Tuesday, 21 July 2015

The Companies Act, 2013 DIRECTORS

1.      Role and responsibilities of Directors

  In view of the fiduciary position held by directors, explicit provisions prescribing directors duties have been added to the new Act. These include keeping away from situations in which they have conflicting interest with that of the company, duty to make good in monetary terms any undue gain/advantage on the part of the directors etc., similar to what was there in the old Act. There are also certain general duties, such as acting in good faith for the benefit of the company and to ensure that the company is filing its financials, annual return and payment of debentures in time. These amendments, though not substantial, have tried to shift the onus on the director for the loss/liability suffered by the company due to their lack of discipline by increasing the penalty and clearly codifying the role and duties.
·         Section 188 of the act restricts directors from buying, selling, leasing or disposing of any property, appointment of an agent and appointment in place of profit in the company or associate/subsidiary and, in all such cases, they are mandated to make a disclosure for these transactions. In case of non-disclosure by a director, he will indemnify the company against any loss incurred by it. The Act has codified and set high standards for a director's duty and liability towards the company.
·         Under section 134 every Directors report (except for One Person Company) shall provide various types of additional information like number of meetings of the Board, Company’s policy on directors’ appointment and remuneration explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the Company Secretary in his secretarial audit report, particulars of loans, guarantees or investments etc.
·         The Directors responsibility statement under section 134(5) shall now also provide for laying down of internal controls and compliance of all applicable laws”.
Section 164 that describes the disqualifications for appointment of a director has focused on corporate compliance. A director will not be re-appointed, or appointed in other company, if any of the companies in which he is a director has failed to file its annual returns or financial statements for three continuous years.

·         The act provides additional disqualification under section 164 for appointment as Director in comparison to the Companies Act 1956.
Ø  Conviction for offence dealing with related party transaction anytime during previous 5 years.
Ø  Not having obtained DIN.
Ø  Conviction for any offence and sentenced for an imprisonment extending to 7 years or more.
Ø  No power of the Central Government to exempt the application of particular disqualification on any person. 
·         A director shall vacate his office u/s 167 if he fails to attend all the meeting of board for consecutive period of 12 months instead of three meetings as provided in the Companies Act 1956 and most importantly, he has to vacant office, even if leave of absence has been granted to him/her.
·         Directors are required to mandatorily forward their resignation along with “detailed reason” for resignation also to the Registrar within 30 days of resignation in the manner prescribed under section 168 and rules made thereunder
·         Concept of constitution of Nomination and Remuneration Committee”, under section 178, to determine and recommend to the BOD the appointment, remuneration of the directors and the KMPs and carrying out the evaluation of every director’s performance.
·         Forward dealings in the securities of the company/ holding/ subsidiary/ associate company are prohibited by Directors and KMPs by section 194.
·         Prohibition on indulging into insider trading by directors/ KMPs or any other person by section 195.
·         Restriction on non-cash transactions involving directors has been imposed under section 192. 

2.     Duties of Directors


·         Section 166 of the Act now specifically provides certain duties of the directors towards the Company.
ü  A director to act in accordance with the Articles of Association (AOA) of the company.
ü  A director to act in good faith in order to promote the objects of the company for the benefit of the members as a whole and in the best interest of the company, employees, shareholders, the community and for the protection of the environment. 
ü  A director to exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
ü  A director not to get involved in a situation where he may have direct/ indirect interest that conflicts/ may conflict with the interest of the company.
ü  A director not to achieve or attempt to achieve any undue gain/ advantage either to himself/ to his relative/ partners/ associates. If found guilty he shall be liable to pay the amount equal to the gain to the company. 

3.     Liability of Directors

·         The definition of “Officer in Default” has been made stringent. Director who are not diligent in performing his duties are also included in the definition of officer in default. So, in the Act wherever there is a penalty or fine provided for officer in default directors are also covered. 

Director as “Officer”

Sec 2(59)“Officer” includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors are accustomed to act. 
·         Liability of directors extends to directors as: 
Ø  “Officer”
Ø  “Officer in Default”
Ø  Personal liability, and,
Ø  Fraud

Liability as “Officer”

  • Section 66(10) (Reduction of Capital)
If any officer of the company—
§    knowingly conceals the name of any creditor entitled to object to the reduction;
§    knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
§    abets or is privy to any such concealment or misrepresentation as aforesaid, he shall be liable under section 447. 


  • Section  105 (5) (Proxies)
If for the purpose of any meeting of a company, invitations to appoint as proxy a person or one of a number of persons specified in the invitations are issued at the company’s expense to any member entitled to have a notice of the meeting sent to him and to vote thereat by proxy, every officer of the company who knowingly issues the invitations as aforesaid or wilfully authorises or permits their issue shall be punishable with fine which may extend to one lakh rupees.
Provided that an officer shall not be punishable under this sub-section by reason only of the issue to a member at his request in writing of a form of appointment naming the proxy, or of a list of persons willing to act as proxies, if the form or list is available on request in writing to every member entitled to vote at the meeting by proxy.
  • Section  173 (4) (Meetings of Board)
Every officer of the company whose duty is to give notice under this section and who fails to do so shall be liable to a penalty of twenty-five thousand rupees.
  • Section  207(4) (Conduct of Inspection and Enquiry)
If any director or officer of the company disobeys the direction issued by the Registrar or the inspector under this section, the director or the officer shall be punishable with imprisonment which may extend to one year and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.
If a director or an officer of the company has been convicted of an offence under this section, the director or the officer shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and on such vacation of office, shall be disqualified from holding an office in any company.
  • Section  212 (Inspection by SFIO)
On receipt of the investigation report, the Central Government may, after examination of the report (and after taking such legal advice, as it may think fit), direct the Serious Fraud Investigation Office to initiate prosecution against the company and its officers or employees, who are or have been in employment of the company or any other person directly or indirectly connected with the affairs.
 Anything contained in this Act or in any other law for the time being in force, the investigation report filed with the Special Court for framing of charges shall be deemed to be a report filed by a police officer under section 173 of the Code of Criminal Procedure, 1973 of the company.
  • Section  274 (Directions for filing statement of Affairs – Winding Up by Tribunal)
If any director or officer of the company contravenes the provisions of this section, the director or the officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both.

