Liability of Non-Executive Directors of a Company in light of COVID-19 Pandemic: An Analysis from an Indian law Perspective 

1. INTRODUCTION

The on-going global Coronavirus disease (“COVID-19”) has affected a countless number of people around the world, businesses and the global economies alike. On March 11, 2020, the World Health Organisation declared COVID-19 a pandemic. In India too, the government has also termed COVID-19 as a pandemic. In testing times like these, India is slowly coming out of an unprecedented nationwide lockdown; which incidentally has been termed to be as one of the biggest lockdown in the world and has resulted in a temporary or partial shutdown of many businesses in India.

The Ministry of Home Affairs (“MHA“) along with various other relevant Indian governmental authorities to safeguard the interests of employees — ­particularly the inter-State migrant workers have come out with a series of notifications, advisories, circulars and orders (collectively referred to as  “the COVID Circulars”), many of which have cast onus on the ’employers’ and companies – whether they be in the industry or shops and commercial establishments,which (broadly) include but are not limited to the following:

(i) making payment of wages to their workers at their workplace, on the due date, without any deduction, for the period their establishments are or previously have been under closure during the lockdown (“MHA Circular”)[1]; and

(ii) ensuring fixed working hours and adequate safety of their employees[2], for the safety measures announced by the relevant governmental authorities, in light of the COVID-19 pandemic. ­

This article seeks to discuss in light of the COVID Circulars and keeping in view the ever-increasing popularity of the appointment of non-executive directors (“NED”) in Indian companies, whether such NEDs can be held liable for non-compliance of the obligations which the COVID Circulars have cast upon companies and employers.

2. ROLE OF NON-EXECUTIVE DIRECTORS WITH REGARD TO COVID CIRCULARS AND APPLICABLE INDIAN LEGISLATIONS  

2.1  Due to the ever-growing participation of private equity and venture capital investments by investors in Indian companies, as a recently evolving trend, such investors in return for their investments have been demanding a board seat of an authorised individual representative of their choice, usually by way of appointing a NED.

2.2 Obligations of Employers with Regard to the COVID Circulars

 As indicated above, several COVID Circulars have cast obligations on ’employers’, especially, when it comes to payment of wages to their workers employed at their workplace, during the period of lockdown. For instance, Labour Departments of States such as Maharashtra and Telangana had even prior to the MHA Circular, directed that during the lockdown period (which was announced by the said States before the nationwide lockdown was announced on March 24, 2020), the employees/workers were to be paid salary and allowances in full, as a paid holiday during such period. As on date, however, there is no clarification from the relevant governmental authorities as to whether a NED will constitute as an ’employer’ and hence, there remains ambiguity regarding whether a NED can be held accountable for any act of non-compliance by a company, in light of the COVID Circulars.

With no ‘explicit’ clarity on the issue of liability of a NED, with regard to COVID Circulars, as a stop-gap measure, guidance on the role and responsibilities, and general actions from the definitions, and cases which have dealt with the said issue in the past, interpretation can be drawn, in terms of the relevant Indian statutes, which include but are not limited to: (i) the  Companies Act, 2013[3] (“the Act”); and (ii) applicable provisions of the Indian labour legislations, which have been analysed (in brief) below.

2.3 Definition and analysis of a NED in line with the Act and the allied Rules made thereunder

 NEDs in India are viewed as a custodian of the company[4]. Under the Act, the liability in case of a default is cast upon the “officer who is in default”[5]. The question which has been repeatedly tested and challenged in the competent court(s) of law is whether a NED in a company can be equated on the same footing as an “officer who is in default”[6]. The extant law, provides a way out for the directors of a company including the NEDs, who can prove that any breach or non-compliance was not intentionaland neither was it an intentional breach by him/her, however, the burden to establish innocence would always lie on the NED. Additionally, the Act provides that a NED should be held liable only in respect of any contravention of any provisions of the Act which had taken place with his knowledge (attributable through board processes) and where he has not acted diligently, or with his consent or connivance[7], a fact which has been reiterated by the MCA, on numerous occasions[8].

To clear the ambiguity around the issue of liability of a NED, the Ministry of Corporate Affairs (“MCA”) had issued a circular[9] (“the Circular”), wherein it clarified that the liability of a NED (not being a promoter or KMP) under the Act, is only for the acts of omission or commission by a company which had occurred with his knowledge, attributable through the ‘board’ process, and with his connivance or where he had not acted diligently (“the Criteria”). The Circular further states that unless the Criteria is met, a NED (who is not a promoter or KMP), should not be arrayed in any criminal or civil proceedings under the Act. The Circular also discusses the need to examine the Criteria, before serving notices to the NED of a company, for a potential non-compliance and default by him/her.

