Directors’ liabilities in Indian companies: Here are various statutes under the Indian laws

Directors are often unable to fathom the liabilities underlying their position in Indian companies. Company, being a legal fiction, directors have traditionally been viewed as their agents or trustees.

Directors’ liabilities in Indian companies: Here are various statutes under the Indian laws
Under various labour laws applicable in India, the employer in case of a company, is the person or the authority who has the ultimate control over the affairs of the establishment. Image: Pexels

By Sandeep Jhunjhunwala

Directors are often unable to fathom the liabilities underlying their position in Indian companies. Company, being a legal fiction, directors have traditionally been viewed as their agents or trustees. The recent corporate frauds involving management and promoters, bring into focus, the fiduciary role of directors and incremental demand for codification of best practices to shield the interests of a company and its shareholders. The designation of a director underscores a vast array of responsibilities going beyond the realm of corporate laws encompassing tax laws, labour laws and a surfeit of business and commercial laws, imputing civil, and in some cases, criminal liabilities. The vicarious liability, causing personal liabilities to be fastened for corporate actions, adds to the burgeoning responsibilities and liabilities of a director. 

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Liabilities under Companies Act, 2013

The Companies Act, 2013 laid a groundbreaking shift in duties of directors’ by codifying their duties and responsibilities enshrined in Section 166. The fundamental duties which emanate from the fiduciary position held by a director include the duty to act in good faith keeping in view promotion of objects of a company, exercise reasonable care, skill and diligence with independence of judgment, steer clear of conflict of interest or take undue advantage. Without the need of a proven breach, any transaction entered into by a director on behalf of the company which places personal interest over duties to the company, is liable to be restrained and could entail penal consequences for the director.

The Companies Act jargonized the term “officer who is in default” to penalise officers, in addition to penalties levied on the company itself for various categories of defaults, contraventions or non-compliances. The term includes a whole-time director or key managerial persons (such as CEO, CFO, whole time CS, MD) owing to their association with the day-to-day activities of the company. Any other director could be held to be liable only with respect to specific contraventions which have occurred with such director’s consent or connivance. However, a nuanced reading of the phrase could reveal that even where the director was aware of violation by virtue of participation in a board meeting, without an explicit objection to the same or a mere receipt of the proceedings of the board, could make such director subject to penal consequences. Section 463 of the Companies Act, however, provides relief and legal protection to directors where it could be demonstrated that the director acted honestly and reasonably. 

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Liability under Income Tax Act, 1961

The Income Tax Act, 1961 affixes a joint and several liability on directors of a private company for non-recovery of tax due from such company. The liability, however, does not extend to directors who did not hold office during the year with respect to which the tax recovery pertains. The Income Tax Act casts burden of proof on the director proceeding against to absolve oneself of the liability by substantiating that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on their part in relation to the affairs of the company. The expression “tax dues” includes penalty, interest, fees or any other sum payable under the Income Tax Act.

Income-taxes, in the overall scheme of strategising business, generally take a back seat leading to dilution of attention to demand and recovery proceedings initiated by the Authorities. Such lenience could cost the director of the defaulting company a heavy buck as exonerating himself from breach of duty, is a subjective and discretionary affair. 

Central Goods and Service Tax Act, 2017

The provisions that impute a personal liability on directors of a private company under the Central Goods and Service tax Act, 2017 for non-recovery of tax, interest and penalty from such company in respect of supply of goods or services or both are analogous to the provisions contained in the Income Tax Act. However, the GST Act contains a specific provision for offences by companies (apart from tax dues) which, similar to the Companies Act, holds the director guilty if it is proved that the offence has been committed with consent or connivance or is attributable to any negligence on their part. 

Foreign Exchange Management Act, 1999 

The material expression under the Foreign Exchange Management Act, 1999 ie “person in-charge” deems a person who was responsible to the company for conduct of its business at the time when the contravention was committed, to be guilty of such contravention. Like tax laws, the benefit of doubt is given in cases where the contravention took place without the knowledge of the accused director or where due diligence was exercised. 

Labour laws 

Under various labour laws applicable in India, the employer in case of a company, is the person or the authority who has the ultimate control over the affairs of the establishment. Default under labour laws including payment of wages below the minimum threshold, non-payment of gratuity, non-reporting or wrongful disclosures, could have an impact on a director in addition to the company’s accountability. 

It is evident that vicarious liability of a director, even though not absolute or plenary, is prevalent in a multitude of Indian laws such as Prevention of Money Laundering Act, Prohibition of Benami Property Transactions Act, Foreign Exchange Management Act, Negotiable Instruments Act etc. Immunity could be sought by proving bonafide. Such demonstration could in itself be arbitrary and long drawn, thereby, calling for directors to be fully aware of their responsibilities and ensuring that all acts of the company meet statutory laws. Documents recording the effect that directors are not conflicted, safeguards by way of Directors and Officers liability insurance, are some measures that could be resorted to, given that comprehending every requirement under all applicable commercial laws to businesses in India, is almost an impossibility.

(Author is By Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP (Business Advisory firm. Views expressed are the author’s own.)

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