CORPORATE GOVERNANCE

Introduction....................................................................................................................................... 2
I. §464 of Companies Act............................................................................................................2
II. Key issues in the Course...........................................................................................................2

Two models of Corporate Governance /Approaches to Corporate Governance................4

I. Comply or Else Approach........................................................................................................4
II. Comply or explain approach.....................................................................................................5

Examples of Comply or Explain Approach in Companies Act, 2013...................................6

I. §129: Financial Statements.......................................................................................................6
II. §134: Financial Statement, Board’s Report, etc........................................................................6
III. §450: Punishment Where No Specific Penalty or Punishment is Provided...............................6
IV. §177: The Audit Committee.....................................................................................................7
V. §135. Corporate Social Responsibility......................................................................................7

Compounding of Offences.............................................................................................................. 9
I. Meaning of Compounding of Offences....................................................................................9
II. Who are compounding authorities under the Act?....................................................................9
III. Injeti Srinivas Committee Report...........................................................................................10

Directors under the Companies Act, 2013................................................................................ 13

I. S.182. ‘Agent’ and ‘principal’ defined.—..............................................................................13
II. S.88. Indian Trusts Act.—......................................................................................................14
III. S.2 Specific Relief Act, 1963. —............................................................................................14
IV. S.11 of the Specific Relief Act, 1963.—.................................................................................15
V. S.166. Duties of directors. —.................................................................................................15
VI. S.172, Companies Act, 2013- Punishment. —........................................................................16
VII. S.430- Matters only be heard by NCLT..................................................................................16

Establishing Liability of Directors............................................................................................. 19

Institution of Independent Directors......................................................................................... 27

 Date: August 3, 2020

INTRODUCTION

It is not only a theoretical subject.

I. §464 OF COMPANIES ACT.

There is Co Act whereas there are others which are Codes.

S.464: Prohibition of Association or Partnership of Persons Exceeding Certain Number

(1) No association or partnership consisting of more than such number of persons as may be
prescribed shall be formed for the purpose of carrying on any business that has for its
object the acquisition of gain by the association or partnership or by the individual
members thereof, unless it is registered as a company under this Act or is formed under
any other law for the time being in force:
Provided that the number of persons which may be prescribed under this sub-section shall
not exceed one hundred.
(2) Nothing in sub-section (1)shall apply to—
(a) a Hindu undivided family carrying on any business; or
(b) an association or partnership, if it is formed by professionals who are governed by
special Acts.

(3) Every member of an association or partnership carrying on business in contravention of

sub-section (1)shall be punishable with fine which may extend to one lakh rupees and shall
also be personally liable for all liabilities incurred in such business.

II. KEY ISSUES IN THE COURSE

They shall be covered by Committee recommendations. We shall look at the acceptance of

some recommendations and reasons for acceptance and rejection. The issues in the course
are:

1) Compliance with Corp Governance: If company doesn’t observe a rule, should it

be punished or be asked whether it should be punished or not? CSR- No gun to
your head. It is a paid promoted extortion. People are afraid of CSR instead of
being enthusiastic. Milton Friedman- Case of people wanting to have a
corporation living under social responsibility. The main aim, as per Friedman, is
to maximize wealth of shareholders. It is not a welfare state body.
2) Dichotomy of control and ownership,
3) Independent Directors- Borrowed from US- Retail shareholding. How is that
functioning? Is the qualification valid that anyone can be appointed? What would
their liability be?

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 4) Halo Effect of Promoters: Narayan Murthy and Ratan Tata- Sikka and Mistry.
Teacher and warden is one person- wields too much power. Richard Branson and
Steve Jobs- violated rules. Chairman emeritus- Ratan Tata- There is no position.
Theory of Internal Autonomy- Reign the person- Question of control becomes
important. Role of Key Managerial Personnel will also be looked at.
5) RPTs will also be looked at. Chanda Kochchar – Husband case.
6) Woman directors- Whether gender based reservation is good? Professionally
managed company- We associate companies with promoters. How do these
companies then play out?
7) The role of auditors,
8) Interface of IBC over CG.
9) The rights of Minority Class shareholders.
10) Ease of Doing Business Index: What do the numbers and factors in the index
mean and they represent? Singapore- Not even one RPT being challenged-
Enforcement of Contracts Index.
11) The issue of arbitrability of Company Disputes. Mediation has been introduced in
Companies Act. How effective is it?

Doubts:

1. Gautam: There are shareholders big in size, even in the US.

Sir: They are regulated by SEC.
2. Abhinav: Environmental Due Diligence- CSR- Zero Draft- MCA. COVID-19 and
change.
Sir: If we have time, we’ll look at it.

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 Date: August 4, 2020

TWO MODELS OF CORPORATE GOVERNANCE /APPROACHES TO CORPORATE

GOVERNANCE.

What kind of model do we adopt in India? It is based on four factors:

1) Fairness
2) Accountability
3) Transparency
4) Equity

The definitions are old and were given in some context. Although they have changed, we
need to consider the social milieu in which the businesses operate. Without the problems of
corporate governance in a jurisdiction, the response to the problems would be coloured by the
definition.

I. COMPLY OR ELSE APPROACH

There are provisions or rules and one has to follow those rules and if there are any deviations,
it would attract penalties. It is a traditional idea. Focus is not on the company or shareholders.
It rests on shoulders of regulators.

In the US or UK, some activities are purely internal matters- M&A of company- doesn’t
require approval from NCLT. They have scheme of arrangement and it gets accepted, the
M&A gets executed.

One jacket fits all approach. Internal powers are taken from shareholders and placed in
regulators’ lap. Something which has taken birth from negativity- It can never be an agent of
positive change.