The MCA, through the said Circular, has also prescribed SOPs (standard operating procedures) for the Registrars, before initiating proceedings against the ‘officers in default’, for offences which include but are not limited to ascertaining the nature of default and officer in default. The MCA has further clarified that in case of any doubts pertaining to the liability of any director for proceedings to be initiated, guidance may be sought from the office of the Director General of Corporate Affairs, MCA, and consequently, such proceedings must only be initiated after receiving due sanction from the MCA. Also note, only where lapse(s) are attributable to the decisions which are taken by the board or its committees which include the NED, adequate care and responsibility must be taken to ensure that unnecessary proceedings are not initiated against such NEDs unless there is evidence to the contrary.

2.4 Definition of ‘Employer’: Guidance from various Indian labour statutes

In light of the COVID-19 Circulars, it appears that most of the advisories seem to be directed towards “employers”, and the roles and responsibilities which would need to be followed during the lockdown. For instance, in light of the hardships faced by the inter-State migrant workers, the MHA Circular called upon all “employers”– whether in industry or in shops and commercial establishments, to make payment of wages of their workers at their workplace on the due date without any deduction in the wages during the lockdown period. On similar lines, relevant State Government authorities of various States, such as (i) Maharashtra; (ii) Uttar Pradesh; (iii) Haryana; and (iv) Karnataka, had issued advisories/orders on similar lines refraining employers from terminating their employees and workers, and/ or to reduce their wages.

As indicated at Point 2.2. above, since the COVID Circulars are silent on who an “employer” is, nor have the relevant governmental authoritiesas on date clarified on who would fall under the definition and ambit of an “employer”, in the interim reliance can be placed on the relevant provisions of the applicable Indian labour laws, where an “Employer” has been defined under various statutes.

For instance, Section 2(7) of the Bombay Shops and Establishment Act, 1948[10], defines an “employer” as a person who owns or has ultimate control over the affairs of an establishment, whereas Section 2(g) of the Industrial Disputes Act, 1947, defines an “employer” to be: ‘(i) in relation to an industry carried on by, or under the authority of any department of the Central Government or a State Government, the authority prescribed in this behalf, or where no authority is prescribed, the head of the department; (ii) in relation to an industry carried on, by or on behalf of a local authority, the chief executive officer of that authority’. Additionally, Section 2(l) of the Code on Wages, 2019, defines an “employer” as: “a person who employs, whether directly or through any person, one or more employees in his establishment”.

Hence, who would fall under the definition of an “employer” would depend on factors such as:

(i) the nature of the business;

(ii) the type of workers employed; and

(iii) the place of operations of a business or an establishment.

3. JUDICIAL PRECEDENTS AND SUBSEQUENT RELAXATIONS BY RELEVANT GOVERNMENTAL AUTHORITIES

3.1 Judicial Precedents

3.1.1 The question of liability of the NEDs has been challenged and discussed upon in the court of law, time and again. Listed below is a brief analysis of the important judicial precedents on this issue, in the recent past:

  • In Chaitan M. Maniar v. State of Maharashtra[11], the Bombay High Court observed that for the acts of a few dishonest people, the NEDs, who were not concerned with the day-to-day functioning of the company will not be held responsible, unless there is valid evidence backed by proof, to prove the active participation of the NEDs in question.
  • In Poonam Garg v. Securities and Exchange Board of India[12],  the appellant (i.e. Poonam Garg) acted in the capacity of a NED in the company and her husband was the promoter, managing director and the compliance officer in the company. The Securities Appellate Tribunal, Mumbai Bench after examining the merits of the case held that: (i) as the appellant’s (i.e. Poonam Garg) husband, was also a promoter/Managing Director/Compliance Officer of the company, the same was sufficient to hold that the appellant (i.e. Poonam Garg) was an ‘insider’ ; (ii) it could be deduced that she was reasonably privy to the PSI or ‘Price Sensitive Information’; (iii) it was not open to the appellant (i.e. Poonam Garg) to feign ignorance of the Prohibition of Insider Trade Regulations; and (iv) take shelter under the violations committed by her husband.
  • For cases pertaining to liability under the Negotiable Instruments Act, 1881, the Supreme Court of India in Pooja Ravinder Devidasani v. State of Maharashtra[13] held that: “a non-executive director is no doubt a custodian of the governance of the company but is not involved in day-to-day affairs of the running of its business and only monitors the executive activity”.

