India – Handbook For The Board Of Directors.

 

4 September, 2016

 

INTRODUCTION

 

The board of directors of the company is responsible for the management of the company and therefore, they are given wide powers to carry out the objectives of the company. However, the powers of the directors are governed by the provisions of the Companies Act, 2013 which erstwhile were covered under the Companies Act, 1956. The objective of this handbook is therefore, to lay down the duties, responsibilities and liabilities of directors in the light of the new Companies Act, 2013. Another objective of handbook is to apprise the directors of their responsibilities under other legislations vis-à-vis direct/indirect taxes, labour and employment as well environment. The handbook provides a brief snapshot of the responsibilities of director under various Indian legislations.

 

DUTIES AND RESPONSIBILITIES OF DIRECTORS

 

The Director must perform the following duties while carrying out the objectives of the company:

 

General Duties/Responsibilities

 

• To act within powers in accordance with the Articles of Association;
• To act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees and the shareholders;
• To exercise reasonable care, skill and diligence;
• To exercise independent judgment;
• To avoid conflict of interest;
• To avoid any undue gain or advantage either to himself or to his relatives, partners, or associates;
• He shall not assign his office.

 

Specific Duties

 

• To attend at least one board meeting held during a period of twelve months;
• To lay in the annual general meeting of the company, the financial statements of the financial year; 
• To appoint the first auditor of the company;
• To disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in the prescribed format in the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made;
• To intimate his Director Identification Number (DIN) to the company or all the companies wherein he is a director within one month of the receipt of such number;
• Every director should refund the excess sum which he received by way of remuneration to the company and until such sum is refunded, he should hold it in trust for the company;
• To produce all the documents and furnish all the statements, information and explanations in such form as may be required by the registrar for the conduct of inspection and enquiry;
• Where a proposal is there to wind up the company voluntarily, the majority of its directors should make a declaration at a Board meeting, verified by an affidavit to the effect that they have made a full enquiry into the affairs of the company and formed an opinion that the company has no debt or that it will be able to pay its debts in full from the proceeds of assets sold in voluntary winding up.

 

ADDITIONAL OBLIGATIONS OF A DIRECTOR IN CASE OF A PUBLIC LISTED COMPANY

 

In case of listed companies i.e. when the shares of the company are listed on a stock exchange in India the company is required to have at least one-third of the total number of directors as independent directors. Accordingly, a director has to give a declaration that he meets the criteria of independence provided in section 149 of the Companies Act, 2013 at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director. The criteria of independence of a director is as under: 

 

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

 

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

 

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

 

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding

financial years or during the current financial year;

 

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

 

(e) who, neither himself nor any of his relatives—

 

(i)  holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

 

(ii)  is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—

 

(A)  a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

 

(B)  any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

 

(iii)  holds together with his relatives two per cent. or more of the total voting power of the company; or

 

(iv)  is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or 

 

(f) who possesses such other qualifications as may be prescribed.

 

No director of a listed company i.e. where the shares of the company are listed on a stock exchange in India, should enter into insider trading;

 

In case of a listed company, an independent director is liable in respect of those acts of omission or commission by a company which had occurred with his knowledge, attributablethrough Board processes, and with his consent or connivance or where he had not acted diligently.

 

RELATED PARTY TRANSACTIONS

 

No company shall enter into any contract or arrangement with a related party with respect to –

 

1. sale, purchase or supply of any goods or materials.
2. selling or otherwise disposing of, or buying, property of any kind;
3. leasing of property of any kind;
4. availing or rendering of any services;
5. appointment of any agent for purchase or sale of goods, materials, services or property;
6. such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
7. underwriting the subscription of any securities or derivatives thereof, of the company.”

 

except with the consent of the board of directors of the company. The term “Related Party” means the director or his relative (term “relative is defined below);

 

 

• a key managerial personnel or his relative;
• a firm, in which a director, manager or his relative is a partner;
• a private company in which a director or manager or his relative is a member or director;
• a public company in which a director or manager is a director and holds along with his relatives, more than two per cent. of its paid-up share capital;
• any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
• any person on whose advice, directions or instructions a director or manager is accustomed to act;
• any company, which is—
  • (A)  a holding, subsidiary or an associate company of such company; or
  • (B)  a subsidiary of a holding company to which it is also a subsidiary;
• such other person as may be prescribed.

 

Relative means anyone who is related to another if –

• they are members of a Hindu undivided family;
• they are husband and wife;
• one person is related to another in the following manner, namely:
  •   Father;
  •   Mother;
  •   Son;
  •   Sons’ wife;
  •   Daughter;
  •   Daughter’s Husband;
  •   Brother;
  •   Sister; 

 

LOAN TO DIRECTORS

 

The Companies Act, 2013 provides that no company shall directly or indirectly advance any loan including any loan represented by a book debt to any of its directors or to any person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

 

However, the Ministry of Corporate Affairs has vide its circular dated 5th June, 2015 has exempted private companies from the applicability of these provisions:

 

• in whose share capital no other body corporate has invested any money;
• if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or INR 500 Million, whichever is lower; and
• such a company has no default in repayment of such borrowings subsisting at the time of making transactions.

