Column: Raising the bar for directors’ conduct

Sep 06 2013, 05:11 IST
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SummaryThe new Companies Act will need directors to reorient themselves to vastly enhanced governance standards

In the current turbulent times, corporates take many difficult decisions some of which come back to haunt them and directors are the one category of persons who while holding the greatest responsibility in guiding the affairs of companies also have to bear the cross of being held accountable for misdeeds of companies. This article seeks to discuss a few aspects relating to directors’ conduct and liability as it would unfold in the coming months.

Directors are, in a limited sense, in the role of trustees who owe a fiduciary duty to the company where they serve. Directors, therefore, are liable for breach of trust if, for example, they are held to have misapplied funds of the company or have knowingly breached or caused a breach of a law applicable to the company. Currently, the concept of “officer who is in default” seeks to fasten liability for breaches of company law provisions which could lead to imposition of fine, imprisonment, or both depending on the nature of the breach involved. This concept applies to managing directors/executive directors and other persons who by being responsible for the affairs of the company are also held accountable for breaches by it. In companies where there is no managing/executive director, all other directors could come under the purview of this provision. Even under other legislations, e.g. under the Income Tax Act, the liability for non-compliance by a company could fasten on the managing director or other director(s) involved in the affairs of the company. The Factories Act also seeks to make the “occupier”, being a director responsible for the affairs of a factory, and by consequence also the key official, responsible to authorities for defaults or non-compliances. In listed companies, the onus of ensuring compliance with various listing requirements is the responsibility of the board of directors, the audit committee and the MD/CEO. Even under criminal law where charges are filed for alleged criminal acts against the company and its directors, besides the requirement of mens rea, the fact, whether or not a director was directly in charge of the affairs of the relevant division /matter, would be the critical ingredient in establishing the liability of a director so charged.

There have been several instances in the recent past where directors have been the subject matter of prosecution due to various breaches by companies. Even though only a managing/executive director would be actually involved

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