NCLAT- Cyrus Mistry- Not an iota in reasoning for corporate governance. Not a consti
matter where 143 can be invoked. This concept places over-reliance on rules rather than
business sense. Many thinkers- primary purpose of law is realization of larger goal. Objective
of company is not strict observance of law. Its objective is wealth or profit maximization.
Company can’t be made to treat the same line as PSUs. Equity can’t overrule Foss v.
Harbottle rule.

Ease of doing business issues arise out of it. Corporate houses wield power. The more this
model is accepted, there would be erosion of shareholder of shareholder autonomy.
Shareholder activism withers away. When you want to become investor friendly destination,
these decisions don’t allow settled positions of law.

E.g.: Officer-in-default – What led us in 1956 to have the concept? We have the concept of
Key Managerial Personnel in 2013.

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 III. COMPLY OR EXPLAIN APPROACH

Examples of comply or else approach are primarily US or India. Even countries like Thailand
or Singapore- most of these jurisdictions have leaned towards comply or explain approach.

It arises out of Cadbury Report in the UK.

Observation of rule precedes content of the rule/effect of rule. Herd mentality followed in
India. Singapore became hub of arbitration.

There would be no rules- there are guidelines. There are some fundamental rules which bring
certainty. Beyond that, there would only be guidelines. Guidelines are recommendatory in
nature.

Deviation is inherent in guidelines and it will happen. It is subject to explanation. It is to the

shareholder. It is called shareholder activism.

We can claim it to be a toothless law but the teeth of Indian laws are biting the town.

In India, the CSR model adopted the ‘comply or explain’ approach. The company could have
chosen not to do it but with an explanation. Regulators have dawned same role as government
before 1990.

Doubts:

1. Officer-in-default – What led us in 1956 to have the concept? We have the concept of
Key Managerial Personnel in 2013.
2. Cross-border mergers- Pranav’s doubt- Approval of regulator.
3. “Observation of rule precedes content of the rule/effect of rule.”

Homework for August 6, 2020

1. Executive Summary of Cadbury Report1.

Explanation: They had to come up with the recommendations due to the global scams.
We come out of UK but want our DNAs to match the US.
2. Compounding of Offences: Injeti Srinivasana Committee Report- Re-categorization
of offences.
3. Cyrus Mistry case.

1
See SRM – I.

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 Date: August 6, 2020

RANDOM FACTS

1. SEBI’s powers- The power of SEBI have become a menace. There is no stability.
2. Shareholders can remove directors. You can call an EGM for doing this. It will crash
share prices and wreak havoc.
3. Mallya hasn’t been caught. No one understands that they are discharging multiple
roles. If King

EXAMPLES OF COMPLY OR EXPLAIN APPROACH IN COMPANIES

ACT, 2013

Two provisions to show the glimpse of comply or explain approach:

I. §129: FINANCIAL STATEMENTS

(5) Without prejudice to sub-section (1), where the financial statements of a company do not
comply with the accounting standards referred to in sub-section (1), the company shall
disclose in its financial statements, the deviation from the accounting standards, the reasons
for such deviation and the financial effects, if any, arising out of such deviation.

These deviations aren’t bad.

There is no penal provision.

There is §134 for imposing penalty.2 Also, there is §450.3

IV. §134: FINANCIAL STATEMENT, BOARD’S REPORT, ETC.

(8) If a company contravenes the provisions of this section, the company shall be punishable
with fine which shall not be less than fifty thousand rupees but which may extend to twenty-
five lakh rupees and every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to three years or with fine which shall not be less
than fifty thousand rupees but which may extend to five lakh rupees, or with both.

V. §450: PUNISHMENT WHERE NO SPECIFIC PENALTY OR PUNISHMENT IS

PROVIDED.

If a company or any officer of a company or any other person contravenes any of the
provisions of this Act or the rules made thereunder, or any condition, limitation or restriction
2
http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17517.
3
http://ebook.mca.gov.in/Default.aspx?page=applicablity&rg_applicabilityChangePage=10.

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subject to which any approval, sanction, consent, confirmation, recognition, direction or
exemption in relation to any matter has been accorded, given or granted, and for which no
penalty or punishment is provided elsewhere in this Act, the company and every officer of the
company who is in default or such other person shall be punishable with fine which may
extend to ten thousand rupees, and where the contravention is continuing one, with a further
fine which may extend to one thousand rupees for every day after the first during which the
contravention continues.

VI. §177: THE AUDIT COMMITTEE

(8) The Board’s report under sub-section (3) of section 134 shall disclose the composition of
an Audit Committee and where the Board had not accepted any recommendation of the Audit
Committee, the same shall be disclosed in such report along with the reasons therefore.

Tussle between Executive and Non-executive directors: That is the purpose of having the
Audit Committee.

How many companies were penalized for CSR non-compliance? Show-cause to students.

VII. §135. CORPORATE SOCIAL RESPONSIBILITY

1. Eligibility in constituting a Corporate Social Responsibility Committee: of the Board

Company’s net worth of >500 cr. or turnover of >2000 cr. or a net profit > 5 cr. or
more during any financial year
Composition: 3 or more directors, at least one director shall be an independent
director.
2. Disclosure: The Board's report under sub-section (3) of section 134 shall disclose the
composition of the Corporate Social Responsibility Committee.
3. The Corporate Social Responsibility Committee shall,—
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy
which shall indicate the activities to be undertaken by the company as specified in
Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities referred to
in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to
time.
4. The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social
Responsibility Committee, approve the Corporate Social Responsibility Policy for
the company and disclose contents of such Policy in its report and also place it on
the company's website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy
of the company are undertaken by the company.

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 5. The Board of every company referred to in sub-section (1), shall ensure that the
company spends, in every financial year, at least two per cent. of the average net
profits of the company made during the three immediately preceding financial years,
in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it
where it operates, for spending the amount earmarked for Corporate Social Responsibility
activities:

Provided further that if the company fails to spend such amount, the Board shall, in its
report made under clause (o) of sub-section (3) of section 134, specify the reasons for not
spending the amount.

