Liability of Independent Directors

Liability of Independent Directors under following Acts:


1. Negotiable Instruments Act

For fastening of criminal liability under the Negotiable Instruments Act, there is no presumption that every Director was aware of the transaction. The Act does not make all the Directors liable for the offence. The criminal liability can only be fastened under the following circumstances:

 Director should be in charge of AND be responsible to the company for the conduct of the business of the company.
 Not responsible if he proves that the offence was committed without his knowledge OR that he had exercised all due diligence to prevent the commission of the offence.


2. Labour Laws viz. Factories Act, Industrial Disputes Act, Provident Fund Act, Payment of Gratuity Act

An offence committed by a company under the various labour legislations (specifically in case of Employees Provident Funds, Payment of Gratuity Act, 1972 and Miscellaneous Provisions Act, 1952 and Factories Act, 1948) is attributed to the persons who were responsible for and had control over the affairs of the company. Hence, Directors would be personally liable for offences committed by a company under the relevant labour legislations. However, this liability is not one imposed on all Directors uniformly; it is only imposed on such Directors who are in overall control of the affairs of the company (this implies control over the day-today affairs of the company). Those Directors who are not in overall charge of the company, but are only in control of certain aspects; or are aware of the policy of the company, but are not in charge of it, would not be held liable.

3. Companies Act
One of the key concepts of the Companies Act is the meaning of the term “officer who is in default.” Under the act, liability for default by a company has been imposed on an officer who is in default. By virtue of their positions in the company, the managing director, the whole-time director, and the company secretary directly fall within the scope of this term. Under the 1956 Act, certain key employees such as the chief executive officer and chief financial officer did not directly come within the ambit of the term, which raised serious concerns because these personnel were viewed as key officials in any company. The 2013 Act corrects this anomaly and significantly expands the scope of the expression “officer in default.” The term also includes the following:

• any individual who, under the superintendence, control, and direction of the board of directors, exercises the management of the whole, or substantially the whole, of the affairs of a company;
• any person on whose advice, directions, or instructions the board of  directors is accustomed to act, other than persons giving advice in a professional capacity; and
• every director aware of wrongdoing by virtue of knowledge of or participation in proceedings of the board without objection

However, Companies Act, 2013 has sought to balance wide nature of the obligations, functions and duties imposed on an Independent Director. The Act restricts and limits the liability of Independent Directors to the matters which are directly relatable to them. Section 149 (12) limits the liability of an Independent Directors only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.