Are Independent Directors liable ever?

The recent adjudication order ("AO") against inter alia independent directors of Bombay Dyeing & Manufacturing Company Limited (“BDMCL”) for misrepresentation in the financial statements, once again brings to the fore, the role and responsibilities of independent directors. This article attempts to share the law around the liability of independent directors.

An independent director is defined under Section 149(6) of the Companies Act, 2013 (“CA 2013”), and under Regulation (16)(1)(b) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI (LODR)”).

As per CA 2013, listed public companies having paid up share capital of Rs. 10 crore or more, or public companies having turnover of Rs. 100 crore or more, or public companies which have, in aggregate, outstanding loans, debentures and deposits exceeding Rs. 50 crore, are required to appoint independent directors. Schedule IV of the CA 2013 prescribes the role, functions and duties of an independent director. As the term suggests, the clan of independent directors are offered certain autonomy. Some of their duties include seeking ‘appropriate clarification or amplification of information’, following appropriate professional advice and opinion of outside experts at the expense of the company, pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company.

Courts have also reiterated on various occasions that independent directors / non-executive directors cannot be held liable for company’s actions unless involved in day-to-day affairs of the running of the company. Recent judgments include in the matter of Satvinder Jeet Singh Sodhi and Anr. v. State of Maharashtra / Tecpro Systems Limited before the Hon’ble Bombay High Court. In the AO re BDMCL, the independent directors were also a part of the audit committee. SEBI had alleged that BDMCL had knowingly operated in related party transactions and further circumvented the provisions of related party disclosure. As per the AO, being independent directors and members of an audit committee, it was vital for them to be aware of such information and merely depending on other’s opinion was not sufficient to determine related party transactions. Clause 49 of the SEBI (LODR) allows the audit committee the power to seek outside legal or other professional advice.

The ambit of their responsibility is far and wide no doubt but what distinguishes their liability from the other directors? Section 149(12) of the CA 2013 provides that an independent director shall be held liable only in respect of such 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. Interestingly, the Ministry of Corporate Affairs vide its circular dated March 03, 2020, notified that any criminal or civil liability should not be arrayed against independent directors unless the criteria specified in 149(12) of the CA 2013 is met.