Explanation.—For the purposes of this section “average net profit” shall be calculated in
accordance with the provisions of section 198.

Homework:

1. Reasons: Deviations from the original intent/ concept

2. Subrit Sarkar- Comply or explain approach
3. Jurisprudence- Transparency, Accountability, Safety of Shareholders- Which model
serves them best?
4. Compounding of Offences: Injeti Srinivasana Committee Report- Re-categorization
of offences. If co. doesn’t appoint woman director- should it merit imprisonment or
does it imply compounding? Have we not diluted the “else” in comply or else
approach?

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 Date: August 7, 2020

COMPOUNDING OF OFFENCES
I. MEANING OF COMPOUNDING OF OFFENCES

Non-compliance with the provisions of the Companies Act, 2013 (“Act”) will entail penalties
and/or imprisonment as specified under the Act. Offences under the Act have been classified
as Compoundable and Non-compoundable offence.

Compounding of offence is a process whereby the person/entity committing default will file
an application to the compounding authority accepting that it has committed an offence and
so that same should be condoned. The compounding authority may compound the offence
and ask the defaulting party to deposit compounding fee as decided by it on case to case
basis. Once the said compounding fee is paid, the defaulting will no more be treated in
default of the offence which has been so compounded.

The provisions pertaining to compounding of offences under the Act are set forth under
Section 441 of Act. Section 441 of the Act provides for compounding of following offences:

1. Offence punishable with fine only, or

2. Offence punishable with fine or imprisonment or both.

The following offences cannot be compounded under the Act:

1. Offence punishable with imprisonment only.

2. Offence punishable with both imprisonment and fine. 
58
131

Examples of offences compoundable under the Act

 Section 56 (6) – non-compliance relating to transfer and transmission of securities;

 Section 64(2) – failure notice to be given to registrar for alteration of share capital;
 Section 99 – default in holding of Annual General Meeting;
 Section 102(5) – not annexing explanatory statement to notice;
 Section 117(2) – failure in filing of resolutions and agreements with the Registrar of
Companies;
 Section 203(5) – Failure to appoint Key Managerial Personnel.

VIII. WHO ARE COMPOUNDING AUTHORITIES UNDER THE ACT?

Under the Act, the compounding authority shall be either:

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 - Regional Director: When maximum amount of fine which may be imposed for such
offence does not exceed INR 25,00,000 OR
- National Company Law Tribunal: When the maximum amount of fine which may be
imposed for such offence exceed INR 25,00,000 shall be compounded by National
Company Law Tribunal.

Recent Developments

In order to boost ease of doing business in India and to reduce the pendency of cases filed
with courts, the Companies (Amendment) Act, 2019 de-criminalised 16 compoundable
offences under the Act which are of the nature of minor violations relating to the technical
defaults.

Where a company or its officer(s) become aware of some default under the Companies Act,
2013 it would always be advisable to avail the benefit of compounding provisions under the
Act so that the company remains fully compliant with the provisions of the Act.

It is about making good the default of non-compliance. You’ve done a wrong and want to
correct it. Thus, there is an opportunity to make good the default. It is some kind of
settlement. Fees shall not exceed fine. It doesn’t exclude payment of a lesser fees.

Penalty- LODR Regulation 30

We are still following Comply or Else Approach. You say a rule is mandatory. If you don’t
follow the rule, make good the rule by paying a fees- Aren’t we coming to the Comply or
explain approach.

Hasn’t the mandate become criminal?

Right to be heard arises only when the investigation starts.

Companies Act §441- There are offences which would be punishable with imprisonment or
fines.

The severe offences which are compoundable:

1. Non-appointment of CS-
2. Non-Holding of AGM-
3. RPTs-
4. Non-Disclosure of Financial Statements-

Why are we still insisting on Comply or Else?

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 IX. INJETI SRINIVAS COMMITTEE REPORT

8 categories of offences- Not the entire report is important. Focus on 2 things:

Among all categories- Category Number 4- p.22, Chapter IV- p. 50. Other relevant
recommendations.

S.197-

53.  

(1) Except as provided in section 54, a company shall not issue shares at a discount.

(2) Any share issued by a company at a 1[discount] price shall be void.

(2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue
shares at a discount to its creditors when its debt is converted into shares in pursuance of any
statutory resolution plan or debt restructuring scheme in accordance with any guidelines or
directions or regulations specified by the Reserve Bank of India under the Reserve Bank of
India Act, 1934 or the Banking (Regulation) Act, 1949.

(3) Where any company fails to comply with the provisions of this section, such company
and every officer who is in default shall be liable to a penalty which may extend to an amount
equal to the amount raised through the issue of shares at a discount or five lakh rupees,
whichever is less, and the company shall also be liable to refund all monies received with
interest at the rate of twelve per cent. per annum from the date of issue of such shares to the
persons to whom such shares have been issued.

§53 is deeply rooted in idea of fairness, an ideal of corporate governance- default in corp
governance norms.

There should be no differentiation

The offences regarding corporate governance offences are very vast. It is not limited to the 4-
5 offences.

Category VI- Substantial Offences- Wh

http://vinodkothari.com/wp-content/uploads/2018/08/Recommendations-of-MCA.pdf

§441 Compounding of Offences4

https://www.mca.gov.in/SearchableActs/Section441.htm

4
https://taxguru.in/company-law/compounding-offences-companies-act-2013-section-441.html.

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Page | 12
 Date: August 10, 2020

DIRECTORS UNDER THE COMPANIES ACT, 2013

SEBI Laws- Multiple laws

Independent Directors- India welcomed the move- How well are they functioning? Are they
effective?

