Criminal Liability of Independent Directors

 

Until now, 'Samaritans' is not how the Independent Directors are purported by Clause 49 in the Listing agreement. An Independent Director is somebody who receives the normal remuneration which any other Director is entitled in ordinary course of business, but incidentally also one who hammers at the wrong doing of the Board of Directors by putting himself into the stakeholder's shoes. (It is noteworthy that the Companies (Amendment) Bill 2009 proposes to disallow the Independent Directors from receiving any amount other than sitting fees and other approved profit related commissions and stock options, whereas as per the clause 49, an independent Director can receive the normal Director remuneration. Hopefully clause 49 should ideally get revised accordingly to concur with this). This is a position that calls for enough empathy as a human being by putting aside all his/her aggressive materialistic ambitions. Of course when it comes to laws and regulations, there will not be enough 'carrots' but certainly a lot many 'sticks' especially if public interest is jeopardized and hence even they become the motivating factors.

 

The Key distinctions between any other Director and an Independent Director are a host of 'detachments' as set out below which make the Director an 'independent' individual,

1. Lack of Pecuniary relationship or transaction with a host of specified persons (promoters, senior management, holding or subsidiary or associated companies)
2. Lack of any relationship with Promoters, Top most management or just one level below that
3. Not a substantial shareholder, supplier, customer, service provider, partner or executive of a statutory audit firm, consulting firm or a legal firm during the last three year
4. Not an executive in the immediately past three financial year

These apart the fiduciary duties of the independent director remain as that of any other Director. In fact they are the real 'strangers on board' the Company. (Unfortunately this time the Companies (Amendment) Bill 2009 seems to have missed out a more popular and frequently used words called 'proven track record' and chose to give Board the liberty to calibrate persons with integrity, expertise and experience without enough guidance. The Board can later on simply report off the compliance with the appointment conditions at the General meeting)

 

As far as India is concerned a Criminal liability involves doing something willfully (mens rea) which is prohibited by law. As of now a 'Corporate' criminal liability is something alien to our jury. 'Corporate criminal liability' has slowly gained acceptance in the West. It is founded on the basis of this ruthless Principle of Agency which holds the Principal vicariously liable for illegal acts committed by his Agent in course of the employment.  We all are aware of the fact that Directors get into a deemed agency relationship upon signing the contract for service. The mindset of the community at large in this backdrop has now been to acquit the Independent Directors by deeming them as innocent at least with respect to offences in routine business. The shield is given under the context that law itself wants a person who is non executive both present and in past and therefore it cannot point fingers at the independent director. As of now the position of an independent Director carries no legal sanctity except for the tag of independence and therefore attaching a criminal liability to them is no blasphemy either. All that is required is the proven guiltiness of mind and then charging them for criminal offence will not be against law.

 

Consider a real case that we had recently. Independent Directors of a company moan of having received notices for appearing in the magistrate for an allegation on heavy misstatement in the Balance sheet by adding extra zeroes! (inadvertently or not). This cannot be construed as committed in the regular course of business and certainly such blunders do not allow sparing a person who is presupposed to know the usual magnitude of the Balance sheet numbers (though he may be off the site most of the times). This is a case where our judiciary rightly presumed that with reasonable diligence such mistakes could have been avoided. Let us not forget that the Companies (Amendment) Bill 2009 is to come up with rules governing the appointment of Independent Directors with special mention about their Chairmanship and Majority strength in the Audit Committee. At least one Director in the committee is supposed to be knowledgeable of the accounts and audit. To add to this requirement the Ministry of Corporate affairs wants a Chartered Accountant to head the Audit committee. An audit committee has a wide range of duties including examination of financial statements, transaction with related parties etc. Under these circumstances a layman definitely gets to understand that such Independent Directors would be reasonably accustomed to the Company financials. Such mishaps only highlight the ineffective functioning of an Audit committee.

 

As per the current Clause 49 as well as the forthcoming companies law (amendment 2009), the appointment of an Independent Director happens through Board. The element of democracy is clearly missing here. In National Governance the people of India elect the desired political parties whereas in Corporate Governance, the stakeholders do not have any idea of the prospective Independent Director. Of course there have been enough voices against this in the past. The Constitution of India does not impose any moral responsibility or liability on the Indian citizens or the respective political party as a whole when a politician commits a wrong doing which wrecks the nation. In the same way the law only intends to hold the concerned Independent Directors severally liable for their own criminal conduct.

 

The MCA has very recently clarified that the Independent Directors can be held criminally liable after being tested positive of 'culpable intent' (or mens rea). Supreme Court reiterated through its decision in S.K.Alagh's case that vicarious liability cannot be passed on to a Director unless the statute provides otherwise and independent Directors are no different specie. Consider a hugely popular offence of a cheque bouncing which deals a heavy blow on the incumbent Director under the Negotiable Instrument Act 1881. The stand of SC is very clear that vicarious liability will attach to a Director who was in charge of the respective activity at the time the offence was committed. Independent Directors are persons called at the time of the Board meeting to ensure that the discussions held and the resolutions passed therein are reasonable, efficient and prudent for the business. Thus their responsibility ideally ends with vigilance in the Board meetings and any matters transacted outside are definitely not within their purview. Hence the widespread perception that Independent Directors are scapegoats may not be always right. 

 

As long as the law or the judiciary does not harass them for other defaults given their asymmetric roles and responsibilities backed up by a non commensurate remuneration, people who offer to come on board as independent directors may turn out to be our Biblic 'Good Samaritans' !