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Directors Liablities PDF
Directors Liablities PDF
(CA P.N.SHAH)
The Companies Act, 2013 has now been passed by the Parliament
in August, 2013.
2013 and is notified on 30th August 2013. It will come into force from the
date to be notified by the Government.
existing Companies Act, 1956. 98 Sections out of 470 Sections of the Act
have come into force from 12.9.2013. The provisions relating to duties
and Responsibilities of Directors are contained in the following sections of
the New Act.
(i)
(ii)
(iii)
Out of the above, Sections 161 to 163, 176, 180 to 183, 185, 192, 194,
195 and 202 have come into force on 12.9.2013. Draft Rules relating to
these topics are also issued for public comments.
While some of these provisions are more or less on the same lines as the
provisions in the Companies Act, 1956 (existing Act) there are some new
provisions which place additional duties and responsibilities on the
Directors.
responsibilities of directors under the Companies Act 2013 (New Act) are
discussed in this Article.
1..Board of Directors
1.1
the case of a public company shall be three and in the case of a private
company it shall be two. The maximum number of directors can be 15.
directors shall be a person who has stayed in India for 182 days or more in
the previous calendar year. Draft Rule 11.1 states that in every listed
company there should be one Woman Director who should be appointed
within one year from the date of this sections coming into force. The Rule
also provides that in every other public company where paid up Share
Capital is Rs.100 cr. or more or turnover is Rs.300 cr. or more, a Woman
Director shall be appointed within 3 years from the date on which this
section comes into force.
1.2
the new Act. This term is defined in Section 2 (62) to mean a company
which has only one person as a Member. In such a company the minimum
number of directors can be only one person who is a resident in India.
2.
Independent Directors
2.1
(i)
(ii)
(iii)
(iv)
(v)
during
the
current
or
two
immediately
(vi)
(vii)
(a)
Any legal or consulting firm which has or had transaction with the
company in or any of its group companies amounting to 10% or
more of the gross turnover of the firm.
(c)
that receives 25% or more of its receipts from the company, any of
its promoters, directors or its group companies or that hold 2% or
more of the total voting power of the company.
(viii) Who is not a Managing/Whole Time/Nominee Director.
2.2 (i)
of the new Act. It will be the duty of every independent director to give a
declaration U/s.149(7) at the first Board Meeting in which he participates
and thereafter at the first Board meeting of every financial year in which
he participates that he meets with the above criteria of independent
director. He has to intimate status of his independence from time to time.
A Managing director, whole-time director or a nominee director will not be
considered as an independent director.
(ii) Draft Rule 11.2 provides that a public company having paid-up
capital of Rs.100 crore more, or having turnover of Rs.300 cr. or more or
having aggregate outstanding Loans, Borrowings, Debentures, or Deposits
exceeding Rs.200 cr. shall also have 1/3rd of the total number of directors
as Independent Directors.
2.3
Directors.
Section 149 (12) provides that (i) an Independent Director and (ii) a
Section 149 (8) provides that the company and the independent
directors shall Comply with the provisions specified in schedule IV. This
schedule lays down a Code of Conduct for Independent Directors. It is
stated that the adherence with this code of conduct by independent
directors and fulfillment of their responsibilities in a professional and
faithful manner will promote confidence of the investment community,
minority shareholders, regulators and companies in the institution of
Independent Directors.
It is difficult to
comprehend whether the corporate sector will be able to find the required
number of Independent Directors to comply with these requirements.
2.8
be able to select the name from such Data Bank if such person qualifies
for appointment as provided in section 149 (6)as discussed in para 2.1
above. The responsibility of exercising due diligence before selecting the
name shall be that of the company. The procedure for selection of the
Independent Directors shall be in accordance with prescribed Rules.
It
may be noted that Draft Rule 11.4 provides for detailed procedure for
maintenance of Data Bank.
3.
Appointment of Directors.
3.1
Sections 151 to 172 of the new Act. These provisions are more or less on
the same lines as provisions of sections 254 to 267, 274, 275, 283, 284,
303, 307 and 313 of the existing Act.
(ii)
Every director
Meeting.
(iii)
the prescribed form which is to be filed by the company with ROC within
30 days. He has also to give his DIN particulars and a declaration that he
is not disqualified under the Act.