 

DISQUALIFICATIONS

 

A person shall not be eligible for appointment as a director of a company if-

 

(a)  he is of unsound mind and stands so declared by a competent court;

 

(b)  he is an undischarged insolvent;

 

(c)  he has applied to be adjudicated as an insolvent and his application is pending;

 

(d)  he has been convicted by a court of any offence, whether involving moral turpitude

or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence

 

Provided that if a person has been convicted of any offence and sentenced in respect thereof to

imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;

 

(e)  an order disqualifying him for appointment as a director has been passed by a Court or Tribunal and the order is in force;

 

(f)  he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;

 

(g)  he has been convicted of the offence dealing with related party transactions under section 188 (Related Party Transaction) at any time during the last preceding five years; or

 

(h)  he has not complied with provisions of obtaining Director Identification Number. 

 

Further, no person who is or has been a director of a company which—

 

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

 

(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

 

LIABILITIES OF DIRECTORS UNDER THE COMPANIES ACT, 2013

 

The Directors will be jointly and severally liable under the following circumstances:

 

• Fails to issue a notice for the conduct of the board meeting;
• Loss suffered due to an inaccurate, untrue or misleading financial report being presented by the company;
• Losses if the shareholders cannot return interim dividends that have been declared;
• In the event that bankruptcy occurs as a result of the fault or negligence of the board of directors and the assets of the company are insufficient to cover the losses incurred in the bankruptcy, the Directors will be liable for the balance of the obligations that cannot be repaid from the assets.

 

A director will be personally liable:

 

• When the directors enter into contract in their own name;
• When they enter into contracts on behalf of company but fails to use “LTD. or PVT LTD.”;
• When directors exceed their powers;
• Mis-statement in the prospectus issued for raising share capital from public;
• Where a company fails to repay the deposit or part thereof or any interest;
• 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.

 

Apart from above, where the provisions of the Companies Act, 2013 provides for liability on the “officer who is in default”, it will include following officers of the company-

 

(i)  whole-time director;

 

(ii)  key managerial personnel i.e. Managing Director, Chief Financial Officer, Company Secretary, Whole-Time Director, Chief Executive Officer or Manager of the company; 

 

(iii)  where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

 

(iv)  any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

 

(v)  any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

 

(vi)  every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

 

(vii)  in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer.

 

Where there are multiple offences committed under the act, may be compounded on an application made to the Tribunal or the RD either before or after the institution of any prosecution.

 

Offences punishable with a fine alone maybe compounded and referred to the Tribunal or Regional Director (where the fine of the offences committed does not exceed Rs. 5 Lakhs). The Special court also has the power to compound offences which are punishable with fine or

imprisonment, or both.

 

LIABILITIES OF DIRECTORS UNDER OTHER CORPORATE LEGISLATIONS

 

Negotiable Instruments Act, 1881

 

In terms of the Negotiable Instruments Act, 1881, the directors who was responsible for the conduct of the business of the company at that point of time when the cheque was dishonored are liable to be proceeded against. The punishment prescribed under the aforesaid legislation is imprisonment of up to 1 (one) year or a fine of up to twice the amount of the cheque so dishonored.

 

Insolvency & Bankruptcy Code, 2016

 

The aforesaid legislation makes a director’s personal assets liable for attachment if it is found that the business of the corporate debtor was carried out in a fraudulent manner in order to defraud creditors. Further, the aforesaid contravention would also be punishable under the said code with imprisonment of not less than 3 years and up to 5 years and a fine which may extend to Rs. 1 (one) crore but not less than 

 

Rs. 1 (one) lakh. Other liabilities that arise for the director under the code would be towards making false representations to creditors, contravention of the resolution plan, which are punishable with imprisonment of not less than 3 years and up to 5 years and a fine which may extend to Rs. 1 (one) crore but not less than Rs. 1 (one) lakh.

 

C. Securities Exchange Board of India Act, 1992

 

In terms of the Securities Exchange Board of India Act, 1992, in case a director indulges in the activity of insider trading then he can be punishable with a penalty of Rs. 10 lakh extendable up to Rs. 25 crores or 3 times the amount of profit gained during insider trading. Further, non-disclosure of acquisition of shares and takeovers can be punished with -penalty of Rs. 10 lakh to Rs. 25 Crores or 3 times the amount of profit gained out of such failure.

