ROLE OF INDEPENDENT DIRECTORS-LEGAL ANALYSIS

ROLE OF INDEPENDENT DIRECTORS-LEGAL ANALYSIS

This is a blog authored by Shashank Painuly, a student of B.A L.L.B (Hons.) Symbiosis Law School, Pune. 

The character of independent directors as compared to earlier times has increased many folds through latest statutes and especially through judicial activism. There exists a bonding of fiduciary nature between the independent directors and the company and thus, the independent directors may be liable for either civil liability or criminal liability or for both for commission or omission is done by them.

The character of Independent Directors on the Board of an organization went under examination by and by after the Satyam disaster where the Serious Fraud Investigation Office (SFIO) had documented seven cases of evidence against eleven ex-directors (inclusive of IDs) of Satyam. The arrest of the Independent Director of Nagarjuna Finance by the Andhra Pradesh administration in the claimed contribution of repayment of public depository aggravated the scenario. The disaster that took place in the Satyam case has aroused serious doubts about the roles and responsibilities of the Independent Director.

Talking of the Bhopal Tragedy case the ex-chairman of Union Carbide, Mr. Mahindra was sentenced to two years of imprisonment for the acts committed by his employees. All this has created a sense of serious trauma in the minds of the ID’s and in the recent times, nearly 400 ID’s have resigned from their position fearing the same will happen to them. Also, many have accepted the position of an ID just to tarnish the reputation of the Independent Directors.

If we take a look in the recent past cases, it can be logically analyzed that be it the cases of cheque bouncing or the case of a faulty product being sold in the markets, it’s always been the Independent Directors who had been held liable for the same. This has bought serious trouble in the company’s growth rate as no one is working in a peaceful environment because of the fear of being prosecuted. Numerous court judgments can be analyzed onto the regard that the Independent Directors have been summoned by the courts of justice and liabilities have been imposed upon them merely based on their being the member and holder of the office in the company.

In Srikanta Dutta Narasimharaja Wodiyar v. Enforcement Officer[1], Mysore the offenses were committed by the members of the company under Section 2, 14, 14(1A) and 14A of the Employees State Provident Fund and Miscellaneous Provisions Act, 1952. The main question that aroused, in this case, was whether the Directors of the company would be held liable for the failure of the contribution of the company as per the above Act of 1952. The said Directors were at that time not the managing body of the company nor were they in charge of the code of conduct of the company’s business at that time. In addition, to state that the Act was a welfare legislation to render gains to the employees of the company as per the requirements and it needed mandatory implementation otherwise violation of such a scheme would lead to prosecution. The justice courts held that the directors would be held liable for managing the affairs of the company in a proper and efficient manner as per section 14A and For 5-A.

There have been a numerous number of cases in the Indian judiciary where both courts including both High Courts and Supreme Courts have laid down certain guidelines before imposing any sort of liability on the directors of the company. Because of the sole reason that no separate statute have some specific rules or provisions on the liabilities of the independent directors of the company, they are treated under the same head as of the directors of the company and same punishment is attracted.  This issue has been dealt with up to some extent in the below-mentioned cases.

The Supreme Court has upheld in the case of M/S Pepsi Foods Ltd. & Anr. v. Special Judicial Magistrate & Ors[2], and observed that the magistrate should analyse the facts and the evidence in the most efficient manner and should apply its mind to all the facts and circumstances of the case before summoning the directors of the company against whom the allegations have been moved in the courts because in the criminal matters it is a serious case when summoning the top notch members of the company.

But in the case of Uttar Pradesh Pollution Control Board v. M/s Mohan Meaking Ltd. and Ors.[3] The Court observed that the Chairman or other officers of the company who either consented to or encouraged in the perpetration of an offense shall be held liable for punishment of offense and the Sessions Court was instructed to carry on with the case in accordance with law.

