Need to limit and streamline independent director liability provide safe-harbours to independent directors: CII

Need to limit and streamline independent director liability provide safe-harbours to independent directors: CII

The decriminalization of many offences under the Companies Act, 2013 is a welcome movement. The terms under the Companies Act try to penalise not merely the company concerned to get a non-compliance, but also "officials in default" or specific recognized officer(s) of the provider. "CII truly appreciates the authorities for job this as a part of its ongoing effort for improving business environment, which in turn not only has the capacity of bringing investment but also improving the quality of corporate boards and diminishing worries of criminal prosecution because of non-material matters."

Early last year, CII attracted the interest of the Regulators to particular details of the regulatory frame for inspection for ease of conducting business in India. CII clarified that in some scenarios, civil and commercial disputes under company and financial legislations are handled as criminal offences, thus raising concerns among supervisors, young entrepreneurs, and national and overseas investors. Attention was drawn to the dilemma of decriminalization of both offences under company and financial legislations which influence the business and Trade with regard to specialized crimes, unless the offences incorporate a component of fraud / wrongdoing.

It was filed that offences that are of a specialized nature or that do not influence public attention prejudicially or that aren't serious offences might be thought to be decriminalized. For such company and financial legislations which fall within the domain of mediation or civil partners, government should think about decriminalising the legislation, unless there's an aim of fraud or misdoings. The punishment should be limited to penalties rather than fines / imprisonment. Periodic or habitual offenders could be penalized with greater penalties as may be determined by the adjudicating authority.

Government recently concluded the practice of decriminalising the Businesses Act, 2013. In this relationship, CII recently filed a Paper to the Ministry of Corporate Affairs highlighting issues connected to frame for reimbursement of offences; accountability of independent directors; vicarious liability, affect of Covid-19 pandemic; and D&O liability insurance. The Paper enumerates the following:

Government has improved in-house adjudication of penalties in respect of particular offences. The mechanism be expanded to further provisions that demand technical lapses. It's further recommended that the government believes the decriminalization of additional compoundable offences under the Companies Act.

As a general principle, given the onerous duties and obligations directors, including independent directors and company secretaries, penalties should be limited to penalties rather than imprisonment.

In connection with CSR, the punishment which are levied for non-compliance should not go past the unspent CSR amount.

In regard to financial statements and books of accounts, a differentiation between fraudulent upkeep and only faulty maintenance be brought out.

There's a need to make procedural and legal safeguards concerning personal liability of individual directors, and initiation of prosecution itself needs to be an exception instead of the rule, to maintain risk and benefits of becoming an independent manager proportionate. The entire notion of decriminalizing civil responsibilities is imperative to conserve religion in the establishment of independent directors.

When there are lots of case laws that put out legal principles on distributing vicarious liability under different statutes, initiation of proceeding itself may involve substantial personal hardship and prices for the concerned people. While wrong doers have to be prosecuted, there have to be procedural guidelines/safeguards around legislation to limit and minimize distress against people that aren't actually and demonstrably in control of the management.

Against the backdrop of COVID-19, bona fide decisions obtained during such extraordinary times (even if they don't turn out as expected ) might not be unduly contested with the advantage of hindsight.

Members of this board may request a Directors & Officers ("D&O") liability insurance and invest a while to know the extent and policy of D&O insurance acquired, and assess its adequacy with regard to the organization and individual supervisors.

Last year CII published Guidelines on Integrity and Transparency in Governance and Responsible Code of Conduct at February 2020.  The Guidelines state that capability for corporates (and their applicable officers/directors) to repay non-serious offences (such as without admission or denial of guilt) could be introduced to get a wider set of legislation; and capacity to compound offences (or assert amnesty for non-serious offences) be made a part of their legal frame. This may enable ease of conducting business, in which procedural and non-serious issues can be settled with no prosecution or adverse reputational judgment.

The CII Paper also claims that it is crucial to put clear secure harbors set up for independent supervisors. Proceedings against independent supervisors could be initiated only once there's prima facie proof of the potential participation in the topic, as opposed to as a matter of course. Placing clear protected harbors will go a long way towards covering issues of gifted individuals wanting to combine business boards as separate directors.

Obligation of an independent director under the Companies Act might be restricted to the degree of these contraventions / defaults, that can be dedicated by the firm with the knowledge or approval of the stated independent manager. It's imperative to explicitly exempt independent supervisors from vicarious criminal liability as they aren't involved in the daily running of the provider. A non-obstante clause might be included in the Act to exclude individual supervisors from any vicarious criminal liability for offences committed by the business.