(v)
be such that they are liable to retire by rotation. At every AGM 1/3rd of
such directors shall retire by rotation.
(vi)
office upto the next AGM. Similarly, Board can also appoint an alternate
director if any director is to be out of India for more than 3 months.
(viii)
(xi)
For
has
to
regularize
the
position
in
one
year
after
the
Section 168 of the new Act provides for resignation of a director and
Elaborate provisions in
these sections are made more or less on the same lines as section 284 of
the existing Act.
(xv)
shareholders. This section is similar to section 252 (1) of the existing Act.
This provision applies to listed companies. Under this section a listed
company may have one director elected by such small shareholders in
such manner and with such terms and conditions as may be prescribed by
Rules.
shares of nominal value of not more than Rs.20000/- or such other sum as
may be prescribed.
The above sections also provide for filing of documents with ROC and
payment of additional fees for delay in filing such documents. Draft Rule
11.6 prescribes Form No. 11.2 for filing consent of Director u/s 152 (5).
Draft Rules 11.7 to 11.10 provide for detailed procedure for application for
DIN, allotment, cancellation etc of DIN.
Duties of Directors:
4.1
He has to carry on his duties with due and reasonable care, skill and
indirect interest that conflicts or likely to conflict with the interest of the
company.
(v)
4.2
shall be punishable with fine which shall not be less than Rs.1 lac which
Directors,
Sections 173 to 195 of the new Act provide for meetings of the Board
provisions are similar to sections 49, 285 to 302, 319, 320 and 372 A of
the existing Act.
5.2
(i)
before the date of the meeting. For any urgent business, a meeting, with
shorter notice, can be held provided atleast one Independent Director is
present at that meeting.
10
give the above notice, if he fails to comply with the above procedure.
(v)
hold one Board Meeting in every six months of the calendar year. The gap
between the two meetings shall not be less than 90 days. The term small
company is defined in section 2(85) to mean (a) a private company with
paid up share capital not exceeding Rs.50 lacs or such higher amount as
may be prescribed or (b) a private company whose turnover, as per last
profit & loss account, does not exceed Rs. 2 crore or such higher amount
as may be prescribed.
Quorum for a Board Meeting shall be 1/3rd of its total strength or two
section 175 has to be complied with. However, 1/3rd of the directors of the
Company may direct that such resolution be considered at a Board
Meeting.
(ix) Draft Rules 12.1 and 12.2 provide for procedure for attendance by a
Director through Video Conferencing or other Audio Visual Means, Draft
Rule 12.3 provides for passing resolution by circulation.
11
5.3
Audit Committee
committee, including the chair person, shall be persons with ability to read
and understand financial statements. The existing Audit Committee, shall
be reconstituted to meet with the requirements of section 177 within one
year from the commencement of the new Act.
(iii)
by the Board.
In particular,
(b)
(c)
(d)
Monitoring the end use of funds raised through public offers and
related matters.
(e)
(f)
(g)
(iv)
12
Details of such
5.4
under.
(i)
This Section provides that in the case of a listed company and such
appoint
Nomination
and
Remuneration
Committee.
The
(a)
accordance with the criteria laid down for this purpose and make
recommendation to the Board.
13
(d)
key managerial
Similarly,
accept deposits which accept deposits from public and have borrowed
money from banks and public financial institutions in excess of Rs.50 cr.
shall have vigil mechanism as provided in Draft Rule 12.5.
5.5. Stakeholders Relationship Committee.
New Section 178 also provides for appointment of Stakeholders
Relationship Committee. This provision is as under.
(i)
Company.
14
5.6
Penalty
In case of contravention of the provisions of section 177(Audit
Committee) and section 178 (as stated in para 5.4 and 5.5 above), the
company will be punished with minimum fine of Rs.1 lac which may
extend upto Rs.5 lacs. Further, every officer of the company in default will
be punishable with imprisonment for a term which may extend to one year
or with minimum fine of Rs.25000/- which may extend upto Rs.1 Lac or
both.
6.
