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COMPREHENSIVE NOTE: LIABILITIES OF THE DIRECTORS- A CRITICAL APPRAISAL ALONG WITH RELEVANT CASES IN INDIA BY: SRISHTI VARMA
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COMPREHENSIVE NOTE:
LIABILITIES OF THE DIRECTORS-
A CRITICAL APPRAISAL ALONG WITH RELEVANT
CASES IN INDIA
AUTHORED BY: SRISHTI VARMA
CONTACT NUMBER: +91 90736 41819
COLLEGE: SYMBIOSIS LAW SCHOOL, PUNE
YEAR & BATCH: 4th YEAR, 2020-2025
COURSE: BA LL.B. (Hons.)
ABSTRACT
Directors
of corporations in India are subject to a number of legal duties and
responsibilities that, if neglected, might expose them to liability. The
obligations of directors in India are governed by the Companies Act, 2013, as
well as other legislations. Liabilities may be a result of behaviors including
carelessness, fraud, breach of fiduciary responsibility, poor management, and
breaking numerous rules and regulations.
In India,
directors may be held accountable for the company's debts under certain
conditions, such as if they committed fraud or behaved carelessly. They could
also be held accountable for any losses the business incurs as a result of their
behavior or inactivity. For a variety of infractions, including making false
representations in accounting records, market manipulation, or money
laundering, directors may also be subject to criminal prosecution.
In the
following research paper, the author will talk about all the liabilities faced
by the directors of a company and answer how does SEBI enforce its role of
enforcing the liabilities on directors. Another question that will be answered
will be about the role of corporate governance in ensuring that the liabilities
are fulfilled.
KEYWORDS: Company,
Directors, Liability, Corporate Governance, Obligations, Duties.
RESEARCH
QUESTIONS
1.
What part does corporate governance play in ensuring
that directors of Indian companies uphold their obligations?
2.
How is the Securities and Exchange Board of India
(SEBI) tasked with overseeing and upholding the responsibilities of directors
in publicly traded corporations?
LITERATURE REVIEW
The
following research papers discuss the topic thoroughly and present the various
views of the authors:
-
This research paper[1]
written by M. Ramachandran and Arya R about a comparison between
the duties of directors’ duties in the 2013 Act and 1956 Act and said that the
Companies Act of 1956, India's prior corporate legislation, was abhorrently
inadequate in this area. The new Companies Act of 2013 may be seen as providing
a noteworthy example of legislation that clearly and correctly clarifies,
reexamines, and broadens the scope of the chiefs' responsibilities.
-
Daya Shankar Tiwari[2], in their
research paper about the Criminal Liability of Directors stated that the brains
of a firm are often seen as the directors. The director is responsible for
managing, directing, and controlling the company's activities. Since directors
cannot operate outside of their authority, it is vital to restrict their powers
and duties. By this paper, the author hopes to highlight the director's
accountability for any wrongs done while performing his or her duties. The
author also went through important sections of corporate law that
deal with directors' criminal culpability.
-
This research paper drafted by M. Vignesh and M.
Kannappan talks about the various duties and liabilities that are imposed
on anyone that becomes the Director of a Company in India.
CRITICAL ANALYSIS
The
directors of companies in India are subject to a variety of responsibilities
that fall into two primary classifications: Civil Liabilities and Criminal
Liabilities.
Civil
Liabilities:
1.
Responsibility of Concern: Directors
have a fiduciary obligation to act in the company’s best interests and to
discharge their responsibilities with due care, diligence, and competence.
2.
Breach of Duty: A director may be held
accountable for any loss or harm incurred by the firm if they fail to uphold
their duty of care.
3.
Mismanagement: Directors are subject to
liability if the company’s affairs are handled improperly, which might result
in losses for the company’s shareholders.
4.
Insider Trading: Directors who utilize any
non-public material for their own profit or the benefit of others may be
charged with insider trading.
Criminal Liabilities:
1.
Fraud: Directors who intentionally provide
false information to shareholders, manipulate financial records, or make
fraudulent comments are subject to criminal prosecution.
2.
Cheating: Directors who commit crimes like
embezzling corporate assets or syphoning off company cash are subject to criminal
prosecution.
3.
Criminal Breach of Trust: Directors
who commit a criminal act of breach of trust, such as stealing money or abusing
business assets, may be subject to criminal prosecution.