Liability as “Officer in Default”

  • Directors are liable as officers in default under all sections where specific penalty is provided for each officer in default.
  • Where no specific penalty is provided under the Act, they are liable under Section 450.

Liability for “Fraud”

  • As per section 447 of the act “Fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.
  • Any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

Section 35 – Civil Liability for mis-statement in prospectus

Where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person concerned shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.

Section 75 – Damages for Fraud (DEPOSITS)

Where a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 within the time specified in sub-section (1) of that section or such further time as may be allowed by the Tribunal under sub-section (2) of that section, and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without prejudice to the provisions contained in sub-section (3) of that section and liability under section 447, be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.

Section 339 – Liability for fraudulent conduct of business

If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper to do so, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct.

Sec 245 Class Action suit

            Prescribed class of shareholders or deposit holders can file claim for damages against the directors of company

4.     Remuneration of Directors/ Managerial Personnel


Type
Non-Executive Director
Independent director
Executive director
Salary
NA
NA
Yes
Commission
Yes
Yes
Yes
ESOP
NA
NA
Yes
Sitting fess
Yes
Yes
NA
·         Section 197 Sitting Fees may be decided by the Board but to a maximum of 1 lakh rupees per meeting of the Board/ Committee.
·         Independent Director is not entitled to ESOP. (section 149(9))
·         Premium paid on Director’s/ Officer’s insurance not to be a part of remuneration. (section 197(13))

Net Profit
Approval
>11 %
Central Government
No profit
Comply with Schedule V or Central Government Approval
·         The total managerial remuneration by a public company to its Directors including managing directors, whole time director and manager in respect of any financial year shall not exceed 11% of the net profits for that financial. Any excess remuneration if not in accordance with Schedule V shall be paid with approval of the Central Government.
·         The limits prescribed for the maximum yearly remunerations to be paid by the company to managerial personnel under (A) & (B) of Section II of Part II of Schedule V of the new act have been revised. Moreover such limits will be doubled if special resolution is passed by the shareholders regarding the same in the GM of the company.
·         So, the new Act now provides a much higher limit as compared to the earlier Schedule XIII under the old act.
·         Further, in some special circumstances a company may pay remuneration in excess of the amounts mentioned in Section II without Central Government (CG) approval (subject to the conditions provided under the section II and III of  Part II of the Schedule V) such as:
§  Remuneration paid in excess of limits prescribed under section II to the managerial personnel of the company is by either a Foreign company or by other company where approval for the same has been taken from the shareholders and such other company will treat the remuneration as managerial remuneration u/s 197 in its books and comply with the provisions.
(what would happen if other company is private company).
§  The following company can pay double the remuneration permissible in section II:
a)      Newly incorporated company for a period of 7 years.
b)      Sick company under the revival scheme.
§  Where the remuneration is in excess of the limits of section II and is fixed by the BIFR or NCLT subject to certain conditions.
§  A company in SEZ subject to some conditions can pay up to 2.4 Crore per annum.
·         In Part IV the CG has the power to exempt any class of companies to follow schedule V.


5.     Independent Directors


As per the Code prescribed in Schedule IV:
·         The Schedule IV to the act provides code of conduct to be followed by Independent Directors (ID) which contains clear guidelines regarding professional conduct, roles and responsibilities of independent directors.
·         Independent directors are bound by this Code to play a role in the appointments, determination of remuneration and removal of non-independent directors and other managerial employees in a separate meeting of independent directors. They shall also review the performance of the chairperson of the company in such meeting.
·         Performance evaluation of independent directors to be done by the entire Board except the ID who is being evaluated.
·          Re- appointment to be done on the basis of the performance evaluation report.
·         The duties under the Code are exhaustive and need the director to maintain confidentiality and attend the general meetings of the company and shall try to attend all the meetings of the company.
·         They also have to ensure that the financials are reflected accurately, controls system and risk management are in place, seek clarifications in case of ambiguity and take and follow the advice of experts at the company's expense.
·         An independent director should ensure that he does not abuse his position and devotes his time and attention to assist the company in implementing best corporate governance practices.
·         In audit committee, the role of independent directors is expanded they have to now examine the financials and approve the related party transactions compared whereas, in the old act they had only a review function in both cases.
·         Independent directors are also expected by the Code to act as a moderator to resolve disputes, act in the interest of the company and with no partiality towards management or shareholders.

As per the Act:

·         As per section 149(6) Independent directors are expected to be completely unrelated to the company or its shareholders. In order to implement this, the Act has prescribed certain disqualifications for appointment as an independent director which aim to ensure that a potential appointee or his relative is not an employee or involved in any relationship or transaction with the company.
·         The most important disqualification is that the director has a pecuniary relationship or is a part of any organization with which the company does business at the time of his appointment.
·         Section 149 of the act provides provision for liability of Independent Director and non- executive director not being promoter or key managerial personnel. Such Directors shall be held liable, only 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.
·         Independent directors shall not be liable to retire by rotation.


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