6.1
existing Act. Under this section the Board is entitled to exercise all such
powers and to do all such acts and things as the company is authorised to
do under the Act,
company. All these powers are similar to the powers granted under the
existing Act.
the powers of the Board which are similar to restrictions u/s. 293 of the
existing Act. These restrictions relate to borrowings, investment, disposal
of companys undertakings etc
New sections 181 to 183 provide for contribution which the Board
Prior
15
Further,
imprisonment for a term which may extend to 6 months and with a fine
which may extend to 5 times the amount wrongly contributed.
(iii)
The
company has to disclose details of such contribution in its profit & loss
account.
6.4
every director on the same lines as Sections 299 and 300 of the existing
Act. He has to disclose his interest in any company, corporate body, Firm,
LLP, or other association of Individuals and his share holding(exceeding
the limit of 2% specified in section 184(2)in the prescribed manner. It is
also provided that he cannot participate in the meeting where any
contract or arrangement is considered. The provisions of New Section 184
apply to private Companies also.
this
16
Loans to Directors
(i) Section 185 of the new Act provides that no advance or loan can be
given by a public or private company, directly or indirectly, to its director,
his relative, partner or any associate concern in which he is interested.
Similarly, no guarantee or any security in connection with any loan taken
by him or such person shall be provided by the company.
Under this
section a loan will include a book debt which is in the nature of loan or
advance. Similar provisions can be found in section 295 of the existing
Act. This section has come into force on 12.9.2013.
(ii)
(a)
Any loan given by the company which in the ordinary course of its
It may be noted that u/s 295 of the existing Act, such loan or
As the new
Section 185 starts with the words save as otherwise provided in this Act
it appears that any such Loan or Guarantee to be given to a Director or
Relative etc. can be given with the prior approval of shareholders by a
Special Resolution as provided in the new Section 186 discussed in Para 7
below.
(iv)
17
provided.
(a)
and
received
the
loan,
guarantee
etc.
will
be
punishable
with
existing Act. This section provides for limitation on loans and investments
by a company, whether public or private. Briefly stated these provisions
are as under.
(i) Inter-corporate investments cannot be made through more than two
layers of investment companies. There are, however, two exceptions viz.
(a) acquision of a foreign company which has investment subsidiaries
beyond two layers as per law of the foreign country and (b) investment in
a subsidiary which is required to have one or more investment subsidiaries
in accordance with the applicable law.
(ii) A company cannot, directly or indirectly, give loan to a body corporate
or any person, give guarantee or provide security for any loan to a body
corporate or other person or make inter-corporate investment exceeding
60% of its paid up capital, free reserves and securities premium account
18
which term-loans are taken and outstanding will also be required if such
loans and investments exceed the limits stated in (ii) above.
(vi)
under the class of companies as may be prescribed can take intercorporate loans or deposits exceeding the prescribed limits. Details of
such loans/deposits shall be disclosed in the financial Statements of such a
Company.
(vii)
The rate of interest for such loans shall not be less than the
prevailing yield of one year, three year, five year or ten year Government
Security closest to the tenor of the loan.
(viii)
shall keep a
19
(x)
The Central Government shall make Rules for the purposes of this
section.
(xi)
(b)
(xiii)
It may be noted that section 372A of the existing Act does not apply
provides that all investments of a Company shall be held in its own name.
There are certain exceptions to the above provision which are on the same
lines as section 49 of the existing Act. If investments are not held in the
Companys name a Register in the prescribed manner will have to be
maintained.
stated in para 7.1 (xii) above is leviable on the Company and the officer in
default.
20
8.
8.1
corresponds with Section 297 of the existing Act. It provides for certain
restrictions on related party transactions. Briefly stated these provisions
are as under:(i)
Sale,
21
against such person and recover the loss, if any, from such defaulting
person. However, such contracts can be ratified by directors within 3
months from the date of contract or shall be voidable at the option of the
board and the director shall indemnify the company for the loss.
8.2
It may be noted that under section 297 of the existing Act prior
This
having a paid-up share capital of Rs.100 cr. or more shall not enter into a
contract or arrangement with any related party (ii) a company shall not
enter into a transaction or transactions, where the transactions or
transactions to be entered into.
(a) Individually or taken together with previous transactions during
a financial year, exceeds 5% of annual turnover or 20% of the net worth
of the company, whichever is the higher, for contracts or arrangements
stated above, or
(b)
with imprisonment for a term which may extend to one year or minimum
fine of Rs.25,000/- which may extend to Rs.5 lacs or with both.