The
Companies Act of 2013 also establishes severe punishment for directors who
violate certain Act requirements, such as failing to file annual reports or
financial statements or failing to call board meetings for shareholders. In
order to prevent any legal repercussions, it is crucial for directors to be
aware of their obligations and act in the company's best interests.
Corporate
governance is crucial in ensuring that Indian company directors follow their
duties. It includes a set of guidelines, customs, and procedures used to guide
and manage an organization. It offers a structure for managing the needs of a
company's many stakeholders, including shareholders, executives, clients,
suppliers, financiers, the government, and the community. The Companies Act of
2013, the rules of the Securities and Exchange Board of India (SEBI), and the
listing agreements of the stock exchanges are only a few of the laws in India
that regulate corporate governance. These regulations set minimal requirements
for corporate governance and provide means of enforcing them.
A firm's Board
of Directors is in charge of making sure that the company is run in a way that
serves the shareholders as well as and other stakeholders. Corporate governance
tools including audit committees, independent directors, and risk management
programs may assist make sure the board performs this duty. Non-executive
directors known as independent directors are chosen to oversee and offer an
unbiased view of the company's activities. They are not connected to the
company's management. Audit committees examine the organization's financial
reporting and risk management programs, and risk management programs assist in
identifying and controlling possible business hazards.
Companies
in India may actively implement best practices in corporate governance in
addition to the regulatory obligations. These procedures may involve openness
and information sharing, management and board responsibility, and moral
conduct. Following these procedures may enhance the company's reputation and
performance while helping to foster trust among stakeholders.
In
conclusion, corporate governance is crucial for ensuring that Indian company
directors follow their duties. It offers a framework for balancing
stakeholders' interests and implementing controls for upholding moral and legal
requirements.
The
regulatory organization that monitors the operation of the Indian securities
market is called the Securities and Exchange Board of India (SEBI). It has the
authority to oversee and enforce the director obligations of listed businesses.
These are some of the ways SEBI keeps an eye on and enforces the obligations of
directors in listed companies:
1.
Disclosure Requirements: According
to SEBI regulations, businesses must provide information on director
responsibilities in their annual report and accounts and other filings. This
material contains specifics about any legal actions taken against directors,
their compensation, and any potential conflicts of interest.
2.
Insider Trading Laws: Under SEBI's insider
trading laws, directors and other insiders are not permitted to trade in the
company's stocks using unreleased price-sensitive information. The director may
be held accountable for any violations of these rules.
3.
Takeover Rules: SEBI has rules governing
acquisitions of publicly traded firms. According to these rules, the potential
buyer must publicly declare their desire to buy the business and provide
information about the offer. In the case of a takeover, it is the
responsibility of the target company's directors to make sure that shareholder
interests are safeguarded.
4.
Corporate Governance Regulations: Companies
are required to have a particular number of independent directors on their
boards of directors under SEBI requirements relating to corporate governance.
These independent directors serve as a check on the executive directors'
behavior and make sure they are upholding their obligations.
5.
Enforcement Actions: Directors who breach
securities laws may face enforcement procedures from SEBI. These enforcement
measures may take the form of fines, penalties, or in certain circumstances,
even criminal charges.
JUDICIAL PRONOUNCEMENTS
The Satyam Scandal[3]
is among the most important recent incidents. Ramalinga Raju, the founder and
chairman of the firm, confessed to faking accounting and exaggerating earnings
in this case. Numerous directors, including independent directors, were found
accountable for their failure to exercise their responsibilities and notice the
fraud. The significance of independent directors in promoting sound corporate
governance and keeping the board responsible is highlighted by this case.
Another well-known instance of
directors being held accountable for failing to safeguard investors' interests
is The Sahara Case[4].
When the Sahara group of firms disobeyed a court order to return investor
funds, the directors of those companies were held personally accountable. This
situation highlights the duty of directors to act in the organization's and its
stakeholders', particularly investors', best interests.
An instance of directors being held
criminally liable for their activities is in the Kingfisher Airlines Case[5].
The chairman of the now-defunct Kingfisher Airlines, Vijay Mallya, and several
board members were charged with embezzling money from the business for their
own use. This situation emphasizes how important it is for directors to operate
honestly and refrain from using business cash improperly for their own
advantage.
The SEBI claimed that the executives
of Infosys, comprising Narayana Murthy, had broken insider trading laws in the N.
R. Narayana Murthy v. SEBI case. The SEBI found that the directors had
broken their fiduciary obligations and fined them as a result. This situation
emphasizes how important it is for directors to uphold statutory regulations
and safeguard shareholder interests.
