is not responsible for day to day affairs of the company; only the person who has control and supervision over the affairs of company shall be liable.
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952: The employer in case of commercial establishment is defined as the person who has the ultimate control over the affairs of the establishment; and this authority can be entrusted to Managing Director, Manager.
In case of offence committed by the company, the similar provision as above mentioned (para A) is provided for and all persons responsible and in charge of the conduct of the business for the affairs of the company shall be liable. In case, the deduction has been made but the contribution has not been made, the Director can also be made liable under Indian Penal Code (u/s 409/ 409 for criminal breach of trust).
In Employees’ State Insurance Act, 1948, the “employer” is the person responsible for supervision and control of the establishment. In case of offences committed by the Companies, the similar provision as stated above is contained. In case, the contributions are not paid by the employer, the imprisonment of 3 years is provided.
Under the Shops & Establishment Acts as well, the “employer” means a person having charge of or owning or having ultimate control over the affairs of an establishment and includes members of the family of an employer, a manager, agent or other person acting in the general management or control of the establishment. As in other labour laws, the details of Manager and Directors are given in the Registration Form and any change in these details is to be intimated to the Labour Department.
As per the Maternity Benefits Act the “employer” means the person who, or the authority which, has the ultimate control over the affair of the establishment and where the said affairs are entrusted to any other person whether called a manager, managing director, managing agent, or by any other name, such person;
Under the Minimum Wages Act, the “employer’ is defined as any person responsible to the owner for the supervision and control of employees or for the payment of wages. The Forms also seek the information of the Director/ Manager who are responsible for the day to day affairs.
Supreme Court in SK Agarwal Case (1998) has considered whether the Director of a limited Company can be considered as the Principal Employer liable to pay contribution under ESI. It was a case of factory and the prosecution was launched under Indian Penal Code (criminal breach of trust). It said that where company has been described the owner of the factory, the Director cannot be said to be employer and the prosecution should have been launched in ESI Act. In another case, Supreme Court in the case of Employees’ State Insurance Corporation, Chandigarh v. Gurdial singh and Ors. (1991) held that the directors of a private limited company were not personally liable to pay contributions under the employees’ state Insurance Act, 1948. The Court while considering a case where a private limited company was the owner of the factory and the occupier of the factory had been dully named under the Factories Act, 1948, stated that the directors did not come within the definition of clause 1 of section 2(17) (Principal Employer) of the Employees’ State Insurance Act.
Further, the Supreme Court has also considered the liability of Director for the offence committed by the company. It said that the criminal liability could be fastened only on those person/persons who were in charge of and were responsible for the conduct of the business of such firm/company/other business establishment at the time relevant. The extent of liability of a director would depend on the nature of his directorship. For fastening the criminal liability, there is no presumption that every partner / Director knows about the transaction.
Supreme Court has said that “Merely being a director of a company is not sufficient to make the person liable. A director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business. The requirement is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. There is no deemed liability of a director. The managing director or joining managing director would be admittedly in charge of the company and responsible to the company for the conduct of its business.
In case where it is proved that Director is responsible for day to day affairs administration of the affairs of the business, the Director shall be liable. The Supreme Court has explained the meaning by observing that the term “person in charge” must mean that the person should be in overall control of the day to day business of the company or firm. The person should be a party to the policy being followed by a company and yet not be in-charge of the business of the company or may be in charge of but not in over-all-charge or may be in charge of only some part of business. (Katta Sujatha Vs. Fertilizers & Chemicals Travancore Ltd. And Another (2003))
The Courts have also held that under EPF Act & the ESI Act, the Directors can be prosecuted, but for prosecuting under Criminal Breach of Trust in the Indian Penal Code, the Directors cannot be deemed to be the employer (Satish Kumar Jhunjhunwala Vs. The State of West Bengal, Calcutta HC 2003).
Under Section 138, Directors can be issued Notices under NI Act. Though the Supreme Court in 2015 observed that there is no need to serve individual notices to the Directors. Only those Directors shall be held liable who are found to be in charge of the affairs of the Company or responsible for the affairs of the Company.
Insurance for Director’s Liability: Section 197 (13) provides that a Company may subscribe an Insurance Policy for defense for its Directors / Managing Director/ Chief Executive Officer/ Chief Financial Officer or Company Secretary. The Policy may indemnify the abovementioned officials against any liability in respect of any Negligence, Default, And Misfeasance, Breach of Duty or Breach of Trust for which they may be guilty in relation to the Company.
Usually the insurance premium should not be a part of such Officers’ remuneration; however, in such cases premium shall form a part of his/her remuneration. Any person or members of the Company may file a case or class action suit before National Company Law Tribunal (NCLT) against the Directors and the insurance shall help in bearing of the legal cost and damages passed against the Directors/ Company.
Director indemnification clauses may be carefully drafted, negotiated and added in shareholder and director agreements to cover the Director even after resignation.
It is clear that the Directors liability is covered quite comprehensively within the Indian Laws. Moreover, Courts (as demonstrated through recent orders have not shied away from stretching the bounds of such liability. In a recent case Chitra Sharma and Ors. vs. Union of India and Ors, the Supreme Court recently passed an order restraining Independent Directors, Promoters of Jaiprakash Associates and their family members from transferring any personal assets or property without the court’s permission until its real estate arm Jaypee Infratech deposits Rs 2,000 crore to protect the interest of hundreds of homebuyers who have invested in the firm’s incomplete residential projects. The Supreme Court further cautioned that any violation of its directive would hold them liable for criminal prosecution. Such an order sent shock waves through the independent directors’ fraternity, for it stretched the liability of independent directors by freezing their personal assets.
It is also the case that the authorities can issue notices to Directors to create pressure for compliance of the directions in the said notices. Though the authorities need to be tough on defaulters, however, such powers must be exercised with caution by the authorities. For example, naming of the Director in all offenses cannot be correct. As stated by the courts time and again, not every Director is liable. Moreover, the extent of their liability must also be assessed. In a recent case, the MCA initially removed allegedly tainted Directors from boards of all Companies. However, disqualified directors may get some relief with the disqualification being limited to only the defaulting companies vide a proposed clarification. Such clarification is yet to be made by the MCA.
It is imperative that all legal compliance is in place. In the event of any notice issued, must refer the respective stature under the notice has been issued before proceeding further. Ascertain the actual role / liability of the named director / s in the notice. It is possible that named director/s is not the actual person liable for day to day operations. The same may be highlighted to the authorities. Based on facts of each case, remedial action to be taken.
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