(ii)
22
8.5
2(76).
In brief, this
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
8.6
followed by One Person Company when it enters into a contract with the
sole member of the Company who is also a director of that company. This
Section does not apply to a contract entered into in the ordinary course of
its businesses.
within 15 days about such contract. The particulars of the contract should
be recorded in the Minutes of the Board Meeting.
23
9.
Register of Contracts:
9.1
In the event of
24
10..
a person connected with him shall not acquire any asset for consideration
other than cash without complying with the procedure stated in the
section;
(ii)
Similarly, the Company cannot acquire any asset from the above
persons for consideration other than cash without complying with the
provisions of the Section;
(iii)
(a)
Company is to be obtained;
(b)
this section shall be voidable at the instance of the company under certain
circumstances specified in Section 192(3).
11.
Personnel:
11.1
25
persons, they will have to surrender the same to the company as provided
in Section 194(3).
11.2
12.1
(i)
buy, sell or deal in any securities by any director or KMP or other officer of
the company either as principal or agent if such director, KMP or officer is
reasonably expected to have access to any Non-Public Price Sensitive
Information in respect of securities of the company, or
(ii)
26
13..
13.1
New Section 134 provides that Board of directors shall approve the
It is also
provided that the Board of directors shall prepare its report and attach
auditors report and boards report to the financial statements before
placing the same before the annual General Meeting. The provisions of
the new section 134 are more or less similar to the provisions of existing
section 217.
13.2
It may be noted that apart from the matters which are required to
be stated in boards report under the existing section 217, new section
134 requires that the board report shall include the following matters.
(i)
(ii)
149(6);
(iii)
as may be prescribed under new section 178(1), (Refer Draft Rule 12.4)
Companys policy on Directors appointment and remuneration, criteria for
qualifications, positive attributes, independence of directors and such
other matters specified in new section 178(3);
(iv)
(vii)
Corporate
Social
Responsibility
Policy
and
details
about
27
of CSR Committee. Further, reasons for not spending 2% of net profit for
CSR activities to be stated as provided in Section 135(5).
(viii)
(Refer Draft Rule 9.10) a statement about formal annual evaluation made
by the Board about the performance of the Board, its committees and
individual directors.
(ix)
position of the company which have occurred between the end of the
financial year of the company and the date of the report.
(xvi)
The
conservation
of
energy,
technology
absorption,
foreign
28
stated in section 217(2AA) of the existing Act, the directors have to state
under section 134(3) of the new Act as under.
(i) In the case of listed companies the directors had laid down
internal financial controls to be followed by the company and that such
internal controls are adequate and were operating effectively:
(ii)
compliance with the provisions of all applicable laws and that such
systems were adequate and operating effectively.
14.
14.1
This section
(i)
activities.
29
(iii)
14.3
(a)
reducing child
mortality and improving material health, (e) combating HIV, AIDS, Malaria
and
other
diseases,
(f)
ensuring
environment
sustainability
(g)
The
Board
of
Directors
have
to
consider
the
CSR
Policy
recommended by the CSR Committee and approve the said Policy. The
Board has to disclose the contents of the Policy in its report to members in
the prescribed manner.
that these activities are undertaken by the Company. The Board has also
to ensure that at least 2% of the average net profits of the company
during the preceding 3 financial years is spent for CSR activities. For this
purpose, the company has to ensure that preference is given for CSR
activities to the local area around the place where it operates. If, for any
reason, the company is not able to spend the above amount in any
financial year, the Board will have to state the reasons for the same in its
report to the members.
15.
Internal Audit:
15.1
the existing Companies Act. However, the statutory auditors are required
to report in the CARO Audit Report whether in the cases of listed
companies and other companies having paid-up capital and reserves
exceeding Rs.50 lacs or have average turnover exceeding Rs. 5 crores
during
the
last
preceding
years
have
Internal
audit
System
30
15.2
The new Act now provides in Section 138 that, in such class of
His
reappointment can be made, for a further similar term, only during the last
year of his earlier term.
31
(iii)
WTD or Manager.
The notice for the above Board Meeting and General Meeting for
Company with the ROC within 60 days of the date of such appointment.
(Refer Draft Rule 13.1 which has prescribed Form No.13.1 for this
purpose).
17.
