Empowering independent directors

Nov 30 2013, 04:52 IST
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SummaryThe burden of proving the liability of independent directors in alleged offences has been shifted to the investigator in the Companies Act, 2013

The institution of independent directors is an integral part of good corporate governance. The Companies Act 2013 gives statutory recognition to independent directors by making it obligatory for all companies of a certain level to appoint them. Section 149 of the Act stipulates the requirements for a person to be named an independent director apart from his/her remuneration and tenure. Schedule IV of the Act contains the Code—a set of comprehensive guidelines—to be followed by them. Section 149 (12), on liabilities, makes a refreshing change by stipulating that an independent director ‘shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his/her knowledge, attributable through company board (board, hereafter) processes, and with his/her consent or connivance or where he/she had not acted diligently’. The key feature of this provision is that it is a direct statement on how liability can arise. The act of omission or commission should have occurred with his/her knowledge and consent or connivance or lack of diligence.

The legislative thinking in the past was different. Most laws enacted in the last 200 years have a section on ‘offences by companies’, as per which every person who was in charge , and was responsible to the company for the conduct of its business, shall be deemed guilty of the offence, and shall be liable to be proceeded against and punished. To avoid liability, such person has to prove that the offence was committed without his/her knowledge or that he/she exercised all due diligence to prevent the commission of such offence. Further, where an offence has been committed by a company and it is proved that it has been committed with the consent or connivance of, or is attributable to any gross negligence on the part of any director or officer of the company, that person shall also be deemed to be guilty. Section 24 of the Securities Contracts (Regulation) Act, Section 278B of the Income Tax Act, Section 140 of the Customs Act, Section 16 of the Environment (Protection) Act, Section 70 of the Prevention of Money Laundering Act, Section 39 of the Foreign Contribution Regulation Act and Section 32 of the Industrial Disputes Act are all on these lines.

There is a world of difference between the concept of liability of independent directors in the earlier Acts and that in the Companies Act 2013. Plainly, the old

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