Are you a Director in a startup? Here's a roundup of recent cases affixing liabilities on Directors

Are you a Director in a startup? Here's a roundup of recent cases affixing liabilities on Directors . The recent prosecution of Chanda Kochhar, the CEO and Managing Director of ICICI Bank in the fraud loan case has once again brought the spotlight to the extent of liability of directors in a company. With myriad laws affixing responsibilities on Directors, such as the Companies Act, Foreign Exchange Management Act, the Negotiable Instruments Act and notifications issued under the same, it can be challenging keeping up with multiple compliances. In this post, Compliance Calendar simplifies the concept around directors’ liabilities in India for offenses committed by the company.
Directors’ liabilities under FEMA
Under Section 13 of the Foreign Exchange Management Act, any person, including a director can be held liable for penalty for the contravention of various provisions, notifications and orders issued under the Act. This includes a monetary penalty of up to three times the sum involved in the contravention (where amount is quantifiable) and up to two lac rupees (where the amount is not quantifiable). It may also entail an accumulated penalty of 5000 per day till the contravention continues.
Vicarious liability of Directors under FEMA
Section 42(1) of FEMA imposes vicarious liability on functionaries of the company who are responsible for the conduct of affairs of the company at the time of contravention. However, if the contravention took place without the Director’s knowledge or that he exercised all due diligence to prevent such contravention. The burden of proof is initially on the complainant to convince the court that the director was in-charge of day to day affairs. After this legal process, a director may be able to acquit himself by proving that either the act was beyond his scope of responsibility, or necessary safeguards were in place.
Liability under Foreign Exchange laws is based on the role played in the company and not the designation
In a recent case, the Supreme Court has held that the for proceeding against a Director of a company for contravention of provisions of FERA, 1973, the necessary ingredient for proceeding shall be that at the time offense was committed, the Director was in charge of and was responsible to the company for the conduct of the business of the company. The liability to be proceeded with for offense under Section 68 of FERA, 1973 depends on the role one plays in the affairs of the company and not on mere designation or status. (Shailendra Swarup vs. The Deputy Director, Enforcement Directorate)
Directors liability under Negotiable Instruments Act
To ensure credibility and efficiency in banking transactions, the sections 138 and 141 of the Negotiable Instruments provide for criminal liability of officers in charge of the company.
Merely mentioning the title of director without substantially proving their role is an abuse of law
Implicating directors blindly without the prosecution clearly demonstrating the actual role played by them is an abuse of legal principles. It was held that the impeaching of directors without reference to their role in relation to a transaction, or to the issuance or dishonor of a cheque by the company, requires to be discouraged, since it amounts to abuse of the salutary process of criminal law. (Sashi Kumar NagarJi & Ors. V. M/S Magnifico Minerals Pvt. Ltd & Org.)
The Kerala High Court recently held that when it is found that the company has not committed the offense, and is acquitted, its directors, including the person signing the cheque as the Managing Director are also not liable to be convicted under Section 138 (Dishonor of Cheque). ( Afsal Hussain v. K.S. Muhammed Ismail & Anr.)
Liability of Chairpersons or Heads of large conglomerates
In a verdict delivered by the Delhi High Court in 2023 (Yashovardhan Birla vs Cecil Webber Engineering Ltd & Org.), the argument of the independent and non-executive Director, who was not managing the day-to-day affairs of the accused company and was not a signatory to the dishonored cheque issued by the company was accepted by the court in exonerating him. In the same case, it was also held that merely the mention of the name of a director on the letterhead as being the Head of the Group, does not ipso fact or ipso sure make him in-charge of and responsible for the affairs and business of the company at the time the offense was committed.
Non-involvement in daily affairs by heads of large conglomerates and the onus on experts so appointed
In the same case as above that discussed the liability of heads of large business conglomerates, it was stated that they are not involved in daily operations or the micro-management which is required to be done by the executive directors and officers of the company. In many companies, non-executive Directors are present on the Board of the Companies for their expert independent advice or oversight of the functioning of the company. A Chairperson or head may preside over the general meetings or of the functioning of the company and guide its business policies, and it need not interfere in the day-to-day affairs of the company. Thus, unless sufficient nexus is proven between the contravention and the involvement of the Chairperson, it is difficult to sustain a case against them. However, each case is judged on its own peculiar facts and circumstances.
Directors responsibilities for statutory dues like taxation, PF
Usually, for lack of clear statutory precedents, no liability is affixed on directors for non-payment of statutory dues such as taxation, employees provident fund contributions etc. However, in certain scenarios, the tax dues of a company can also be recovered from the Directors if it is shown that they were responsible for the affairs of the company and were responsible for non-compliance with provisions relating to Government dues. Moreover, with the enactment of anti-avoidance principles in taxation laws, a director must remain vigilant about statutory compliances. In several cases, the courts may apply the concept of “lifting of
the corporate veil”, by which, the personnel operating the company may become personally responsible. (Prakash B. Kamat vs. Principal Commissioner of Income Tax)
Under section 89 of the Central Goods and Services Tax Act, 2017, the Directors of a Private Company where any tax, interest, or penalty cannot be recovered can be held jointly and severally liable. However, a director may be able to defend himself by proving that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
Personal liability of directors
When a director signs a document, or concludes an agreement in his personal capacity, even though on behalf of the company, he may be held to be personally liable. This was decided in the case Naresh Kumar Gupta v. Satya Pal & Org., CM (M) 66/2022, where the director had appended his signature to each of the settlement deeds twice, once in his personal capacity and once as the authorized signatory/ director of the Company. Thus, the director was not absolved from liability even after the Company was declared insolvent and resolution proceedings were commenced. The court held that possession and recovery of damages/mesne profits in respect of the property was executable against the director.
Criminal liability under other Acts
The above provisions that absolve directors from liability in corporate laws may be inapplicable when it comes to other protective laws, such as the Consumer Protection Act, the Drugs and Cosmetics Act etc. In a recent case that involved adulteration in a syrup made for pediatric use, the argument that the director was not involved in day to day affairs of the company failed. An offense by the company involving a public health hazard would be treated differently and more strictly by courts, including personal culpability of directors. (Rajnikant Gulabdas Patel Vs. State of Maharashtra)
Thus, liability for non-compliance with corporate laws in India may attract personal liability on directors. It is also advisable to keep abreast of regulatory requirements specified under various laws applicable on your company as well as implementing robust corporate governance practices. In addition, Directors and Officers (D&O) insurance must be considered to provide financial protection to directors in case they are personally sued for alleged wrongful acts in their capacity as directors.
It's crucial for directors to stay informed about the legal and regulatory framework governing their roles and responsibilities to avoid the risks associated with non-compliance. Connect with our experts at Compliance Calendar for professional legal advice on compliance matters. For latest news and advisory on compliances for startups, entrepreneurs and directors, follow our posts that underscore important regulations for navigating the legal landscape in India.

