Background
The fiduciary duties of the directors of a company under the Companies Act, 2013 (“Act”) have been well-recognised in multiple landmark judgments, and in Section 166 of the Act. Under Section 166(3), a director is required to exercise his duties with reasonable care, skill and diligence, and exercise “independent judgement”.
It is stated in Section 179(1) of the Act that the Board of Directors shall be entitled to exercise all such powers, and do all such acts and things, as the company is authorised to exercise and do.
Further, it is significant to note that Section 134(5) of the Act casts onerous responsibilities on the directors to provide various certifications in the Directors’ Responsibility Statement (that forms part of the Directors’ Report for the financial year) relating to the annual accounts, applicable accounting standards, and towards making reasonable judgments and estimates to present a true and fair view of the state of the company’s affairs.
The directors will be able to provide the certifications required under Section 134(5) only if they have access to sufficient information regarding the company’s affairs. The director’s ability to exercise his powers and make judgments about the company’s operations depends on the quality of information that is provided. However, the information rights available to directors under the Act, that would facilitate a director to effectively perform his duties, remain underarticulated. One such right that assumes significance is the right of a director to inspect the books of accounts and other records of a company.
In this post, the authors have examined the inspection rights of a director under Indian law, and the restrictions on this right. It also discusses the reforms required on this aspect of law.
Directors’ right to access and inspect the company’s records – Why is this important?
The Covid-19 pandemic has significantly changed the way companies’ function, and internationally, this change has manifested itself in increased reliance on online communications as opposed to physical meetings. Thus, most companies are now conducting virtual Board meetings.
This scenario gives rise to two questions. One, if a director has the right to access video recordings of Board meetings, particularly as an evidence of his stance on a given issue taken during the meeting. Two, can a company give a director access to the video recordings of the Board meetings, or are there grounds to deny such requests.
In this context, it is pertinent to note that over the last decade, most leading companies have begun allowing the directors to access the agenda papers of Board meetings on their iPad / Tablet through a specially designed software. The practice of providing physical copies no longer exists, even though the software in question usually does not permit a director to ‘store’, ‘print’ or ‘forward’ a copy of the document.
Given this market practice, an examination of the extent of information that can be provided to a director in electronic form (such as video recordings of the proceedings of the Board Meetings) assumes greater relevance.
Information rights of directors under Indian law
Section 128(3) of the Act provides that the ‘books of accounts and other papers’ maintained by a company within India shall be available for inspection by a director at the company’s registered office during business hours, and for the company’s financial information maintained outside India, copies of such information shall be maintained and made available for inspection to a director subject to conditions that may be prescribed.
Section 2(12) of the Act defines “book and paper” as including “books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form.”
Section 2(13) defines “books of accounts” as including records maintained by the company in respect of the sums received and expended by it, the sales and purchases of goods and services made by it, the company’s assets and liabilities and the items of cost that may be prescribed under Section 148 of the Act, in case of a company which belongs to any class of companies specified under that section.
Further, Rule 3(1) of the Companies (Accounts) Rules, 2014 provides that the books of account and other relevant books and papers maintained in electronic form must remain accessible in India so that they can be used for subsequent reference.
From the above provisions, it is clear that a director has the right to access the video recordings of the meetings. Further, the Secretarial Standard on Meetings of the Board of Directors (“SS-1”), approved by the Central Government pursuant to Section 118(10) of the Act, states that a director is entitled to inspect the minutes of the meetings held during his tenure, and the inspection of the minutes book may be provided either in physical, or in electronic form.
Jurisprudence on information rights of directors
There are multiple judgments on Section 209(4) of the Companies Act, 1956 (“1956 Act”) which corresponds to Section 128(3) of the Act. In N.V. Vakharia v. Supreme General Film Exchange Co. Ltd,[1] the Bombay HC upheld a director’s right to inspect the company’s accounts and other books and papers through an agent, provided that the latter gave an undertaking that he would disclose such information only to his principal; i.e., the concerned director.
