India: Add-Ons To The Term ‘Non-Executive Director'

Last Updated: 14 September 2016
Article by Link Legal India Law Services

In the changing corporate-legal environment, it is important to understand the roles, responsibilities and liabilities associated with the position of a non- executive director in a private limited company, particularly when the Companies Act, 2013 ("Act") has a sack full of punishments and penalties for both directors and companies, in case of any default.

The role of each individual on the Board has been defined and explained under the Act, be the company a small or a budding one, a medium or a large, the Act has a lot about the roles, responsibilities and liabilities of a non-executive director in a private limited company.

With this write-up here, we are trying to provide an understanding on the same. Before entering into the details of how a non-executive director functions or shall function, it is pertinent understand the background on the non-executive chairman under the Act:

Who is a Non-Executive Director?

The Act does not specifically provides the definition of term 'Non- Executive Director' However, we can construe it by understanding the definition of term 'Executive Director' provided under Rule 2(k) of the Companies (Specification of Definition Details) Rules, 2014, which reads as follows:

"Executive Director means a whole time director as defined in clause (94) of section 2 of the Act"

To further clarify, a 'Whole Time Director' as defined under section 2 (94) of the Act reads as follows:

"Whole Time Director includes a director in the whole time employment of the Company"

The above definitions of executive directors well provide the understanding that a non-executive director is a director who is not a Whole-time Director i.e. a director not being in whole time employment of the company. A Non-Executive Director is the best kept secret of most successful companies. A full time fixture or in a temporary arrangement, non-executive directors contributes a wealth of knowledge, strategies, experience and contacts to the business.

Such directors are also considered to be the custodians of the governance process as they are not involved in the day-to-day running of business and monitor the executive activities.

Roles, responsibilities and liability of a Non-Executive Director:

The fact is well noted that the non-executive directors are not involved in the day to day activities of the company and hence it is all the more important to understand what exactly are the roles and responsibilities of a non-executive director and also the liabilities associated with it:

Roles and responsibilities of a Non-Executive Director –

This could be explained with a cluster of words and phrases, but nothing explains better then what is held by the Supreme Court of India, in a landmark case:

Pooja Ravinder Devidasani v/s. State of Maharashtra, [Criminal Appeal Nos. 2604-2610 of 2014 (Arising out of Special Leave Petition (Crl) Nos. 9133-9139 of 2010]1, where it was observed that:

"There is also no dispute that the Appellant was not the Managing Director but only a non-executive of the Company. Non-executive Director is no doubt a custodian of the governance of the Company but does not involve in the day-to-day affairs of the running of its business and only monitors the executive activity".

Similarly, in Chaitan M. Maniar v. State of Maharashtra 2004 ALL MR, it was observed that for the acts of some unscrupulous persons, the non-executive directors, who are not concerned with the day to day functioning of the company cannot be held responsible unless the active participation of the director is substantiated by concrete material or instances or particulars.

It is important for the companies and its Board and the non-executive directors too, to understand and define the role of a non-executive director on the Board of the company in order to chalk out the responsibilities to be disposed and the liabilities to be shared with them.

In light of the various precedents laid down by courts in India, it can be understood that a non-executive director is not involved/engaged in the day-to-day affairs of the operations or running of business of a company, however still termed and viewed upon as a custodian of the governance of the company.

Liabilities of a Non-Executive Director –

As regards the liabilities of a non-executive director, it is pertinent to note that the Act or any other statue does not distinguish the liabilities of a non-executive director from that of an executive director. However, the Act provides for limitation of liabilities of a non-executive director under Section 149 (12) (ii), which states as follows:

"a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently."

In a related case of SMS Pharmaceuticals v/s. Neeta Bhalla, the Delhi High Court observed that the liability depends on the role that the person plays in the company and not on the designation or status. The court further concluded that the liability arises on account of conduct, act or omission on the part of a person and not merely on account of holding an office or a position in a company.

The aforesaid provision read with the observations of the abovementioned case, concludes that liability of a non-executive director under the Act is limited to the extent of such contraventions / defaults, which are committed by the company with the knowledge or consent of the said non-executive director.

Despite the aforesaid principle being recognized in many cases in India, Union Carbide Corporation v/s. Union of India Etc. (commonly known as 'Bhopal Gas Tragedy Case') changed the understanding with regard to the liabilities of a non-executive director of a company. In this case a non‐executive director being chairman was also convicted for the offence along with the executive directors of the company. The said conviction was based upon the contention that 'how can a chairman without any knowledge of the company activities, preside over the meetings of the shareholders and higher officials'.

In light of the said case, it may be concluded that a non-executive director, may not be involved / engaged in the day-to-day activities or running of business of a company, but if he is a Chairman of the Company / Board and is presiding over the meetings of the Board, he may be held responsible for the wrong doings of the company on the basis of his participation and / or involvement in the discussions held in the Board meetings of the Company as a Chairman.

If we take a close look on the definition of 'officer in default' provided in the Act [under Section 2(60)], it clearly indicates that not only the executive directors or Key Managerial Personnel are to be considered as officers in case of any default under the provisions of the Act, but, such other persons of a company under the immediate authority of the Board or Key Managerial Personnel; persons giving advice in professional capacity; any director who is aware of such contravention and had participated in the proceedings of the Board without objecting to the same, or where such contravention had taken place with his consent or connivance, shall also be officers in default and shall also be held liable to any penalty or punishment by way of imprisonment, fine or otherwise as prescribed under the Act. Therefore, in the event a non-executive director / chairman qualifies under the said definition, he is also liable to be penalized under the provisions of the Act.

While we sum up the stands taken by various courts in India with respect to liability of a non-executive director (whether or not a Chairman of the board) of a company in India, we find that each case turns on its own facts.

Hence, whenever something goes beyond what the statues have provided and the courts in its judgments have laid down for the non-executive directors, the decisions / conviction is based upon the degree of involvement of said director on the Board of the company and also on the criticality of the matter in question.

Footnotes

1 In this case, the court ascertained the liability of a non-executive director in respect of a cheque bounce case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Narasappa, Doraswamy & Raja
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Narasappa, Doraswamy & Raja
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions