Why independent directors can help strengthen corporate governance

An independent director contributes significantly to corporate governance by offering an impartial and objective viewpoint during a company’s decision-making processes. To maintain accountability, transparency, and the protection of stakeholders’ interests, independent directors in India are subject to obligations that are outlined in the Companies Act of 2013.

Independent directors work with other board members to offer oversight, strategic direction, and moral leadership. Their impartiality, range of experience, and dedication to strong governance supports sound decision-making and the organization’s performance as a whole.

Duties of an independent director

Schedule IV of the Companies Act, 2013 lays out the duties of independent directors as follows:

  1. Undertake appropriate induction and continually refresh and improve their understanding of the company and their own skill set.
  2. Ask for clear information and get professional advice from outside experts when needed, with the company covering the costs.
  3. Try to attend general meetings and every meeting of the board. The director should also attend and participate in all meetings held by committees of which they are a member.
  4. Stay informed about the business and the external environment in which it functions.
  5. Not to interfere unfairly with the operations of the board or the committees.
  6. Confirm that any related party transaction is in the best interests of the company and has been properly assessed before authorizing it.
  7. Ensure the presence of an effective mechanism to safeguard whistleblowers from retaliation.
  8. Report instances of unethical behavior, fraud, or breaches of the company’s code of conduct.
  9. Assist in safeguarding the company’s interests, shareholders, and employees within authorized limits.
  10. Maintain confidentiality and refrain from disclosing sensitive information without board approval or legal requirement.

Liabilities of an independent director

Although directors are liable in respect of a contravention of any of the provisions of the Companies Act, including if they are aware of contraventions through receiving proceedings of the board or  after participating in such proceedings, the Companies Act specifically provides a safe harbour for independent directors.

As per Section 149 (12) of the Companies Act, 2013, an independent director will be liable only in respect of such acts or omissions which had occurred with their knowledge, including those attributable to board processes, or which occurred with the director’s consent or connivance or because the director did not act diligently. Similar protective measures for offences committed by companies are also outlined in specific acts such as the Negotiable Instruments Act, the Banking Regulations, the Insurance Act, the Payment of Bonus Act and others.

For example, Section 141 of the Negotiable Instruments Act, 1881 specifies that if a company commits an offence under this Act, and it’s proven that any director, manager, secretary, or other company officer was involved through consent, connivance, or negligence, then that individual will also be held accountable for the offence and may face prosecution and punishment accordingly.

The liability of independent and non-executive directors has been scrutinized under Section 141 of the Negotiable Instruments Act, 1881. For instance, in K.K. Ahuja v. V.K. Vora case (2009) 10 SCC 48, the court noted that, in the case of a managing director, it is not necessary to make an averment in the complaint that the managing director is in charge of the company as it is clear from the prefix ‘Managing’ that they are in charge of the affairs of the company. However, other company officials can be held accountable under Section 141(2) of the NI Act by detailing their responsibilities and involvement in any dishonoured cheques and by requiring consent, connivance, or negligence on the part of the company official.

In the case of SMS Pharmaceuticals v. Neeta Bhalla (2005) 8 SCC 89, the court was of the opinion that liability depends on the role one plays in the affairs of a company and not on designation or status alone.

In the case of Pooja Ravinder Devidasani vs State of Maharashtra and Another (2014) 16 SCC 1, the court held that ‘a non-Executive Director is not involved in the day-to-day affairs of the company or in the running of its business. Such a Director is in no way responsible for the day-to-day running of the Accused Company. Moreover, when a complaint is filed against a Director of the company, who is not the signatory of a dishonoured cheque, specific averments have to be made in the pleadings to substantiate the contention in the complaint, that such Director was in charge of and responsible for conduct of the business of the Company or the Company, unless such Director is the designated Managing Director or Joint Managing Director who would obviously be responsible for the company and/or its business and affairs.

In the case of Sunita Palita and Others v. M/s Panchami Stone Quarry (2022) SC Online SC 945, the court reiterated the above opinions and stated that a director of a company who was not in charge or responsible for the conduct of the business of the company at the relevant time, will not be liable under those provisions and it would be a travesty of justice to blame directors, who may not even be connected with the issuance of a cheque, only because of their designation.

The Ministry of Corporate Affairs issued a circular in March 2020, stating that Section 149(12) of the Companies Act, 2013 is a non-obstante clause and independent directors and non- executive directors should not be brought into any civil or criminal proceedings, under the Act, unless the criteria under Section 149 (12) are met and sufficient evidence exists against them.

It is clear from the above case law that the courts generally examine the liability of an independent director by considering whether the individual was ‘in-charge’ and ‘responsible to’ the company and overseeing its affairs, which includes having control over its daily business and operations. This will determine liability based on the involvement of the director in any offence committed by the company.

Independent directors are vital to maintaining the values of integrity and safeguarding shareholder interests. Through their continuous monitoring role, reliance on outside counsel when necessary, and advocacy of moral business conduct, independent directors make a significant contribution to the long-term viability and prosperity of the organizations they represent.