Mind and brain of the corporation

Simple advice/ resolution: can

Fredrick Trowtwein- Theories of Corp Law- Corpn serving of directors or the other way
around?

US or UK- Not similar to India- Because of promoters. Promoter in 2013, ICDR Regulations

Tata, Mistry, Wadia- Euphoria in India. Halo effect of promoters- No one knows promoters
in Infosys besides Murthy or Nilekani.

Berle and Maine- Modern Company Law- Shareholder responsibilities & Agency Problem in
Companies. Entire development of literature.

Undertakes analysis of American shareholders. Lack of trust between different players-

shareholders and mgt. Rules about Independent directors, auditors, etc.

Wealth maximization and empire building.

Wealth maximizing: Problem of mistrust- Ancillary issues with directors.

Entire issue of directors being agents- Doesn’t emanate from companies act, 2013.

Source of classical problem: Before CG- Friedman only maximization was wealth
maximization. Only parameter was this. Egoistic empire building- frowned upon- throw
directors out of the company.

I. S.182. ‘AGENT’ AND ‘PRINCIPAL’ DEFINED.—

An ‘agent’ is a person employed to do any act for another, or to represent another in dealings
with third person. The person for whom such act is done, or who is so represented, is called
the ‘principal’.

Directors are employed by the corporation- not shareholders- using money of shareholders-

“Interested”- Relationship between Principal Agents? Can directors be liable for any wrong
decisions? How does their liability flow?

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 X. S.88. INDIAN TRUSTS ACT.—

Where a trustee, executor, partner, agent, director of a company, legal advisor, or other
person bound in a fiduciary character to protect the interests of another person, by availing
himself of his character, gains for himself any pecuniary advantage, or where any person so
bound enters into any dealings under circumstances in which his own interests are, or may
be, adverse to those of such other person and thereby gains for himself a pecuniary
advantage, he must hold for the benefit of such other person the advantage so gained.

Illustrations:

(a) A, an executor, buys at an undervalue from B, a legatee, his claim under the will. B is
ignorant of the value of the bequest. A must hold for the benefit of B the difference
between the price and value.
(b) A, a trustee, uses the trust-property for the purpose of his own business. A holds for
the benefit of his beneficiary the profits arising from such user.
(c) A, a trustee, retires from his trust in consideration of his successor paying him a sum
of money. A holds such money for the benefit of his beneficiary.
(d) A, a partner, buys land in his own name with funds belonging to the partnership. A
holds such land for the benefit of the partnership.
(e) A, a partner, employed on behalf of himself and his co-partners in negotiating the
terms of a lease, clandestinely stipulates with the lessor for payment to himself of a
lakh of rupees. A holds the lakh for the benefit of the partnership.
(f) A and B are partners. A dies. B, instead of winding up the affairs of the partnership,
retains all the assets in the business. B must account to As legal representative for the
profits arising from As share of the capital.
(g) A, an agent employed to obtain a lease for B, obtains the lease for himself. A holds
the lease for the benefit of B.
(h) A, a guardian, buys up for himself incumbrances on his ward Bs estate at an
undervalue. A holds for the benefit of B the incumbrances so bought, and can only
charge him with what he has actually paid.

Specific Relief Act, 1983

Definition of not only Trust but Trustee

Everyone holding property in Trust. Trustee holds property for benefit of beneficiary.
Fiducuiary duty

Person can mean shareholder or company.

XI. S.2 SPECIFIC RELIEF ACT, 1963. —

S.2. Definitions.—In this Act, unless the context otherwise requires,—

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 (c) “trust” has the same meaning as in section 3 of the Indian Trusts Act, 1882 (2 of
1882), and includes an obligation in the nature of a trust within the meaning of
Chapter IX of that Act;
(d) “trustee” includes every person holding property in trust;

Definition of Trustee also includes any obligation

XII. S.11 OF THE SPECIFIC RELIEF ACT, 1963.—

11. Cases in which specific performance of contracts connected with trusts enforceable.—

1. Except as otherwise provided in this Act, specific performance of a contract may, in

the discretion of the court, be enforced when the act agreed to be done is in the
performance wholly or partly of a trust.
2. A contract made by a trustee in excess of his powers or in breach of trust cannot be
specifically enforced.

XIII. S.166. DUTIES OF DIRECTORS. —

1. Subject to the provisions of this Act, a director of a company shall act in accordance
with the articles of the company.
2. A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, the community and for the protection of
environment.
3. A director of a company shall exercise his duties with due and reasonable care, skill
and diligence and shall exercise independent judgment.
4. A director of a company shall not involve in a situation in which he may have a direct
or indirect interest that conflicts, or possibly may conflict, with the interest of the
company.
5. A director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates and if such
director is found guilty of making any undue gain, he shall be liable to pay an
amount equal to that gain to the company.
6. A director of a company shall not assign his office and any assignment so made shall
be void.
7. If a director of the company contravenes the provisions of this section such director
shall be punishable with fine which shall not be less than one lakh rupees but which
may extend to five lakh rupees.

The forum for this dispute would be the NCLT. S.88 been eclipsed? Wouldn’t there be
overlap of jurisdictions? 166- Fiduciary duty would be loosely worded.

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 XIV. S.172, COMPANIES ACT, 2013- PUNISHMENT. —

If a company contravenes any of the provisions of this Chapter and for which no specific
punishment is provided therein, the company and every officer of the company who is in
default shall be punishable with fine which shall not be less than fifty thousand rupees but
which may extend to five lakh rupees.

