'Independent non-exec directors liable only when involved in company's daily affairs'

Mumbai: Independent, non-executive directors cannot be held liable for acts of the company if they are not involved in the daily affairs of the company, the Bombay High Court recently held in two separate decisions, reported Bar and Bench.

The first order was passed on July 2 by Justice PD Naik quashing criminal proceedings for check bounce under Section 138 of the Negotiable Instruments (NI) Act against two applicants, who were independent non-executive directors.

While the prosecution urged that there was sufficient evidence to indicate the role of the accused in the case, the applicants contended that they were never at the helm of the affairs of the company or actively participating in the same.

The Court opined that every person connected with the company could not be held to be vicariously liable for the acts of the company.

"Simply because a person is director of company does not make him liable under the NI Act. Only those persons who are in-charge and responsible for the conduct of business of the company at the time of commission of the offence will be liable for criminal action. A director, who was not in charge of and was not responsible for the conduct of the business of the company, at the relevant time, will not be liable for offence by invoking Section 141 of NI Act," Justice Naik observed.

With these observations, the judge quashed the criminal proceedings initiated by the Metropolitan Magistrate against the two applicants.

The second decision was rendered on July 8 by a division bench of Justices KR Shriram and Milind Jadhav quashing multiple orders of the Joint Director General of Foreign Trade (Joint DGFT) which had imposed penalties on a company including all the directors, ex-directors including the non-executive director, Anand Bhatt who was also a practising advocate associated with law firm Wadia Ghandy & Co.

Bhatt's wife approached the Court in 2009, a year after he had passed away in a terrorist attack in Hotel Oberoi which took place on November 26, 2008.

The division bench noted from the orders that the person accused was the company and beyond that, there was no evidence to show what role each director had in the company.

"Where there are allegations of vicarious liability, then there has to be sufficient evidence of the active role of each director. There has to be a specific act attributed to a director or the person allegedly in control of the management of the company, to the effect that such a person was responsible for the acts committed by or on behalf of the company," the bench noted.

It held that since there was nothing to show that the applicant was in control and management of the company or that he was personally responsible for its acts, prejudice has been caused against him by the notices.

In view of this, the Bench quashed and set aside the multiple orders by the Joint DGFT against the applicant.