Till the recent times, the most comprehensive case on director’s liability is that of SMS Pharmaceuticals v. Neeta Bhalla[4]. It substantially deals with the legal tussle on the issue of director’s liability and the defences that are available to them in these kinds of situations. This case primarily dealt with the issue of dishonouring of cheque under Section 138 and 141 of the Negotiable Instruments Act, 1881. The essential requirement under Section 141 is that the person accused of the offense should be the officer in charge of the code of conduct of the business at the time the offense was committed. Merely because of the fact that person is a director does not make him liable for the act committed. Thus, in this case, the basic requirement was fulfilled under Section 141 and the directors were held liable.

In the case of Homi Phiroz Ranina & Ors. v. State of Maharashtra[5] the Mumbai High Court stated that “there has to be a prima facie case against the directors or officers of the company and it is the responsibility of the complainant that the allegation against the officer or directors must be specifically pleaded and also set out that the concerned accused was in charge of day to day and conduct to the business of the company.”

The Apex Court in the case of K.K Vohra v. V.K. Vohra & Anr.[6] observed that the liability will be imposed only on the basis of the time at which the director was the officer-in-charge of the code of business conduct of the company and not on the basis of the director being the holder of the designation in the company.

In Keki Hormusji Gharda and Ors. v. Mehervan Rustom Irani & Anr.[7]  the Supreme Court following the Pepsi Food Ltd. judgment held that in order to impute liability on the officers of the company only on the basis of legal fiction, specific averments in the complaint must be made and the officer cannot be held liable only on the ground that he is holder of the office in the company.

The Court while referring to the case of SMS Pharmaceuticals held in the case of Pepsico India that the ” it is well established that the complainant in his complaint against the Directors of the company has to indicate as to whether the Independent Director was responsible for the day-to-day affairs of the company or whether they were responsible for the conduct of the business of the company.”  Merely because the person is the Director of the company does not make him liable for the charges imputed against him, till some specific allegations against him show that he was the part of the management of the company. Thus in the present case, the appeal was admitted and the HC judgment was set aside.

 

 

  • The list of other cases that reiterate the same position are as follows:-
  • Girdhari Lal Gupta v. Assistant Collector of Customs
  • Kailashpati Kedia v. State of Maharashtra
  • TP Singh Kalra v. Star Wire India Limited

Thus, it can be deduced from the above case laws that the independent director cannot be held liable for the wrong being committed unless his role has been specified as the manager of the business affairs of the company. Hence there exists only one defense which can be reasonably used by the independent directors that the consequence of the acts that were committed was not in their knowledge or their consent was not taken and they acted with due diligence.

 

[1] 1993 AIR 1656, 1993 SCR (3) 508.

[2] MANU/SC/1090/1998.

[3] MANU/SC/0199/2000

[4] (2005) 8  SCC 89.

[5]  2003 Bom CR Cri, 2003 117 Com Cas 201 Bom.

[6]  MANU/SC/7125/2007.

[7] AIR 2009 SC 2594.

 

 

LEGAL ANALYSIS AND RECENT DEVELOPMENT- POST INSOLVENCY AND BANKRUPTCY CODE 2016

LEGAL ANALYSIS AND RECENT DEVELOPMENT- POST INSOLVENCY AND BANKRUPTCY CODE 2016

This is a blog authored by Mahak Paliwal, a student of B.B.A L.L.B (Hons.) Symbiosis Law School, Pune. 

The recent developments post coming into being of the Insolvency and Bankruptcy Code, 2016 stands comprehensive. The judicial pronouncements in light of the Insolvency and Bankruptcy Code, 2016 has locked up various interrogations which have hampered the development of the law so far.