As can be seen from the cases cited above the courts usually examine the liability of a NED, individually on a case-to-case basis, and as such, there is no ‘one size fits all’ formula of the judicial tests, which the judicial courts, examine and has been laid down, to determine the liability of a NED.

3.1.2 Further, as discussed above, several COVID Circulars have imposed various obligations on the “employers” until a few relaxations by the relevant governmental authorities were announced[14]. Additionally, many COVID Circulars, such as the MHA Circular has been challenged by numerous aggrieved parties, before various courts having judicial jurisdiction, primarily on account of the inability of companies to pay wages during the period of lockdown. Listed below is a brief analysis of a few of such cases:

  • The Supreme Court of India in the matter of Hand Tools Manufacturers Association v. Union Of India[15], in its order stated that no coercive action was to be taken against an association of 52 (fifty-two) companies from Punjab for failing to comply with the MHA Circular, wherein the employers were compelled to pay wages to workers during the period of lockdown on account of COVID-19. The Hand Tools Manufacturers Association had challenged the constitutional validity of the Notification dated March 20, 2020, issued by the Secretary (Labour & Employment) and select portion of Clause III of the MHA Circular, both of which compelled payment of full wages to workers and employees during the period of lockdown.
  • The MHA Circular was also  challenged in  Ficus Pax Pvt.    v. Union of India[16], in the Supreme Court of India, wherein the appellant (Ficus Pax Pvt. Ltd. ) approached the Court to quash the MHA Circular directing payment of full wages to workers and employees during the lockdown as  “arbitrary, illegal, irrational, unreasonable and contrary to the provisions of law including Article 14 and Article 19(1)(g) of the Constitution of India.”

3.2  Subsequent relaxations by the relevant governmental authorities at the Central level

 There have been a few relaxations announced by the relevant governmental authorities with regard to the liabilities which the COVID Circulars have placed on the ’employers’.  For instance, the relevant governmental authority on the issue of ‘payment of wages’ to temporary/casual/daily wage workers in light of the lockdown, has clarified that the lockdown period is part of the moral/humanitarian/contractual obligations of all companies irrespective of whether they have any legal obligation for CSR contribution under Section 135 of the Companies Act, 2013, and hence, payment of wages to temporary or casual or daily wage workers during the lockdown period will not count towards CSR expenditure[17].

Additionally, the MHA has by way of issuing an order[18] dated May 17, 2020 (“New Order”) announced various relaxations, wherein the previously issued SOPs, including the MHA Circular, has now been replaced with new guidelines. This would mean that the restrictions which had been imposed by the MCA Circular pertaining to mandatory payment of wages, during the period of lockdown would with effect from May 18, 2020, no longer be applicable and as a result of this move, any termination measures or reduction in wages by an employer would be governed by applicable provisions of the Indian labour statutes.

As on date, however, there appears to be ambiguity regarding the New Order i.e. whether it would apply to establishments which were not operational previously during the period of lockdown, and unless the courts decide otherwise, companies including the employers would be bound by guidelines issued by the MHA Circular from its enforcement (i.e. March 29, 2020), until the day of enforcement of New Order (i.e. May 18, 2020). Additional relaxations in the form of the previously issued standard operating protocol (“SOP”) have been now replaced with the new lockdown guidelines, for instance, it is no longer mandatory for the employer to ensure that its employees have installed the ‘Arogya Setu’ app but the same is to be done by the employer on a ‘best effort basis’ only.

3.3. Subsequent Relaxations by Various State Governments

In light of the COVID-19 pandemic, many State Governments have also provided a few relaxations in the compliance requirement for a few of the applicable labour laws, as a result of which the onus on the part of the employers or the “officer in charge” which may include NEDs by virtue of the role played by them in the company has significantly been reduced. For instance, the State of Uttar Pradesh provided relaxations to the “employers”, by way of issuing an Ordinance[19], in complying with certain requirements of the applicable legislation, such as exemptions from complying with the provisions of the Industrial Disputes Act, 1947 (“IDA”) and the Factories Act, 1948 for 3 (three) years, starting from the date of the said Ordinance.

4. CONCLUSION

4.1 To conclude and to answer whether a NED can be held liable for any non-compliance in light of the  COVID Circulars, the following points provide an overview of the issue:

(i) As discussed above, as on the date of this article, there is no explicit clarity from the relevant governmental authorities, regarding whether a NED would fall under the definition of an “employer”. Hence, the liability of a NED, would need to be determined individually and on a case to case basis, till the time further clarity by a relevant governmental authority is provided.

