Introduction

On 2 March 2020, the Ministry of Corporate Affairs (MCA) issued a standard operating procedure (SOP) for prosecution of independent directors (IDs) and non-executive directors (NEDs) in respect of noncompliance with the provisions of the Companies Act, 2013 (Act).  

The SOP clarifies that the imposition of liability of the IDs and NEDs (not being amongst the promoters or key managerial personnel (KMPs)) for various violations of the Act is not a rule and needs to be assessed on a case to case basis. It has been prescribed that all care must be taken to ensure that civil or criminal proceedings are not unnecessarily initiated against the IDs or the NEDs unless sufficient evidence exists to the contrary.  

Analysis

The SOP envisages the dual objective of (i) re-iterating the existing legislative framework prescribed under Section 149(12) of the Act; and (ii) providing guidance to certain regulators while prosecuting officers in default for non-compliance of the provisions of the Act.  

Various statutes, in addition to the Act, impose a liability on the “officer who is in default” of the company in case of non-compliance with statutory obligations by companies. Such provisions have put IDs and NEDs in a perilous position, as in addition to potential reputational loss, they are also faced with the risk of civil/criminal liability being attributed to them, even for corporate acts committed without their connivance/knowledge.  

“Officer who is in default”: Various provisions of the Act impose vicarious civil and/or criminal penalty on individual officers/directors for defaults by corporates. Section 2(60) of the Act, inter alia, classifies whole time directors and KMPs as “officers in default.” Section 2(60), however, also includes every director, who is aware of a contravention by virtue of the receipt of any proceedings of the board of directors (Board) or participation in such proceedings without objecting to the same. Thus, the Act also seeks to penalise IDs/NEDs who are either aware of a default or do not exercise due diligence while performing their duties.  

Safe-harbour for IDs/NEDs: Roles and responsibilities of IDs and NEDs are the cornerstone of corporate governance. Therefore the Act, as it currently stands, has sought to make the liability of IDs/NEDs commensurate with the extent of control that they exercise over the affairs of the company. Section 149(12) of the Act provides a safe harbour to IDs and NEDs (not being promoters or KMPs) and shields them from any liability unless such liability arises from acts of omission or commission by a corporate with their knowledge (through Board processes) and consent or connivance or where they fail to exercise diligence. While the safe-harbour under Section 149(12) protects the IDs/NEDs from liability arising out of acts not 

within their control, it does not preclude the investigative agencies/courts/regulators from conducting an investigation against them or summoning them.  

SOP only for certain regulators: The SOP has been addressed to the regional directors, the registrars of companies and the official liquidators (Regulators). It is aimed at streamlining the process of prosecuting IDs/NEDs and making it more objective. Specific instructions have been issued to the Regulators to take due care to ensure that civil or criminal proceedings are not unnecessarily initiated against the IDs or NEDs unless sufficient evidence exists to the contrary. The Regulators have been directed to ascertain the involvement of the officers concerned while investigating a corporate default. The SOP also directs the Regulators to seek guidance from the MCA in case of any doubt regarding the liability of the officers concerned.  

The Regulators are required to implement the SOP with immediate effect, including in respect of ongoing cases. Further, cases which do not stand the test of the SOP but where prosecution has already been filed are required to be submitted to the MCA for examination. 

Key Takeaways: 

The SOP is in sync with the view taken by the Hon’ble Supreme Court of India in the case of Shiv Kumar Jatia vs. State of NCT of Delhi where the Hon’ble Supreme Court of India had opined that “an individual either as a director or a managing director or chairman of the company can be made an accused, along with the company, only if there is sufficient material to prove his active role coupled with the criminal intent. Further the criminal intent alleged must have direct nexus with the accused.” 

While the SOP is certainly a welcome step and provides some respite to the IDs / NEDs under the Act, the vulnerable position of the IDs / NEDs does not undergo a change vis-à-vis the liability imposed under other statutes such as the Income Tax Act, 1961, the Prevention of Money Laundering Act, 2002, Negotiable Instruments Act, 1881, environmental legislations, the Securities and Exchange Board of India Act, 1992 and so on. Accordingly, the IDs and NEDs are still exposed to the risk of liability as these statutes do not carveout such exceptions for IDs/NEDs by virtue of their role in the company.