All directors might not be aware of the duties and liabilities that come with the position. As this position is accepted by choice, a director cannot claim leniency in the court of law claiming that he was ignorant. This book lists out the duties and liabilities under primarily the Companies Act and SEBI’s Listing Obligations and Disclosure Requirements; while discussing various types of directors, their qualifications, disqualifications, tenure, procedures for appointment, reappointment, retirement, resignation, removal and other modes of cessation of directorships.

The duties, including those of a fiduciary nature, are covered extensively, of directors and independent directors. Situations where directors are likely to be regarded as officers who are in default as per companies Act, 2013 are also pointed out with instances.

Collective responsibilities of the board of directors is inescapable by the individual director and therefore the liability too. This book contains a discussion on this aspect. The last chapter of the book deals with lessons and and learnings, through ten leading cases from around the world as illustration."

Duties and Liabilities of DIRECTORS

First published in India 2022

© 2022, Author

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About the author

DR. K.S. Ravichandran, aged 60 years, a Master of Commerce, Bachelor of Law, a Fellow Member of the Institute of Company Secretaries of India [ICSI], a lawyer by qualification and post graduate in commerce, has been in practice as a company secretary ever since 1994.

He is an expert in corporate laws, securities laws, foreign exchange laws, IPR Laws, ADR Laws, debt recovery and insolvency laws. He advises companies in mergers and acquisitions, capital raising programmes and investment transactions, joint ventures and collaborations, intellectual property rights, dispute resolution, insolvency resolution, contraventions, compounding, adjudication and prosecution.

He represents clients before various regulators and tribunals and appellate tribunals such as NCLT, NCLAT, DRAT, arbitral tribunals and adjudicating authorities under various laws.

He holds a doctorate from the Alagappa University on Prosecution of Corporate Directors in India and UK, He holds a Diploma in Electronics and Radio Communication Engineering awarded by IAF and a Diploma in Technology awarded by HAL.

He is a member of AIPPI, INSOL INTERNATIONAL, and CIArb, UK.

He is currently the Chair, Corporate Law of the Southern Regional Council of ASSOCHAM. He is a member of various committees of the Bangalore Chamber of Industry and Commerce. He was part of the Expert Sub group constituted by the MCA to study suggestions relating to certain chapters of the Companies Act, 2013. He was member of the Secretarial Standards Board and was a member of the Core Group constituted by the ICSI for formulating the New Vision ICSI 2022.

His latest books are (a) Second Edition of his book on “Related Party Transactions” by Lexis Nexis; (b) Third Edition of his book on “A Treatise on Contraventions under the Companies Act, Securities Laws and FEMA” by Bloomsbury and (c) “CSR ESG and Charitable Institutions” by Lexis Nexis; in addition, he has authored several books such as the Law relating to Limited Liability Partnership, the Law relating to Debt Recovery and winding up and Secretarial, Securities and Management Audit. He has spoken in more than 500 conferences and webinars and has authored thousands of articles.

Before plunging into corporate laws, he had served the Indian Air Force for over 9 years as a specialist in Russian Radars and was a lecturer in commerce for the Government of Arunachal Pradesh at Pasighat.

Foreword

Preface

Duties and liabilities of directors is a subject I had always wanted to write. I mean this is not only an important subject but also one that is close to my heart. Having almost three decades of practical experience, rubbing shoulders with promoters, executive and non-executive directors of several companies, some of which are fairly very large and listed, I have understood the need to bring out a comprehensive work on this topic as even well experienced directors have exhibited lack of sufficient understanding of what duties directors owe to their companies and how and for what they are liable. Independent directors invariably say they are wary of being made liable for what they didn’t do.

Every person who becomes a director may not be aware of his duties not to speak about his liabilities. In most of the cases, including start-ups, founders or promoters have a great feeling of pride when they present their business cards carrying designations such as managing director/director.

When an individual has chosen to be a director, he/she must be deemed to know the duties he/she is expected to perform. In case a director tolerates the wrongs done by others with whom he/she is associated and does not discard such wrongdoers, the director invites the liability. Therefore, the first important point directors are required to remember is that directorship is not thrust upon any person. It is accepted by choice and with the affirmative consent of the person concerned. Whenever a person accepts the directorship of a company, he or she is not expected to remember what Orissa High Court had said in in Registrar of Companies, Orissa v Orissa Paper Products Ltd. and Ors., [1988] 63 Comp Cas 460 (Ori). The High Court held that “the directorship of a company is not thrust upon a person. It is accepted by choice”.

Any person who becomes a director, at the barest minimum, must understand three important common things. Firstly, he owes a duty to act in a bonafide manner and in good faith to protect the interests of the company in accordance with applicable law, memorandum and articles of association. Secondly, a director is duty bound, at all times, to ensure that he or she does not involve in any situation in which he or she may have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. In simple words, he owes a duty to protect the interests of the company. His duty towards the company cannot be compromised to make personal gains or to achieve his personal interests that conflicts with his duties towards the company. Therefore, directors are duty bound to disclose their interests and concerns. Thirdly, a director shall understand that decisions at the level of Board of Directors are taken collectively by a majority of the directors and individual views will get subsumed with the view and collective will of the majority. Therefore, the Board of Directors owe a collective responsibility too.

