Q1: In Satyam’s case, auditors did not do their job well. In such case, can the Independent Directors be held responsible? – Sudhir Jain
Response: There are various factors that are required to be considered to ascertain the liability of independent directors. Every statute under which an independent director may be charged will need to be looked at and relevant judicial precedents will play an important role. In the context of Companies Act, 2013, the liability of independent directors is spelt out under section 149(12) of the Companies Act, 2013, which reads as:
“(12) Notwithstanding anything contained in this Act, —
(i)an independent director;
(ii) a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred withhis knowledge, attributable through Board processes, and with his consent or connivance orwhere he had not acted diligently.”
Additionally, the Ministry of Corporate Affairs has issued guidelines and standard operating procedure (SOPs) to be adopted by all registrar of companies (ROCs) vide its General Circular dated March 2, 2020 for prosecuting independent directors. Section 166 is also an important provision to note which lists the duties of directors (whether independent or not). Judicial precedents too play an equally important role.
Q2: Will virtual board meetings be continued or stopped in a post COVID environment – Vivek Soni
Response: Section 173, 174 of the Companies Act, 2013, read with Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 have already contemplated the process for conducting meetings through video conferencing or other audio visual means. Recently, MCA relaxed the requirements of holding physical board meetings for certain matters listed in rule 4 of Companies (Meetings of Board and its Powers) Rules, 2014, vide the Companies (Meetings of Board and its Powers) Amendment Rules, 2020 dated March 19, 2020, for the board meetings to be held until June 30, 2020. Whether or not this relaxation continues, we will need to wait for further MCA’s notifications/amendments.
Q3: Do you think that the virtual board meeting will reduce the chance for Independent Directors to put in more questions to the management on various subjects before they give their approval especially with annual financials now being adopted by more companies. Will IDs be having lesser liability on account of COVID pandemic. – Venkatakrishnan Subramanian
Response: Section 173, 174 of the Companies Act, 2013, read with Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 have already contemplated the process for conducting meetings through video conferencing or other audio visual means. Recently, MCA relaxed the requirements of holding physical board meetings for certain matters listed in rule 4 of Companies (Meetings of Board and its Powers) Rules, 2014, vide the Companies (Meetings of Board and its Powers) Amendment Rules, 2020 dated March 19, 2020, for the board meetings to be held until June 30, 2020.
Section 149(8), read with Schedule IV of the Companies Act, 2013, and Regulation 17(5)(b) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, require independent directors to adhere to certain duties and code of conduct. These include duties, roles and functions that IDs are required to play. The independent directors can always seek clarifications/responses from the management as long as those are within the purview of their roles and duties. In order to understand liability of independent directors under the Companies Act, 2013, one may refer to Section 149(12) of the Companies Act, 2013, and MCA’s General Circular dated 2 March 2020, which provides for the parameters to understand liability of independent directors. Section 166 is also an important provision to note which lists the duties of directors (whether independent or not). Judicial precedents too play an equally important role.
Q4: Can the Company also cover the liability of Directors during this COVID pandemic under the regular D&O policy? – Venkatakrishnan Subramanian
Response: It would depend on the coverage of the D&O policy that you have in place and the nature of liabilities sought to be covered. To our knowledge, legal and defence costs incurred by directors are usually covered under most D&O policies. However, fines and penalties are excluded from the coverage. For instance, if an employee files a claim for wrongful termination, and a Labour Court imposes a fine on the director, while the cost of defending the claim could be covered under the D&O policy, the fine would not be. Further, the nature of legal costs and defences and the amounts covered would also vary on the basis of the terms of the policy.
Q5: What protection will D&O insurance cover – Vivek Soni
Response: On account of the present scenario, there may be an increase in claims against directors from shareholders, employees and third parties:
- Shareholders could claim that directors have been in breach of their statutory and fiduciary duties
- Employees could file claims for wrongful termination, discrimination, failure to promoter, breach of contractual obligations, sexual harassment
- Claims may also arise on account of anti-competitive practices, breach of lending documents, non-compliance with applicable laws, failure to fulfil contractual obligations
D&O insurance would protect directors from:
- Legal and defence costs
- Damages and expenses incurred/arising from claims brought against them, due to wrongful acts in their capacity as Director or Officer of a company
A D&O policy could include:
- Employment practice liability cover
- Cover for failure/negligence to supervise against any professional indemnity claims
- Cover for damage to reputation
- Cover for regulatory crisis response
- Cover for assets and liberty costs including prosecution, bail bond and civil bond expenses
We also suggest that you consult an insurance advisor to advice you in relation to this.