XV. S.430- MATTERS ONLY BE HEARD BY NCLT

L. Chandra Kumar and Sampath Kumar- Tribunals have supplementary role the HC. Now,
the tribunals go over the HC.

XVI. NEW FLEMING SPINNING & WEAVING COMPANY V. KESSOWJI NAIK5.

Directors can be held responsible for Misstatements in Prospectus under S.35

5
1885 ILR 9 Bom 373

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 Corporate Governance Notes

Independent Director / Executive Director - relevance attached to decision making in the

affairs of the Company.  Risks and liabilities attached to the company. Mind and brain of the
corporation. 

Frederick theories of corporation. 

Promoter - do not take from RBI - definition under the CA, 2013 relevant and ICDR
regulation. 

Essentially a shareholder. Director is a part of the management or the board.  Nandan

Nilekani or Naryana Murthy for Infosys. Promoters are powerful. 

Berles and Means  shareholding pattern - environment of mistrust. Management is engaged in

the wealth maximisation objective of the shareholders. 

Role of director is 

S.2 (34) of CA - director. Problem of directors being agents of shareholders does not emanate
from the Act. Source of this problem. Definition of agency S.182 of Contract Act, 1872 -
problem. If shareholders were principal, then the directors would be the agents. Others argue
the Corporation itself would be the Principal and all the others would be its agents . Directors
are employed by the corporation to utilize or maintain the wealth of the Corporation.  

Only principal which would have governed - Wealth maximization objective

Entrusted - relationship Can the directors be held liable for any decision impacting the wealth
maximization objective of the Corporation. Responsibility of directors. 

S.88 Indian Trusts Act - where a trustee, executor, partner, agent, director of a company,
legal adviser, or other person bound in a fiduciary character to protect the interests of another
person. 

Specific Relief Act, 1963. S2(c) Trust and S. 2(d) Trustee defined. Includes every person
holding property in trust.  S.3 of Indian Trust Act. includes an obligation in the nature of
trust. Equating director as trustee. S.2(c) “trust” has the same meaning as in section 3 of the
Indian Trusts Act, 1882 (2 of 1882), and includes an obligation in the nature of a trust within
the meaning of Chapter IX of that Act; Directors of Co have fiduciary duty or a responsibility
to protect the interests of another person (includes both juristic and living being) can mean
both Corp and Shareholders. Individually to shareholders and collectively towards the
Corporation. Co is the collective will towards the shareholders. If a director fails to perform
the obligation out of a negligent Act S.11 of Specific Relief Act, can be enforced or resorted
to enforce or call for a specific relief. 

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Trustee towards the beneficiary and Trust - the same analogy applies to directors having a
fiduciary relationship with the shareholders and the Corporation. 

S.166(5) duty of director to act in good faith  continues to apply - forum for remedy would be
NCLT. Case may be brought under S.447. 

Alternate remedy - Consequences for civil remedy under Specific relief S.11  may also be
claimed in a civil court. 

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 ESTABLISHING LIABILITY OF DIRECTORS
Duties shouldn’t be onerous. For every Act where they can’t be made liable. For every
minute mishap they can't be held liable. People would prefer being shareholders rather than
directors.

Can't let go of the directors for mismanagement if culpability was intentional. Wrongful gain
or loss. 

Differentiating Intentional gain and mistake

Interpretation given by Courts for liability of Independent/Executive Directors for acts of the
Company: 

1. Sahara Judgment: One- About resolving conflict between Registrar of Companies

and

In the Sahara case, the major issue was whether the SEBI had jurisdiction over unlisted
companies. Two unlisted companies had issued optionally fully convertible debentures
(OFCD’s) to 3 Million subscribers raking up to ₹26,000 crore with a paid up capital of mere
₹10,00,000 and no assets.

SEBI issued show cause notices to the companies under section 67(3) of the companies Act
after taking cognizance of the matter. An order was passed by a whole time member of SEBI
directing both the companies to regulate and deposit information under section 11 of the
SEBI Act. One of the companies appealed to the SAT and then the Supreme Court claiming
the lack of jurisdiction of SEBI over an unlisted company and the presence of the jurisdiction
of the Registrar of Companies Unlisted Public Companies (Preferential Allotment) Rules
2003.

The Supreme Court, after taking into consideration section 55A of the erstwhile Companies
Act, stated that any public offer by an unlisted company for more than 49 individuals would
come under the purview of SEBI. The interpreted section 55A the SEBI Act harmoniously to
come to this conclusion. Therefore, the conflict of jurisdiction was resolved.

In 2010 Subrata Roy Sahara convicted. Offshoot subsidiary of Sahara. Pvt placement can be
made limited to 49 people max. In one instance or not it was not specified. Took money in
groups/tranches of 49 people.  Private company and not listed so SEBI wouldn’t have had a
role. SEBI show cause notice issued. But “interests” of investors was involved and
confidence of shareholders gets affected- SEBI can have jurisdiction under S.11(1) (tb
checked). Intention to get listed. SEBI said it wasnt mistake done in the garb of raising extra
money. What can’t be done directly was done indirectly. 

2. Avnish Bajaj v. State (29 May 2008 Del HC)-  Read IMP - MMS clip related to the
DPS scandal was being sold on Ebay (Baazi.com). Liability of directors was the

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 contentious issue. Directors can't look after everything being sold on the platform .
Liability of EBay’s directors? Contended: Merely a lapse, not intentional. The site
earned huge revenue. Shouldn’t they be held liable? Specific provision to impose
criminal liability on company or directors, S. 67 IT Act or sth- 

Two situations where director can be held liable:

A. Doctrine of attribution. Can the crime be attributed to the director? A sufficient role
must have been played by the director. Alter ego doctrine applies here. Attribute acts
of company to director. Doctrine of attribution is the genes, while others are species.
278, 292- Other than this, no vicarious liability in IPC.  S.27 SEBI Act- Vicarious
liability of director of listed company. 305 CrPC- If case against company.