The boundaries surrounding the concept of ‘operational creditor’ and ‘operational debt’ elaborated in the definition has been aptly dealt with by the tribunal wherein the term operational creditor has been interpreted the term “operational debt” in the light of section 5(20) of the code to mean debt that “may arise out of the provision of goods or services including dues on account of employment or a debt in respect of repayment of dues arising under any law for time being in force and payable to Centre or local authority.” The vagueness governing the limitation period or issue as to whether an application filed under the code can be time barred or not has been precisely dealt with by the tribunal in M/s. Deem Roll Tech Limited v. M/s. R.L. Steel & Energy Limited. [1] The tribunal resolved the issue in the light of both the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. It was held that Sec. 255 of the code has failed to amend and put bar on section 433 of the Companies Act which provides for applicability of the provisions under of the Limitation Act when a matter put forth before a tribunal or an appellant body. Accordingly, in absence of any such bar the petitioner application was declared as time barred in lieu of the Limitation Act. The Apex court while exercising its power under Article 142 of the Constitution of India Act, 1950 which provides enforcement of decrees and orders of Supreme Court allowed the applicant to withdraw his application post the initiation of insolvency proceedings and admission of his application by recording expressly the consent of the parties to the dispute and quashed the NCLAT inferences.[2]

NCLAT in para 35-40 laid down that only a representative who has been authorized to institute proceedings under the code is eligible to file an application under section 7 of the code. Mere confederation of the general authority of attorney does not entitle an individual to initiate proceedings by way of filing application under section 7 of the code.[3] Additionally, the notice under section 8 of the code ought to be sent by the operational creditor himself, neither his advocate nor attorney.[4]  Not only is the notice to be sent by concerned creditor himself but also, the prior notice under section 8 of the Insolvency and Bankruptcy Code, 2016 ought to be sent before institution of the interim resolution process. Further, while filing an application of insolvency under section 9 of the code it is mandatory to obtain a certificate which reveal the non payment of the operational debt. [5] The application under section 7,8,9 and 10 of the code should be refiled and admitted within the prescribed period of 7 days and the time period of fourteen days specified under them stands discretionary in essence.[6]

 

In the recent past, the court has comprehensively determined the wide scope of code by excluding the application of the Limitation Act and declaring it as a complete code in itself.[7] The National Company Law Appellant Tribunal has declared financial debt to include ‘ debentures’ accordingly, an amount which the debenture holder stands             deprived of constitutes a debt and appellant can be called “financial debtor” and respondent a “financial creditor.”[8] Where the higher court had not passed any order relating to winding up and the appointment of official liquidator stands outstanding, such pendency cannot act as a bar for instituting corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.[9]  The distinguished role of adjudicating authority while entertaining petition under section 7 as opposed to section 9 was dealt with by NCLT in the matter of State Bank of India, Colombo Vs. Western Refrigeration Pvt. Ltd.[10] The court held the following: First, while adjudicating upon matter within the purview of section 7; the authority ought to take into account the documents along with the contentions of both financial creditor and the corporate debtor. Second, the court is entitled to solely reject the argument contending absence of any defense for debtor under section 7. Lastly, the NCLT reaffirmed the applicability of principles of natural justice with respect to the matters pertaining to section 7 of the code.

 

References

[1] (C.A. No. (I.B.) 24/PB/2017.

[2] Lokhandwala Kataria v. Nisus Finance & Investment Manager LLP.

[3] Palogix Infrastructure Pvt. Ltd v. ICICI Bank Ltd.2017.

[4] Paharpur Cooling Towers v. Ankit Metal & Power (NCLAT

[5] Achenbach Buschhutten GmbH & Co. v. Arcotech ltd. (NCLAT)

[6] Surendra Trading Company v. J.K Jute Mills Company Ltd. (SC)

[7] Speculum Plast Pvt. Ltd V. PTC Techno Pvt Ltd. (NCLAT on 07.11.2017)

[8] Neelkanth Township And Construction V. Urban Infrastructure Trustee Ltd. (NCLAT)

[9] M/s Allocin Laboratories (India) Pvt. Ltd v. M/S Vasan Care Pvt ltd. (NCLT Chennai) @para4

[10] 7/7/NCLT/AHM/2017, delivered on 26.05.2017.