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Director’s liability under Corporate Law

by CA Karishma
Corporate Law

Under the Corporate Law, an Independent Director can be held liable only if omission or commission by a company occurred with the directors knowledge.

Appointment as a Director is now emerging as a post-retirement source of income. An elderly gentleman, a banker with over 39 years of experience in a Public Sector Bank, recently walked into my office with an interesting issue. He was appointed as the Director of a manufacturing entity which had a turnover of Rs 50 crore and when a cheque bounced, criminal proceedings were initiated against the company and him. He was totally shattered as this was the first black mark in his career. He mentioned that he had no role to play in the Finance Department as his role was limited to Business Development. The question is, can proceedings be initiated against the Director and if so, what are the defences available to him?

Typically, Directors’ liabilities can be those arising under the Companies Act and those under other laws. Under the Corporate Law, an Independent Director can be held liable only if omission or commission by a company occurred with the directors knowledge. In other cases, the question of imposing such vicarious liabilities is not subject to any limitation.

Recent developments:

In corporate law jurisprudence, to quash a complaint against a Director, the latter MUST furnish some sterling incontrovertible material or acceptable circumstance to substantiate his contention. Further, he should make out a case that, him being under trial would be an abuse of the process of law.
Recently, the Supreme Court, in the case of Standard Chartered Bank vs State of Maharashtra, held that a Managing Director, Whole-time Director and Executive Director would be liable for prosecution in a cheque bounce case.

The necessities:

In view of the above, with the myriad opportunities available for retired individuals, it is also imperative that Directors have well-drafted agreements covering indemnification. Further, Directors’ and officers’ liability insurance and indemnification should sufficiently cover the director even after resignation/retirement.

-SHERRY SAMUEL OOMMEN

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