B. Doctrine of vicarious liability. S.141 of NI Act, Tortious principle. 

C. Doctrine of Special Responsibility & Knowledge: Case on this: Shamanur Shiv

Shankaraarappa v. India Sugars Co. - 18 July 2014 :  Kar HC - Responsibility of
different portfolios- Managing director’s liability different from other directors.
Responsibilities attached to one position need to be examined for non-observance- If
found guilty, you’ll be responsible. Apart from the portfolio, if you had the
knowledge of the act or fraud being played upon, (people were raising the defence of
their portfolio- I am supposed to have a very narrow functioning area).  

Do liabilities only flow out of the responsibilities he has been given. Can only
be held liable for special knowledge regarding the affairs which he has been
assigned. Rank/ Position/ Responsibilities given if were to be the deciding
criteria for determining liability would be very problematic. 

Rata Tata protects himself from the position he has taken as Chairman
Emeritus. Where would you find the responsibilities for that position. How
would any shareholder proceed against him because there is no principle under
contract law governing such a position. 

Antitrust law is called so because these were enacted to regulate the

functioning of these trusts. 

Fundamental idea across all offences: Officer-in-Default, Fraud in 447 (Fraud

is different in Companies Act to that from under S.17 Indian Contract Act
Law). Directing mind and will of the Co is different. Irrespective of whether
you were supposed to know something (e.g. a director in sales- liability to you
via virtue of doctrine of attribution.) 

3. Miheer H. Mafatlal v. Mafatlal Industries: 1956 Act case- Landmark holds true.
Every decision put to test/scrutinized by the directors/ BoDs - Reasonable diligence
has been exercised. What would be the std? Ordinary prudent man? No. Business
prudent man. Corporate Restructuring and M & As. Scrutiny of decision/ how to

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 check that. Reasonable care and due diligence. There shouldn’t be a hair-splitting
analysis. For every investment decision- not resulting in dividends- shouldn’t be
scrutinized/penalized. Court must see the decision taken from the point of view of a
common ordinary prudent man of business taking commercial decisions. Decisions
taken by BoD were in the best interests of the shareholders or not. Bound to make
errors at certain instances. Can't be based on results. Intention should be the deciding
criteria but how to determine the intention. If results were the criteria, it would be
very odd. 

3. Zylok: Commercial decision making power of the director needs to be reasonable and
can’t be perfect.

3. Sunil Bharti Mittal v. CBI- 2015 (Read) Corporate Criminal Liability. Specific
provision to impose criminal liability on company or directors, S. 67 IT Act or sth-
How does the court reach the conclusion? Alter-ego principle was applied in reverse.
Person in charge of the company- should be in control at the time the crime was
committed.

3. Iridium Telecom v Motorola India - 

3. Standard Chartered Bank v. Directorate of Enforcement 5 May - Corporations can

be held liable. The only possible option that the court had was to impose a fine. (Read
para 19). The language was imprisonment & fine was read as imprisonment or fine. 

3. Official Liquidator Supreme Bank Ltd. v. PA Tendulkar - AIR 1973 SC 1104

3. National Small Industries v. Harmeet Singh Paintil  - SC 15 Feb 2010

3. Chanda Kochhar case - Rules were not notified under which was she held liable-
check 

3. HDFC Securities v. State of Maharashtra  (2017) 1 SCC 640 - Crim appeal 1213 of
2016- SC judgment

3. Shiv Kumar Jatia v. NCT of Delhi - SC judgment - these two cases toe the line of
Sunil Bharti Mittal case - 

3. SEBI v. Gaurav Varshney - (2016) 14 SCC 430- When would SEBI be allowed to
prosecute directors criminally? Other side- The principle is: An absolute liability with
regard to any fraud or wrongful act or omission on whom a responsibility has been
given by the company like an officer-in-default (should there be a carve out as
Australia & States of US). Under companies act 

 1st type of offences- look for Officers-in-Default [S.2(60)]- Who  can be held
to O-i-Ds? WTDs- then whom and then proceeds….). Attributing the criminal
intent - The person fails to take reasonable steps to prevent or act in

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 accordance with rules. For this to become O-i-D- the requirement of mens rea
is present.

 2nd type of people: Non-compliance of failure to comply - Someone fails to

comply with the norms and rules laid under the Companies Act. (Examples?
Auditors, etc) E.g. Financial statements - S. 129(7) Annual financial
statements if not submitted properly- it lists out category of persons- if they
are not there (like the auditors not appointed, WTDs, Director in charge of
financial statements or person in charge of financial statements are not there)-
then all the directors can be held liable. 

 Is it the violation of the Doctrine of attribution or vicarious liability? 2 fork

test?  

S. S.129(7): Punishment for non-compliance with  financial statement requirements of CA,

2013. 

If a company contravenes the provisions of this section, the managing director, the whole-
time director in charge of finance, the Chief Financial Officer or any other person charged by
the Board with the duty of complying with the requirements of this section and in the absence
of any of the officers mentioned above, all the directors shall be punishable with
imprisonment for a term which may extend to one year or with fine which shall not be less
than fifty thousand rupees but which may extend to five lakh rupees, or with both.

(Aakash) AK Ahuja- Negligence- AK Ahuja case- Even for these the director can be held
liable. While enumeration position under 141(2)- for dishonour of cheque (connivance,
consent or negligence)- 

(Sir) Provisions always have “knowingly, knew, knowledge, etc”. Second category is
interesting. NI act- Has provision of vicarious liability for incriminating directors for offences
by company. Can the directors be criminally prosecuted for acts done with wrongful criminal
intention and thought process or can the directors be criminally prosecuted under the garb of
collective responsibility theory? 

 Gopal Khaitan v. State - AIR 1969 Cal 132  Cal HC - Imp Read

Trust building exercise between owners and directors.

