Liability of Independent Directors – An Important Aspect of Corporate Governance

MMB Admin

20 Aug 2022

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Neutrality and professional repute can give a board a new paradigm of thinking through an ‘independent director’. The Board of any company is primarily responsible for shaping the future of the company along with exhibiting diverse actions and perspectives which are in the best interest of the stakeholders of the company.

However, to balance larger interests of the company, many times, independent directors are inducted to provide objectivity to the issues discussed by the board and get an unbiased opinion on the same. The independent directors are certainly a part of the board but are completely disconnected from the daily affairs of the Company. This gives rise to the question of extent of the liability of independent director for collective actions of the board. It is important to note that courts have now distinguished “connivance” from consent that it does not require the parties to be of one-mind. In Chintalapati Srinivasa Raju Vs Securities and Exchange Board of India, the Apex Court recognised the role of independent directors, holding they are not responsible for the conduct of the business of the company. Therefore, there is a window for caveat in legal principal to make an independent director under the exemption from vicarious liability exist.

Further, the Supreme Court in Sunil Bharti Mittal Vs Central Bureau of Investigation had elucidated that the principle of alter ego can only be applied to make a company liable for acts of a person or a group of persons who exercise significant and pervasive control over the affairs of the company. It was further noted that directors of the company can be held responsible for the wrong done by the company only where there is sufficient evidence to prove an active role and a criminal intent or if the relevant statute has specifically imposed liability on them, such as labour and environmental law statutes. Vicarious liability cannot be imposed on any director in the absence of a legislative mandate. The Companies Act, 2013 clearly provides certain protective measures for independent directors which indicate that an independent director can only be held liable in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. The Court has quashed the criminal proceedings against the independent non-executive directors and has ordered an expedited trial against the rest of the executives.

According to the Companies Act, 2013, following are some of the important duties of independent directors:

1. undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
2. seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;
3. strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;
4. participate constructively and actively in the committees of the Board in which they are chairpersons or members;
5. strive to attend the general meetings of the company;
6. where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;
7. keep themselves well informed about the company and the external environment in which it operates;
8. not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
9. pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;
10. ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;
11. report concerns about unethical behaviour, actual or suspected fraud or violation of the company's code of conduct or ethics policy;
12. act within their authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
13. not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.

How Can MentorMyBoard help you?

MentorMyBoard is on a mission to set up effective and efficient Boards in India with great Board members. With an expert team of mentors, MentorMyBoard can organizations in the following manner:

a.      Help in identification of appropriate persons fit to be independent directors on their boards;

b.     Conduct personalized handholding and mentoring sessions to develop and nurture essential skillsets required to become an independent director;

c.      Conduct suitable training programs on practical aspects of the boardroom;