A careful reading or analysis of the provisions of different statutes governing tax evasion, money laundering, security fraud, etc. suggests that Indian statutes impose vicarious liability on officers who are in charge of and responsible to the company for the conduct of business and those who contributed to the contravention or the offense by giving consent, connivance and not acting diligently.
In Sunil Bharti Mittal v CBI, the Supreme Court clarified the situations where directors and other officials can be held liable for an offense by the company. These are (a) the existence of sufficient evidence about active role coupled with criminal intent b) where the statute clearly stipulates the liability of officers and directors.
Section 166 of the Companies Act, sets out certain principles applicable to independent directors like acting in good faith and in accordance with articles of the company and exercising due and reasonable care, skill, diligence, and independent judgment while making important decisions. When a company commits an offence the officers who are ‘in default’ are vicariously liable. The first set of liabilities which is statutory in nature requires directors to make compensatory payments to the state and victims, fines, and imprisonment.
The second set of claims is raised by the company itself or its shareholders for breaches of the director’s duties. The Companies Act attempted to balance the liability of independent directors considering the extensive nature of their duties.
As reflected in the ruling of the Supreme Court in Pooja Ravinder Devidasani v State of Maharashtra & Ors where the court observed that although a non-executive director is custodian of corporate governance and is at the helms of affairs of the company, he may be made liable but he does not become liable for all the actions of the company just because of being a director of company the rationale being the limited control of the independent directors over the affairs of company.
In Somendra Khosla v State the Delhi High Court refused to quash the complaint against the independent director despite his argument regarding the absence of a role played in the offence committed. Similarly in Chitra Sharma and Ors v Union of India and Ors, the Supreme Court didn’t distinguish between other directors and independent directors while lacing restrictions upon leaving the country without permission of the court.
It is widely prevalent to incriminate all directors irrespective of the category they belong in cases pertaining to the Negotiable Instruments Act. Further, during the trial of any offense, all directors including independent and non-executive are summoned and a burden is cast on them to prove their diligence and acting bona fide while discharging their duties.
Even though there is a general principle that only when there is sufficient ground for initiating criminal proceedings against a person on the basis of evidence on record then only a court can issue a summons to any person as an accused the courts have departed from this practice often against independent directors who generally are not in charge of day-to-day affairs of the country.
The regulatory framework disproportionately exposes independent directors to significant liability risks considering their onerous duties and functions. There is a wide chasm in the responsibility and liability of independent directors. Considering the promoter and owner-controlled appointment and removal process the independent directors are scarcely independent in the real sense and in such cases it is very difficult and overburdened for them to effectively carry out duties including managerial overreach and self-dealing transactions.
It is also highly difficult to bring an element of impartiality in boardroom decision-making along with overseeing compliance with corporate governance norms with informed objectivity which is a fundamental objective for which independence of the director is sought.
The independent directors also face information asymmetry in the current board structure where management chooses to conceal certain information from them which makes it difficult for them to make any decision regarding corporate governance. Hence imposing liability upon them without ensuring their independence in letter and spirit has made them vulnerable to prosecutions and harassment