S.141 of NI Act - 

Chitra Sharma v. UOI

Jagjivan Joshi 

S.27 of SEBI Act which doctrine responds to this provision. r/w S.24 and S.26 25, 24, 27 of
SEBI Act

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KK Ahuja v VK Vohra - Cheque bounce. Liability of directors under civil and criminal
liability for mismanagement. 

Independent and Non Executive Directors - difference. 

S.2(47)- 149(5)- 

Independent Directors concept introduced in Companies Act, 2013- check mandate of

Executive Directors. Appointed by Executive Directors - to evaluate their performance who
in  turn assess the performance of Ind. Directors. 

Non-executive vis-a-vis executive directors: Meaning of the non-executive directors has to be

inferred. Companies (Specification of Definition) Rule, 2014- Rule 2(k) Definition of
executive director. Executive means Whole Time Director(WTD). 

Def of WTD- S.2(94)- It says includes  (inclusive definition) = Director in Whole time
employment of company [Nature of service covered]. 

Meaning of non-executive director: Person not in the whole time employment of the
company.

Is an Independent director a whole time employment in a company? Yes they would be

considered as whole time employees even though they can occupy positions as independent
directors in several Companies, he would still  be penalized if he can't manage his role. At par
with EDs for liabilities. No differentiation under the Companies Act for attracting liability. 
They wont be considered as part time employees merely because they are independent
directors in several companies. 

For independent No relationships with stakeholders of the Company whether pecuniary,

fiduciary

Cases:

 Pooja Ravindra Devidasini v. State of Maharashtra: (2014) 16 SCC 1

Paragraph 9 Imp to be read: This case observed that Non Executive Directors- a custodian of
the governance of the company. But it isn't involved in the day-today running of the business
and only monitors the executive activity. There is a huge confusion, thus, between Non
Executive Directors and Independent Directors. Three essentials: 

1. Both become custodians

2. Bot don’t involved in day to day

3. Both Monitor day to day activities.

Cadbury Committee Report: 

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For the intention of the legislature with regard to Independent directors: See Director/
Attributes of Independent Directors  in
http://www.mca.gov.in/Ministry/reportonexpertcommitte/chapter4.html. 

 Chetan M Mannniar v. State of Maharashtra - 2004 judgment. - Liability of Non

Executive Directors: Directors not concerned with day to day functioning can’t be
considered liable unless there is “active involvement/participation” on their part. 

 SMS Pharmaceuticals v. Neeta Bhalla - Delhi HC Judgment- Very Imp- Liability of

a person would not depend on the role or designation given to him but as per the
performance of duties/discharge of duties that they would be performing. This,
somehow,  corrected the position in Chetan Manniar. 

If you read the concept of O-iD- It doesn’t differentiate between executive, non-exec or inde.
s.2(60)(6)- Every director aware of contravention- 

1. By virtue of receipt of proceedings- it may be his signature or 

2. Participation in proceedings and not objecting (This is crucial) SEBI took this into
account for holding people guilty in Zylog Systems Ltd.- 2 independent directors had
raised objections to resolutions and their dissent was noted and when later on it came
out to be a fraud, these people were let off.  or - Clause 6 

3. If there is connivance, it would amount to 

MCA circular - Circular No. 1/2020 dated 02/03/20 - Restrictions or caveats for criminally
prosecuting of  IDs and NEDs. Para 3 of the circular  Non promoter Non Key Managerial
Personnel: 

1. Directors nominated by the Government or Public Sector undertakings 

2. Director nominated by public sector Financial Institutions or Banks having equity. 

3. Directors appointed under statutory rules or regulations - NCLT.

Appointed to protect the legitimate interests of certain investors. Not there to manage the day
to day working. 

Manage without intrusion into the daily affairs. 

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Legislative intent behind 149(11) & (12)- Mitigating factors- S. 2(60) - clause 6- 149(11)-
Talks about higher thresholds before imposing civil liability on directors. Reason behind
mitigating factors- 21st Report of Standing Committee of Finance behind Companies Draft
Bill, 2009 and the other is the 57th report of the Standing Committee on Finance - These 2
reports referred to if any doubts with regard to any provision in Companies Act, 2013.  

In 21st report- If 11.43 & 11.45- 

11.43 

“The Ministry have accepted the aforesaid suggestion for incorporating a new clause on
liability of Independent Directors and have accordingly proposed a new sub-clause as under: 

New sub-clause 132(8)- (immunity from civil or criminal action to independent director in
certain cases) 

An independent director shall be held liable, only in respect of such acts of omission
or commission by the company or any officer of the company which constitutes a
breach or violation of any provisions of Act, which had occurred with his knowledge,
attributable through Board processes, and with his consent or connivance and where
he had not acted diligently.”

11.45 

“As already recommended by the Committee in the overview (Part-I of the Report), the
Committee would like the Government to formulate a code of Independent Directors, which
may, inter-alia include their mode of appointment, role and responsibilities vis-à-vis other
Directors, their remuneration and extent of their Jaliability. It is the Committee’s considered
view that Independent Directors should be distinguished from other Directors in the
Board. They should also not be ‘related’ to the promoters or persons occupying management
positions at the Board level and as already recommended, they should also not have any kind
of pecuniary relationship with the company. The proposed code should be suitably
incorporated in the Bill to enable the institution of independent directors to evolve with
time.” 

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Intention behind Section 149(11) - Same liability shouldn't be there for independent
directors as to that of non-executive directors. Threshold is low for Officer in Default under
clause 6. Functional efficacy of independent directors would be affected if liability attracted
was on the same threshold. Fear in the mind of independent directors would arise as reins of
the company laid with NEDs. 