In Sugrabai Alibhai and others v. Amtee Properties Private Limited,[2] the Bombay HC reiterated that in view of Section 209 of the 1956 Act, a director is entitled to inspect the company’s books of accounts and other papers either personally or through an agent.
In D. Ross Porter v. Pioneer Seeds Co. Ltd (“Porter”),[3] the Delhi HC held that Section 209(4) confers a statutory right on directors to inspect the books of account and books and papers of a company. At the same time, one must note the fiduciary relationship between a director and the company, and Section 209(4) cannot be interpreted to grant an unfettered inspection right to a director, if such right went against the company’s interests. It was also noted that the Court must determine whether the director would suffer irreparable injury due to the non-enforcement of the right.
Note that the expression “books of account and other books and papers” has to be interpreted ejusdem generis to include only those papers which are of the same kind as books of accounts.[4] Thus, where a complainant alleged that he was prevented by the company from inspecting the nomination papers filed by different candidates for appointment as directors, the Court prevented the complainant from inspecting such nomination papers by holding that “other books and papers” under Section 209(4) does not extend to nomination papers.
Position under English law
In Dilato Holding Pty Ltd v. Learning Possibilities,[5] it was held that a director can access all company documents if they are used only for performing duties owed by the director towards the company.
In Oxford Legal Group Ltd v. Sibbasbridge Services Plc,[6] it was held that inspection rights cannot be exercised for an “improper purpose”. Examples of ‘improper purpose’ would include situations where a shareholder director was seeking to access corporate information to assist his own private claim against the company.
The English jurisprudence can be relied upon to arrive at a view that if in certain specific circumstances, the Board of a company is of the opinion that a particular director is misusing the information provided for some nefarious purpose (say, to benefit a business rival or a competitor) then the company would be justified in refusing to provide the director with access to certain information.
Concluding thoughts
The limits of the inspection rights provided under Section 128(3) remain unclear. Though in Porter (supra), the Court had used a director’s fiduciary duties as the limiting factor of his rights provided under Section 128(3), it had failed to elaborate on the same. However, cue may be taken from English judgments which state that a director has the right to inspect a company’s documents (including its minute book and accounting records), provided such right is used not for the director’s own advantage.[7]
While there is a well-established jurisprudence on the scope of a director’s inspection rights under Section 128(3) of the Act, the law is silent on what are the legal rights of a former director to have access to the records of the company that relate to his tenure as a director. This assumes relevance in situations where legal proceedings are initiated against a director after he ceases to hold office.
For instance, let us say that a director held office on the Board of Company X from April 1, 2014 to March 31, 2019. Subsequently, the Enforcement Directorate initiates proceedings against him in January 2021. The question arises whether such a director would have access to the company’s records for the period between April 1, 2014 to March 31, 2019 (when he held office as a director) – so that he could build strong grounds of defence before the law enforcement agencies? Today, the law is silent on this important issue and a specific provision would provide a much-needed clarity on this aspect. The law must specifically provide a former director with a legal right to have access to all the relevant records that relate to his tenure as a director of the company, and Parliament needs to step in to provide for such a right under the Act.
While most companies continue with the D&O Insurance Policy cover for retired directors, they must also give these directors access to all the records to adequately defend themselves before any law enforcement or judicial authority. Ideally, such an information right of a director also needs to be incorporated in the Articles of Association of the company. An outgoing PE or strategic investor must also provide for such a right in the Share Purchase Agreement to protect its nominees on the Board, who would be stepping down upon closing of the transaction.
For further information, please contact:
Bharat Vasani Partner, Cyril Amarchand Mangaldas
shikha.tandon@cyrilshroff.com
[1] AIR 1948 Bom 301
[2] 1984 55 Comp Cas 734 Bom
[3] (1989) ILR 1 Delhi 150
[4] K. Kanagasabapathy v. T.M. Shanmugham, (1972) 42 Comp Cas 596
[5] [2015] EWHC 592 (Ch)
[6] [2008] EWCA Civ 387
[7] Constantien Medien AG v. Ecclestone [2013] EWHC 2674 (Ch)