To sum up, it is crucial for sound
corporate governance and safeguarding the interests of shareholders and other
stakeholders that directors' responsibilities in Indian corporations be met.
These legal precedents emphasize the need for directors to use caution,
vigilance, and care as they carry out their responsibilities. A company's
checks and balances should be sufficient to guard against any improper activity
by its directors.
CONCLUSION
In
conclusion, a company's directors are subject to a number of obligations and
duties towards the business, its stakeholders, shareholders, and workers. They
must fulfil their obligations with care, competence, and effort, and failure to
do so may have legal and financial repercussions. Recent case laws have shown
that courts are more prepared to hold directors responsible for their deeds and
to inflict harsh fines in situations of duty violation. Directors must thus be
fully aware of their responsibilities and use extreme prudence while performing
their tasks. On the other side, organizations need to have strong corporate
governance rules and practices in place to guarantee that its directors work in
the organization's best interests and adhere to legal and regulatory
obligations. Ultimately, the obligations of directors are crucial to upholding
the corporate sector's integrity, and their responsibility must be preserved to
guarantee that businesses conduct themselves in an open and responsible way.
REFERENCES
- Duties and Liabilities of Directors: A
Global Overview, International Finance Corporation, https://www.ifc.org/wps/wcm/connect/5f5c648e-7c9f-4cf5-89da-44b09e0d0e3a/Duties+and+Liabilities+of+Directors+2018_FINAL.pdf?MOD=AJPERES&CVID=mev5zYw
- Companies Act 2013, Ministry of
Corporate Affairs, Government of India, http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
- Recent cases where directors have been
held liable for corporate misconduct, The Economic Times, 29 May 2021, https://economictimes.indiatimes.com/news/company/corporate-trends/recent-cases-where-directors-have-been-held-liable-for-corporate-misconduct/articleshow/83014571.cms
- The Satyam Scandal: A Case Study in Corporate
Governance, The Economic Times, 3 April 2019, https://economictimes.indiatimes.com/markets/stocks/news/the-satyam-scandal-a-case-study-in-corporate-governance/articleshow/68640751.cms
- Satyam
Scandal, https://www.mlsu.ac.in/econtents/5678_Satyam.pdf
6. Gupta, S. “Case Study: From
Riches to Rags: The Story of Vijay Mallya” Pacific Business Review
International, Vol. 9 (Issue 7) (2017), Accessed March 2023, http://www.pbr.co.in/2017/2017_month/Jan/22.pdf
7. Sharma, G. “A Review on
Kingfisher Airline ‘Prosperity Converted Into Bankruptcy” Papers
SSRN, (2019), Accessed March 2023, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3396995
- Tiwari, A. “Case study on Subrata
Roy Sahara vs. Union of India and Ors.” Law & Political Review,
(2020), Accessed March 2023, https://thelawbrigade.com/wp-content/uploads/2020/06/Archita-LPR.pdf
- Faujdar, A. “Corporate Governance in
India after the Satyam fiasco” Papers SSRN, (2011), Accessed March
2023, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2462666
[1] M.RAMACHANDRAN and ARYA.R (2018) A
STUDY ON DIRECTORS DUTIES UNDER 2013 COMPANIES ACT IN COMPARISON WITH 1956
COMPANIES ACT, International Journal of Pure and Applied Mathematics. Acad
Publisher . Available at: https://acadpubl.eu/hub/2018-120-5/1/19.pdf
(Accessed: March 14, 2023)
[2] Tiwari, D.S. (2013) Criminal
liability of director, SSRN. Available at:
https://deliverypdf.ssrn.com/delivery.php?ID=750066083101070097069066080112096076007056010023061049023085007108094105006125000111041119107107108043037092093116123109114092060086008008061122027080118089028092004064001071084065012082083025002085121127070012021001093065115074006098026003099001071114&EXT=pdf&INDEX=TRUE
(Accessed: March 14, 2023)
[3] Satyam Computer Services Limited
Scam
[4] Sahara vs. SEBI case
[5] Vijay Mallya Scam
Article Information
COMPREHENSIVE NOTE: LIABILITIES OF THE DIRECTORS- A CRITICAL APPRAISAL ALONG WITH RELEVANT CASES IN INDIA BY: SRISHTI VARMA
Authors: SRISHTI VARMA
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/01/18
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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