What is the role of an Independent Director in the company? Independent directors

cannot be roadblock to the job of Non executive directors. Can't be Captain America. Only
job to oversee the function of executive directors. Can't be a hindrance in their functioning.
Not a part of the essential decision making process. Can't understand the hidden/ulterior
motives of the executive/non executive directors. Bar for attracting liability is higher for these
people so that they can function in a protective environment. 

Zylok case - dissent was noted of independent directors - threshold is satisfied. 

   Jagjivan Hira Lal Doshi & Ors.v. Registrar of Companies - (1989) 65 CompCas
553 (Bom) - Full time director compared with director lent specialized service

If the legislature doesn’t differentiate between knowledge, should there be a

differential liability? Or sth like that. 

If Directors are given equal voting rights, equal opportunity to be heard- there is no
distinction between opportunity- irrespective of him being a part timer or full timer-
Why should there be a difference between the liabilities? Rules of construction don’t
call for construction or qualification of the “directors’ liabilities”. There shouldn’t be
a differential treatment between directors. It is not a labour court where public interest
is involved. You can’t play in the gallery. It doesn’t make sense to have the different
types of directors.  

 Chitra Sharma v. Union of India - Writ Pet 744 of 2017 - No Independent Director
or promoter would be allowed to alienate personal properties or assets and if they do
they will be held liable not only for criminal prosecution but also for contempt of
court. Direction issued for Independent Directors- The kind of direction that people
issues for IDs- There is no specific discussion for IDs. 

 MCA Circular 1 of 2020 (see earlier ref)- Not only a welcome move but in the spirit
of 149(12).  

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 INSTITUTION OF INDEPENDENT DIRECTORS

Control Ownership Dichotomy - mistrust in ownership of Company. 

Independent Directors and Minority Shareholders. 

S.230 - Scheme of Arrangement - 

Promoter / Board of Director conflict in a situation scheme of M&A or Demerger -

Requirement of majority shareholders - Must hold 3/4th or more in value of the total paid up
share capital of the Co. 

100 shares holding 1 share each - FV 10. Total SC - 1000 - Satisfaction of Prompt/ Dual
Majority Test - scheme would require 75 shareholders to approve of it because of the
threshold requirement being so high. 

Reasons for dual test - 

1. People who have invested a lot of money would lack representation if they were to
keep the threshold as merely the majority. 

2. If only value was considered, in certain cases it may be provided to by very few
shareholders. Majority would not get adequate representation in such a scenario.  

3. Decisions should reflect the combined will of the promoters and the public
shareholders. Would have risked / exposed the public shareholders to the whims and
fancies of the promoter shareholders. 

Considering the dual majority test as a requirement for S.230 be a case of conflict /
requirement of Director Promoter conflict. 

Related Party Transactions could be a part of conflict. 

S.104 - Chairman of Meetings- Check his powers.  

Lot of things rest on the Chairman's shoulders which is elected by the shareholders where the
promoters have a very large say. 

Meaning of promoter under the Companies Act has been recently under with the
understanding of promoter under the SEBI Act and allied rules. 

Co limited by shares implicit idea is liability of shareholder is limited to the extent of his
shareholding in the Co. Is Not the existence of a promoter an anomaly to the idea of liability
of promoters, isnt this flouting of a basic principle of Company law. 

For any avg retail investor, the decision to invest money is not taken by the BoD, they are
behind the curtain for management, the limelight of corporate functioning is taken by the

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promoter, they inspire the retail average investor. Their presence is vital. Promoters are also
provided with liabilities if they were part of some wrongful act or omission or some
fraudulent act. 

S.7(6) - attracts liability of promoter - Without prejudice to the provisions of sub-section (5)
where, at any time after the incorporation of a company, it is proved that the company has
been got incorporated by furnishing any false or incorrect information or representation or by
suppressing any material fact or information in any of the documents or declaration filed or
made for incorporating such company, or by any fraudulent action, the promoters, the persons
named as the first directors of the company and the persons making declaration under clause
(b) of subsection(1) shall each be liable for action under section 447.

S. 34, 35, 36, 37 - attracts Liability of promoters

Role of SEBI - under S.24 of Companies Act, 2013. 

S.13(8)  

S.27(2) - The dissenting shareholders being those shareholders who have not agreed to the
proposal to vary the terms of contracts or objects referred to in the prospectus, shall be given
an exit offer by promoters or controlling shareholders at such exit price, and in such manner
and conditions as may be specified by the Securities and Exchange Board by making
regulations in this behalf.

S.188 - RTP 

S. 149(6) -  An independent director in relation to a company, means a director other than a

managing director or a whole-time director or a nominee director,—

a. who, in the opinion of the Board, is a person of integrity and possesses relevant
expertise and experience;

b. (i) who is or was not a promoter of the company or its holding, subsidiary or associate
company; ii) who is not related to promoters or directors in the company, its holding,
subsidiary or associate company;

Independence of Independent Directors is of primal importance considering their as

evaluating the functioning of the executive directors. Primacy of the opinion of the Board is
stressed. Independent director cannot be at the behest of the Promoters or are not under the
control of promoters - stressing on complete independence. 

Whether an equilibrium would be maintained with the existence of this person or would it
create too many centres of power in the Co. 

Has it balanced the equation between the two entities of  promoters/ executive directors in the
Co.? 

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Whether the co would be facing multiple centres of power and whether it would be grappling
under it. 

Look at the definition of promoter and promoter group under SEBI (ICDR) Regulation of
2018. Check this case also

 K.K. Modi v. Securities Appellate Tribunal- Appl 9/2001 - Bom HC 

Reclassification of shareholding - Regulation 30 & 31A under LODR Regulations -

Professionally managed Co. without any promoters - entirely run managed by Directors. If
the mistrust is so deep, then how to check for the average investor how these companies are
managed or who is involved in their decision making. 

E.g., Promoterless Co Infosys. 

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