Managerial Remuneration:
17.1
32
existing sections 198 and 309 and Schedule XIII. In brief these provisions
are as under:(i)
other directors by a public company shall not exceed 11% of net profits of
the Company for the financial year.
provided in new Section 198.
only one such person) shall not exceed 5% of the above net profits.
(b)
If
there
are more
total
remuneration payable to all such persons shall not exceed 10% of such
net profits.
(c)
not exceed
(iii)
directors for attending meeting of the Board or its committee. Under Sec.
197(5) it is provided that a director shall be entitled to receive such fees,
as may be prescribed for attending Board or a committee Meeting or for
any other business purpose as the Board may decide. The Government
may prescribe different fees for different classes of companies and for
Independent Directors.
exceeding Rs.1 lac per meeting, can be fixed by the Board of Directors.
Different fees for Independent Directors and other Directors can be fixed
within the above limit.
(iv)
If, in any financial year, the company has no profits or its profits are
inadequate, the company can pay remuneration to its directors, MD, WTD
and Manager, (other than sitting fees as stated in (iii) above) within the
limits specified in Schedule V.
33
excess of the limits stated above without prior sanction of the Central
Government, he will have to refund such excess amount to the Company.
It will not be possible for the company to waive recovery of the excess
amount without the approval of the Central Government.
(ix)
34
(xi)
stock option) which is higher than what is due on the basis of restated
financial statements.
17.3
18.1
New Section 198 provides for the method for calculation of net
profit for the financial year for determining the limits for payment of
Managerial Remuneration as discussed in Para 17 above. This section is
similar to the existing Section 349.
18.2
Section 198 makes provision for computation of the net profit in the
same manner as in existing section 349. The Section is divided into four
parts as under:(i)
(ii)
(iii)
(iv)
18.3
Comparison of new Section 198 and existing Section 349 will show
that the only difference is with regard to any change in carrying amount of
35
19.1
This
payable by the Company. This section has come into force on 12.9.2013.
36
20.
20.1
(ii)
Company Secretary
(iii)
CFO
Draft Rule 13.7 provides that every listed company and every other
company, whether Public or Private, having paid up share capital of Rs.5
cr. more should have whole-time Key Management Personnel.
The
(i)
Such KMP shall not hold office in more than one Company, except in
Specific notice
37
giving details of such proposal should be given for such Board Meeting.
Such appointment will be subject to other provisions of the Act as
discussed earlier.
(iv)
within 6 months.
20.4
The company will be punishable with minimum fine of Rs. one lac
Rs.50000/-. In the event of continuing default, further fine upto Rs.1000/for every day during which the contravention continues can be levied.
21.
Secretarial Audit :
Section 204 is a new section. It applies to a listed company and to
from a
The Secretary appointed for this purpose will have to audit the
above report, the Board will have to give explanation about the same in
the Board report as provided in section 134(3).
(iv)
38
(v)
Draft Rule 13.7 provides that Section 204 shall apply to a listed
To
ensure
that
the
company
complies
with
the
applicable
To Sum up:
23.1
about
these
provisions
relating
to
their
duties
and
39
23.2
Non-Executive
Directors
of
listed
Companies
and
other
specified
about the activities of the company where they have accepted this
assignment.
will
be
onerous.
Considering
the
functions
of
these
recognition in the new Act. This will be over and above the financial audit
and cost audit.
reports of the various auditors and ensure that the necessary explanation
is given in the Board report in cases of qualifications or adverse remarks
by the auditors.
23.5
etc. have to discharge the onerous duties and responsibilities cast in the
new Act.
employees and other persons working for the Company. Considering their
duties and responsibilities which they have to shoulder, companies will
have to adequately compensate them.
23.6
40
will have to constantly watch the amendments made in the Rules from
time to time before taking any decision.
23.7
From the above provisions it will also be noticed that some stringent
and minimum and maximum fines will be levied for contravention of these
provisions.
directors and
It
appears
that
in
enacting
such
stringent
provisions
the
Government has taken care of some of the deficiencies of the existing Act
and tried to remove the same. Further, an attempt is made to address the
issues which have arisen in some cases of corporate failures and
Corporate Scams which have so far come to light. Let us hope that the
new Act, if properly implemented and administered brings more discipline
in the matter of Corporate Governance in the years to come.