Q6: What will be a good coverage for Directors – Vivek Soni
Response: A good coverage would be to have the following risks covered:
- Investigation Costs: Costs on account of regulatory investigations arising out of an insured event, and at full policy limits ought to be covered
- Insured Individuals: All persons who are designated and act in the capacity of directors and officers of the company should be covered
- Investigation of Cyber Circumstances: Costs incurred investigating any circumstance resulting from a cyber event where litigation is anticipated ought to be covered
- Allocation: There should be a clear demarcation between the entity and the individual and the loss attributable to the directors should be allocated appropriately
- Shareholder Actions: Shareholder actions against the company which arise as a result of a cyber-related incident (e.g. following a stock drop) should also be covered
- Reputational Damage Costs for Directors: The costs of mitigating any reputational injury resulting from any alleged claim should also be taken care of
- Post-Retirement: The policy should also cover any risks arising post the retirement of the independent director
Q7: Can you please shed some light on force majeure? How does this impact directors specifically? – Ketki Bhagwati
Response: Force majeure emanates from French wherein it literally means superior force. Force Majeure indicates an event which is out of the control of the human being and prevents one or other party performing their contractual obligations, meaning thereby that the performance of the contractual obligations becomes impossible or impracticable. The scope of the force majeure would depend on the language agreed in the contract.
A force majeure would not per se impact the directors. The directors should ensure that contracts have been vetted to check whether there was a force majeure clause. If so, the company could check whether under relief can be sought under such clause on account of the present scenario in respect of the performance of its obligations.
Q8: Can we use a force majeure clause as part of employment letter and take actions on terminating employees under these pandemic conditions. – Venkatakrishnan Subramanian
Response: The Government of India, Ministry of Home Affairs, has issued an order dated March 29, 2020 under Section 10 (2) (l) of the Disaster Management Act, 2005. Para (iii) of said states that “all the employers be it in the industry or the shops and commercial establishments shall make payment of wages of their workers at their workplaces on the due date without any deduction, for the period their establishments are under closure during the lockdown.” Which notification ceases to have effect from May 18, 2020. However, till May 18, 2020, the employer would not have been able to terminate the workmen in light of the circular of the Ministry of Home Affairs. However those employees who do not fall within workmen category as per the Industrial Disputes Act, 1947 can be terminated if a force majeure clause is included in their employment letter permitting the employer to terminate the employment of an employee on occurrence of a pandemic.
Q9: I have a question on employee contracts. We are an IT consulting firm who realised in this Pandemic that we were careless in our employment letter. Now that things are getting better, can we make a companywide change to employment contracts and enforce it on employees across the company. – Anand Sahay
Response: Yes, the employment contracts can be revised based on the mutual consent of the employer and the employee, however, the terms of the revised employment contract can only be effective from the date on which the revised contract is executed.
Q10: This knowledge shared is very beneficial. I would like to thank all the panelist invited. The role of independent director is very well explained. What should be the key point in an SOP? Any highlight on the same – Deepika Yadav
Response: Section 149(8), read with Schedule IV of the Companies Act, 2013, and Regulation 17(5)(b) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, require independent directors to adhere to certain duties and code of conduct. These include duties, roles and functions that IDs are required to play. You may also refer to Section 149(12) of the Companies Act, 2013, and MCA’s General Circular dated March 2, 2020, which provides for the parameters to understand liability of independent directors under the Companies Act, 2013. Section 166 is also an important provision to note which lists the duties of directors (whether independent or not). Judicial precedents too play an equally important role.
Q11: The company is doing business with China. What precautions I, as an independent director should take.
Response: Section 149(8), read with Schedule IV of the Companies Act, 2013 and Regulation 17(5)(b) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, require independent directors to adhere to certain duties and code of conduct. These include duties, roles and functions that IDs are required to play. On an independent note, you may also refer to Section 149(12) of the Companies Act, 2013, and MCA’s General Circular dated 2 March 2020, which provides for the parameters to understand liability of independent directors under the Companies Act, 2013. Section 166 is also an important provision to note which lists the duties of directors (whether independent or not). Judicial precedents too play an equally important role. Additionally, you may refer to our slides for further details.