The recent prosecution of Chanda Kochhar, the CEO and Managing Director of ICICI Bank in the fraud loan case has once again brought the spotlight to the extent of liability of directors in a company. With myriad laws affixing responsibilities on Directors, such as the Companies Act, Foreign Exchange Management Act, the Negotiable Instruments Act and notifications issued under the same, it can be challenging keeping up with multiple compliances. In this post, Compliance Calendar simplifies the concept around directors’ liabilities in India for offenses committed by the company.

Directors’ liabilities under FEMA

Under Section 13 of the Foreign Exchange Management Act, any person, including a director can be held liable for penalty for the contravention of various provisions, notifications and orders issued under the Act. This includes a monetary penalty of up to three times the sum involved in the contravention (where amount is quantifiable) and up to two lac rupees (where the amount is not quantifiable). It may also entail an accumulated penalty of 5000 per day till the contravention continues.

Vicarious liability of Directors under FEMA

Section 42(1) of FEMA imposes vicarious liability on functionaries of the company who are responsible for the conduct of affairs of the company at the time of contravention. However, if the contravention took place without the Director’s knowledge or that he exercised all due diligence to prevent such contravention. The burden of proof is initially on the complainant to convince the court that the director was in-charge of day to day affairs. After this legal process, a director may be able to acquit himself by proving that either the act was beyond his scope of responsibility, or necessary safeguards were in place.

Liability under Foreign Exchange laws is based on the role played in the company and not the designation

In a recent case, the Supreme Court has held that the for proceeding against a Director of a company for contravention of provisions of FERA, 1973, the necessary ingredient for proceeding shall be that at the time offense was committed, the Director was in charge of and was responsible to the company for the conduct of the business of the company. The liability to be proceeded with for offense under Section 68 of FERA, 1973 depends on the role one plays in the affairs of the company and not on mere designation or status. (Shailendra Swarup vs. The Deputy Director, Enforcement Directorate)

Directors liability under Negotiable Instruments Act

To ensure credibility and efficiency in banking transactions, the sections 138 and 141 of the Negotiable Instruments provide for criminal liability of officers in charge of the company.