The book covers every aspect of duties and liabilities of directors. For the purpose of giving a complete view, a chapter has been dedicated to explain the differences between various types of directors, their qualification and disqualifications, tenure, provisions and procedures for their appointment, reappointment, retirement, resignation, removal or other modes of cessation of directorships under the Companies Act, 2013. To the extent required, cross reference to select provisions of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 has been made. This chapter explains in brief the provisions and procedures relating to the appointment of and remuneration to directors who are appointed to occupy managerial positions.

The second chapter comprehensively captures the duties of directors including what are commonly known as fiduciary duties. In view of the increasing regulatory prescription underlining the role of independent directors, a separate chapter focusses only on independent directors, their qualifications, attributes, attitude, tenure, appointment, re-appointment, remuneration, resignation and removal procedures. Yet another chapter covers, elaborately, the various aspects of penal and other liabilities of directors. This chapter discusses in detail the situations when directors are likely to be regarded as officers who are in default within the meaning of the Companies Act, 2013. This chapter discusses in brief about the contractual liabilities of directors as well.

The fifth chapter comprehensively dwells on the collective responsibilities of the Board of Directors, while the sixth chapter of this book contains more than 100 frequently asked questions on the topic of duties and liabilities of directors. The last chapter explains 10 lessons and learnings from 10 case studies chosen from decided cases in India and other countries such as United Kingdom, South Africa, and New Zealand. One of the sub-chapters of this chapter explains the additional role and responsibility shouldered by a chairperson of a company in enabling a transparent board process with adequate opportunity to all the directors to have their say and determine the way forward and further setting the ethical tone of the company. I am sure, these practical cases will explain the facts and situations in which directors have been declared liable to serve as a valuable guidance to all concerned.

As was held in Dorchester Finance Co v Stebbing, [1989] BCLC 498, “a director in carrying out his duties: (i) is required to exhibit in the performance of his duties such a degree of skill as may reasonably be expected from a person with his knowledge and experience, (ii) should take such care as an ordinary man might be expected to take on his own behalf, and (iii) must exercise any power vested in him in good faith and in the interests of the company.”

In India, there are hundreds of thousands of micro, small, and medium enterprises dressed up as companies comprised in what is commonly called as the corporate sector. Certain companies are just glorified partnerships. Most of the unlisted companies are promoted, formed, owned, controlled and managed by families. As such, directors have to bear in mind that mutual trust forms the fabric of faith and accordingly, they have to act carefully.

Way back in 1853 itself, as could be seen from the decision in Blissett v Daniel, (1853) 68 ER 1022, “the utmost good faith is due from every member of a partnership towards every other member; and if any dispute arise between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour.” This impliedly creates a fiduciary obligation between each other.

While there is no doubt that as long as their company is meeting its obligations towards its creditors on time, there may not be any reason for any of the creditors to bring any action against the company and its directors; the directors have to sit down and see if there is any threat of their company losing its status as a solvent company if the solvency is deteriorating,. Directors are supposed to discuss and arrive at an informed decision if they see no reasonable prospect of their company being in a position to meet its obligations towards its creditors. Insolvency is a slow poison and suddenly the situation will become critical. Only directors who have the whole picture will first know about the same.

With the introduction of a new and efficient Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016, there are increasing number of cases where past records and transactions, including related party transactions, are scrutinized thoroughly to see if the directors have indulged in any wrongful or fraudulent trading. In other words, when the company comes under CIRP, past transactions during look back period and beyond comes under minute scrutiny and therefore directors have to be extra-ordinarily cautious when it appears to their mind that their company is suffering erosion of its net worth and its commitment to creditors is not likely to be honoured on time and/or in full. Directors in the twilight zone have to be extra-ordinarily cautious while trading on goods and services availed on credit and running the business by availing credit facilities. As a whole, the book offers a comprehensive view of its theme.

I take this opportunity to thank all those who have supported me in completing this project. Especially, I must place on record my sincere thanks to members of Mr. Toby Thomas, a senior editor of Bloomsbury, the publisher, my family, friends and relatives. In fact, Mr Toby Thomas was the one who asked me if I can undertake any new project. Coinciding with his enquiry, a chance meeting with Mr C Velumani, Chairman of CRI Group of Companies, Coimbatore advised me to write on this topic. He shared his experiences too.

There are no words to thank Shri Justice N Seshasayee, a sitting Judge of the Madras High Court who has given a beautiful foreword as an ornament to this book. I must place on record my sincere thanks to Ms S Shilpa, my dedicated staff, who has helped me in indexing, and in identifying relevant case law on this subject from various sources and Ms. R Sruthi, my daughter who helped me by reading and editing a few chapters. Last but not the least, I must thank my wife G Indumathi, and my professional friends CS DR Shobha Shridhar, CS Monica Gandhi, CS Snehal Kulkarni, CS Darsana Menon who have shared certain fundamental questions for being included under the heading “Frequently Asked Questions”.

As a whole, I am happy that I have authored a book which I feel would be of immense use to various stakeholders. The young generation who are becoming professional or entrepreneurial directors of companies including start-ups must learn more about duties and liabilities of directors. I am confident that this work is going to be certainly useful to directors, professionals, academicians, professors and teachers, and students. I request readers to feel free and share observations, comments and suggestions to my e mail ID ksr@ksrandco.in

Place: Coimbatore

Date : 22^nd Jun 2022 DR K S Ravichandran