Annexure I
CODE FOR INDEPENDENT DIRECTORS
This Code is a guide to professional conduct for independent
directors.
41
decision making: (v) not allow any extraneous considerations that will
vitiate his exercise of objective independent judgment in the paramount
interest of the company as a whole, while concurring in or dissenting from
the collective judgement of the Board in its decision making; (vi) not abuse
his position to the detriment of the company or its shareholders or for the
purpose of gaining direct or indirect personal advantage or advantage for
any associated person; (vii) refrain from any action that would lead to loss
of his independence; (viii) where circumstances arise which make an
independent director lose his independence, the independent director
must immediately inform the Board accordingly; and (ix) assist the
company in implementing the best corporate governance practices.
2.
(i)
help in bringing an
42
held
before
approving
related
party
transactions
and
assure
themselves that the same are in the interest of the company; (x) ascertain
and ensure that the company has an adequate and functional vigil
mechanism and to ensure that the interests of a person who uses such
mechanism are not prejudicially affected on account of such use; (xi)
report concerns about unethical behavior, actual or suspected fraud or
violation of the companys code of conduct or ethics policy; (xii) acting
within his authority, assist in protecting the legitimate interests of the
company, shareholders and its employees; and (xiii) not disclose
confidential information, including commercial secrets, technologies,
advertising and sales promotion plans, unpublished price sensitive
information, unless such disclosure is expressly approved by the Board or
required by law.
4. Manner of Appointment:
(i)
of the
43
through a letter of appointment, which shall set out: (a) the term of
appointment; (b) the expectation of the Board from the appointed director;
the Board-level committee(s) in which the director is expected to serve
and its tasks; (c) the fiduciary duties that come with such an appointment
along with accompanying liabilities; (d) provision for Directors and
Officers(D and O) insurance, if any; (e) the Code of Business Ethics that
the company expects its directors and employees to follow; (f) the list of
actions that director should not do while functioning as such in the
company;
and
(g)
the
remuneration,
mentioning
periodic
fees,
companys website.
44
5.
Reappointment:
The re-appointment of independent director shall be on the basis of
Resignation or removal:
(i)
the same manner as is provided in sections 168 and 169 of the Act.
(ii)
of the
a period of not more than one hundred and eighty days from the date of
such resignation or removal, as the case may be.
(iii)
in its Board even without filling the vacancy created by such resignation or
removal, as the case may be, the requirement of replacement by a new
independent director shall not apply.
7.
Separate meetings:
(i)
45
8.
Evaluation of performance:
Annexure II
Broad conditions for managerial remuneration specified in schedule V
I
PART I:
Managing or
Central Government:
The conditions for such appointments are the same as in schedule
XIII of the existing Act.
II
PART II
A.
30 lacs
42 lacs
46
60 Lacs
Note:
If the
Board and, in the case of a company covered under Section 178(1) also by
the Nomination and Remuneration Committee;
(ii)
the company has not made any default in repayment of any of its
47
(i)
has been ordered by the Board for Industrial and Financial Reconstruction
or National Company Law Tribunal, for a period of five years from the date
of sanction of scheme of revival, it may pay remuneration up to two times
the amount permissible under section II.
(c)
section II but the remuneration has been fixed by the Board for Industrial
and Financial Reconstruction or the National Company Law Tribunal:
Provided that the limits under this Section shall be applicable subject
to meeting all the conditions specified under Section II and the following
additional conditions:
48
(d)
commerce from time to time which has not raised any money by public
issue of shares or debentures in India, and has not made any default in
India in repayment of any of its debts (including public deposits) or
debentures or interest payable thereon for a continuous period of thirty
days in any financial year, may pay remuneration up to Rs2,40,00,000 per
annum.
D.Section IV Perquisites not included in managerial remuneration:
A managerial person shall be eligible for the perquisites which shall
not be included in the computation of the ceiling on remuneration
specified in Section II and Section III above on the same lines as provided
in schedule XIII of the existing Act with some modification.
E. Notes (i) Explanation I to V defines the following terms on the lines
similar to provisions in schedule XIII of the existing Act.
(a) Effective capital
(b) Family
(c) Role of Nomination and Remuneration Committee
(d) Negative Effective Capital.
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