Merely mentioning the title of director without substantially proving their role is an abuse of law

Implicating directors blindly without the prosecution clearly demonstrating the actual role played by them is an abuse of legal principles. It was held that the impeaching of directors without reference to their role in relation to a transaction, or to the issuance or dishonor of a cheque by the company, requires to be discouraged, since it amounts to abuse of the salutary process of criminal law. (Sashi Kumar NagarJi & Ors. V. M/S Magnifico Minerals Pvt. Ltd & Org.)

The Kerala High Court recently held that when it is found that the company has not committed the offense, and is acquitted, its directors, including the person signing the cheque as the Managing Director are also not liable to be convicted under Section 138 (Dishonor of Cheque). ( Afsal Hussain v. K.S. Muhammed Ismail & Anr.)

Liability of Chairpersons or Heads of large conglomerates

In a verdict delivered by the Delhi High Court in 2023 (Yashovardhan Birla vs Cecil Webber Engineering Ltd & Org.), the argument of the independent and non-executive Director, who was not managing the day-to-day affairs of the accused company and was not a signatory to the dishonored cheque issued by the company was accepted by the court in exonerating him. In the same case, it was also held that merely the mention of the name of a director on the letterhead as being the Head of the Group, does not ipso fact or ipso sure make him in-charge of and responsible for the affairs and business of the company at the time the offense was committed.

Non-involvement in daily affairs by heads of large conglomerates and the onus on experts so appointed

In the same case as above that discussed the liability of heads of large business conglomerates, it was stated that they are not involved in daily operations or the micro-management which is required to be done by the executive directors and officers of the company. In many companies, non-executive Directors are present on the Board of the Companies for their expert independent advice or oversight of the functioning of the company. A Chairperson or head may preside over the general meetings or of the functioning of the company and guide its business policies, and it need not interfere in the day-to-day affairs of the company. Thus, unless sufficient nexus is proven between the contravention and the involvement of the Chairperson, it is difficult to sustain a case against them. However, each case is judged on its own peculiar facts and circumstances.

Directors responsibilities for statutory dues like taxation, PF

Usually, for lack of clear statutory precedents, no liability is affixed on directors for non-payment of statutory dues such as taxation, employees provident fund contributions etc. However, in certain scenarios, the tax dues of a company can also be recovered from the Directors if it is shown that they were responsible for the affairs of the company and were responsible for non-compliance with provisions relating to Government dues. Moreover, with the enactment of anti-avoidance principles in taxation laws, a director must remain vigilant about statutory compliances. In several cases, the courts may apply the concept of “lifting of

the corporate veil”, by which, the personnel operating the company may become personally responsible. (Prakash B. Kamat vs. Principal Commissioner of Income Tax)

Under section 89 of the Central Goods and Services Tax Act, 2017, the Directors of a Private Company where any tax, interest, or penalty cannot be recovered can be held jointly and severally liable. However, a director may be able to defend himself by proving that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

Personal liability of directors

When a director signs a document, or concludes an agreement in his personal capacity, even though on behalf of the company, he may be held to be personally liable. This was decided in the case Naresh Kumar Gupta v. Satya Pal & Org., CM (M) 66/2022, where the director had appended his signature to each of the settlement deeds twice, once in his personal capacity and once as the authorized signatory/ director of the Company. Thus, the director was not absolved from liability even after the Company was declared insolvent and resolution proceedings were commenced. The court held that possession and recovery of damages/mesne profits in respect of the property was executable against the director.

Criminal liability under other Acts

The above provisions that absolve directors from liability in corporate laws may be inapplicable when it comes to other protective laws, such as the Consumer Protection Act, the Drugs and Cosmetics Act etc. In a recent case that involved adulteration in a syrup made for pediatric use, the argument that the director was not involved in day to day affairs of the company failed. An offense by the company involving a public health hazard would be treated differently and more strictly by courts, including personal culpability of directors. (Rajnikant Gulabdas Patel Vs. State of Maharashtra)

Thus, liability for non-compliance with corporate laws in India may attract personal liability on directors. It is also advisable to keep abreast of regulatory requirements specified under various laws applicable on your company as well as implementing robust corporate governance practices. In addition, Directors and Officers (D&O) insurance must be considered to provide financial protection to directors in case they are personally sued for alleged wrongful acts in their capacity as directors.

It's crucial for directors to stay informed about the legal and regulatory framework governing their roles and responsibilities to avoid the risks associated with non-compliance. Connect with our experts at Compliance Calendar for professional legal advice on compliance matters. For latest news and advisory on compliances for startups, entrepreneurs and directors, follow our posts that underscore important regulations for navigating the legal landscape in India.