(ii) In the interim, guidance can be drawn to applicable provisions of the Indian legislations, as discussed in line at Points 2.3 and 2.4 of this article (i.e. the definition of NED and definition of an ’employer’).

(iii) Several petitions challenging the legality of the COVID Circulars, have been filed by affected parties, many of which are still pending to be adjudicated upon by the courts, and are likely to be answered in the coming few days.

4.2 In the interim, in light of the COVID Circulars, to better protect the interest of the NEDs, the following measures should ideally be adopted by the companies:

(i) Obtaining a D&O (director and officer) insurance to better protect the interests of NEDs in a company;

(ii) Indemnification rights as part of the definitive agreements to protect the rights of the NED should be sought by the investors wanting to appoint a NED (i.e. in the form of their representative on the board of a company);

(iii) Clear demarcation of the roles and responsibilities of a NED in the company should be ideally defined and documented; and

(iv) As a stop-gap arrangement, companies may choose to nominate an individual/group of individuals (which may also include NEDs), to oversee the compliance requirements, including the requirements stemming from the COVID Circulars. This may however not be a fool-proof method to safeguard the interest of NEDs, as different courts, may take a different view on this.

4.3 In continuation to recommendations discussed at Point 4.2 above, NEDs may also make a recommendation to the KMPs or the members of the board of directors (as the case may be) and ensure that the employees are paid their wages on time – in line with the advisories issued by the relevant governmental authorities from time-to-time, and further, written consent of employees stating that the company is complying with the norms laid down by the relevant governmental agencies can be obtained, to protect the interests of the NEDs in a company.


*Lawyer from New Delhi/Mumbai, India. Author can be reached at ‘aseem.sahni@outlook.com’.

[Disclaimer: The content of this article is intended to provide a general guide to the subject. Specialist advice should be sought about your specific circumstances.]

[1] Refer to Order issued by the Ministry of Home Affairs – No. 40-3/ 2020- DM-I (A), dated March 29, 2020.

[2]MHA in its directive issued on May 1, 2020 had made installation of ‘AarogyaSetu’ App mandatory for both private and public sector employees and had called upon the head of the respective organisations to ensure 100 per cent coverage of the app among the employees.

[3] The Companies Act, 2013

[4] Chintalapati Srinivasa Raju  v. Securities and Exchange Board of India, (2018) 7 SCC  443, dated May 14, 2018.

[5] Section 2(60) of the Act defines an “Officer who is in default” and provides a list of officers of a company, who will be held accountable in case of default by the company, which include but are not limited to: (i) whole-time director; (ii) key managerial personnel; or (iii) any person in accordance with whose advice, directions or instructions, the board of directors of the company is accustomed to act, other than a person who gives advice to the board of directors in a professional capacity.

[6]Please refer to Point 3.1 of this article, for a discussion on an overview of the judicial interpretation.

[7]Section 149(12) of the Companies Act, 2013.

[8]Refer to ‘Report of Expert Committee’, available at:http://www.mca.gov.in/Ministry/reportonexpertcommitte/chapter4.html (last visited on May 24, 2020).

[9]Refer to General Circular No. 1 / 2020 (F.No. 16/1/2020-Legal) dated March 2, 2020.

[10]Also referred to as the Maharashtra Shops and Establishment Act, 1948.

[11]2004 SCC OnLine Bom 139

[12]  2018 SCC Online SAT 99.

[13] (2014) 16 SCC  1 

[14]Brief analysis of the relaxations announced by the various relevant governmental authorities in light of the COVID Circulars has been discussed at Point(s) 3.2 and 3.3 of this article.

[15]Writ Petition (Civil) Diary No. 11193/2020, order dated 15-5-2020.

[16] (2020) 4 SCC 810

[17]Ministry of Corporate Affairs  General Circular No. 15/2020 (F. No. CSR-01/4/2020-CSR-MCA), ‘COVID-19 related Frequently Asked Questions (FAQ No. 6) on Corporate Social Responsibility (CSR)’ dated April 10, 2020.

[18]Refer to order issued by the Ministry of Home Affairs – No. 40-3/2020-DM-I(A) – dated May 17, 2020, available at https://www.mha.gov.in/sites/default/files/MHAOrderextension_1752020_0.pdf

[19]Refer to Ordinance entitled “Uttar Pradesh Temporary Exemption from Certain Labour Laws Ordinance, 2020”, dated May 08, 2020. It has since been withdrawn.

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