 

D. Foreign Exchange Management Act, 1999

 

Directors can incur liability if there is any transfer of any foreign security or immovable property outside India in contravention of rules made with respect to such transfer. Further, where foreign exchange is due or has accrued in India, but has not been repatriated to India, the directors can be held accountable. Further, where the director is the authorized person and does not co-operate in the process of inspection by the RBI, then he/she can be held accountable.

 

Any contravention of section 13 (penalties) of the aforesaid legislation can be compounded on application made by the person committing such contravention within 180 days from the receipt of such contravention by the Directorate of enforcement. Once the contraventions are compounded, such contravention shall no more be treated as an offence under FEMA.

 

LIABILITIES OF DIRECTORS UNDER TAX LEGISLATIONS

 

A. Income Tax Act, 1961

 

Where any tax due from a company cannot be recovered, then it can be recoverable from the persons who were directors unless they prove that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on their part. Further, directors can also be held liable if Tax Deducted at Source has not been deducted till the time it is paid at the rate of 1% of the TDS amount per month and in the case it was deducted and not paid, then 1.5% of the TDS amount per month till the time it is paid. 

 

Central Sales Tax Act, 1956

 

When any private company is wound up or in the process of liquidation and there exists any tax assessed under this act which cannot be recovered, then the director of the private company at that point of time can also be liable to be proceeded against.

 

Service Tax (Finance Act, 1994)

 

Where the company indulges in evasion of service tax or fails/delays in payment of service tax or issues bills, challans etc., without provision of taxable services, then the directors of the company can be penalised with a fine of up to Rs. 1 lakh.

 

LIABILITIES OF DIRECTORS UNDER LABOUR LEGISLATIONS

 

The Payment of Gratuity Act, 1972

 

The directors of a company can be held personally liable if the amount of gratuity payable to an eligible employee is not paid within 30 days from it being due, with imprisonment of up to 1 (One) year but not lesser than 3 months and fine of up to Rs. 20,000 but not less than Rs. 10,000. Further, when there is a dispute with respect to non-payment of gratuity, then imprisonment can go up to 2 years but not less than 6 months.

 

The Payment of Bonus Act, 1965

 

If there is any offence committed by a company under this act and it is proved that it was caused with the consent or the neglect of any director or any other person in charge of the affairs of the company, then they will be liable to be proceeded against and can be penalised under this act with a fine of up to Rs. 1,000 and imprisonment up to 6 months.

 

Industrial Disputes Act, 1947

 

Directors can be liable for an offence committed by a company under this act unless it is proved that it was done without the consent of such director, which can be a fine of up to Rs. 1,000 and imprisonment of up to 6 months.

 

Employees State Insurance Act, 1948

 

In case of any unwarranted reduction in the wages or benefits available to the employees and if contribution to ESI is not made by the employer, then the directors can be held accountable and penalised with 1 (One) year imprisonment and/or fine up to Rs. 10,000.

 

E. The Employees Provident Funds And Miscellaneous Provisions Act, 1952

 

Employer (which term includes a managing director) who avoids to make any payment with respect to the insurance scheme, pension scheme etc., of its employees or knowingly makes or causes to be made any false statement or false representation, can be punishable with imprisonment for a term which may extend to 1 (One) year and/or a fine of Rs. 5,000. Further, an employer can also be penalised with imprisonment for a term which may extend to 3 years in case of failure to pay inspection charges levied under the aforesaid act or the scheme framed thereunder.

 

LIABILITIES OF DIRECTORS UNDER ENVIRONMENTAL LEGISLATIONS

 

Air (Prevention & Control of Pollution) Act, 1981

 

In case a company allows emission of air pollutants in excess of standards specified under the act or does not provide information as required by the board or obstructs carrying out activities conducted by the board, then the directors of the company can be punished with imprisonment of up to 6 years and/or fine up to Rs. 5,000 during which the contravention continues.

Water (Prevention & Control of Pollution) Act, 1974

 

Similarly, noncompliance of directions issued by the Pollution Control Board (PCB) can be punishable with imprisonment of upto 7 years and/or fine up to Rs. 5,000 during which the contravention continues. Further, failure in making sure that no waste is disposed of into a well or any water body for domestic use could be punished with imprisonment of up to 6 years and/or fine. 

 

LIABILITIES OF DIRECTORS UNDER THE INFORMATION TECHNOLOGY ACT, 2000

 

Directors can be held personally liable for offences committed by companies, including as illustrated below:

      

• Damage to computer or Computer System etc.;
• Dishonestly receiving stolen computer resource or communication device; Identity theft;
• Violation of privacy;
• Disclosure of information in breach of contract;
• Publication of Electronic Signature Certificates (ESC’s) with wrong information; Publishing or transmitting sexually explicit material.

 

The penal consequences of the aforesaid violations can go upto imprisonment of 5 years and a fine that in some cases may be as much as Rs. 1 (One) crore.

 

 

For further information, please contact:

 

Ravi Singhania, Partner, Singhania & Partners

ravi@singhania.in