Duties and Liabilities of Directors Under Companies Act, 2013

Group 6:

B14119 Vasu Sharma (Ms)B14071 Arun Chandran V B14077 Jamesh Bharadwaj B14083 Keshav Srinivas Dhavile B14089 Mayur Umdekar

Section 166 of Companies Act, 2013Directors’ General Duties

How Director shall act• According to Articles of the company subject to

compliance with Companies Act, 2013 (Statutory Duties)

Good Faith and in Best Interest• A director of a company shall act in good faith in order to

promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment

• Turner Morrison & Co v. Shalimar Tar Products (all endeavors of the directors must be directed to the benefit of the company

Care, Skill and Independent Judgement• A director of a company shall exercise his duties with due

and reasonable care, skill and diligence and shall exercise independent judgment

• Extraneous factors and persons shall not hamper director’s sovereign views

• The director can seek information, clarification and advises to enable him to take free decisions on his own

Section 166 of Companies Act, 2013Directors’ General Duties [Cont’d]

Conflict of Interest• A director of a company shall not involve in a situation in

which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company

• Allen v. Hyatt {1914} – Directors have to disclose their personal interest

Undue gain or advantage• A director of a company shall not achieve or attempt to

achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.

• Interpretations of relative, partner and associate• The company need not necessarily incur losses• Directors may not necessarily have monetary gains• Guinness plc v. Saunders - Directors cannot ask for set

off for any claim that he may have against the company

Section 166 of Companies Act, 2013Directors’ General Duties [Cont’d]

Assignment (Transfer of rights of office)• A director of a company shall not assign his office and

any assignment so made shall be void• Transfer of rights of office could be construed as violation

of the trust of shareholders• Oriental Metal Pressing Works {P} Ltd., v Bhaskar

Kashinath Thakoor – A director can appoint his successorPenal Provisions for contravention of Section 166• If a director of the company contravenes the provisions

of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees

• Contravention attracts penalty, but not imprisonment• Contravention does not render vacation of office in terms

of Section 167 of the Companies Act 2013 unless the director is disqualified by an order of a court or the Tribunal

Liabilities of Director Under Section 447, Companies Act 2013

Section 447 newly introduced in Companies Act

2013

Provides for “Punishment For Fraud"

FRAUD

Omission, Concealment of Fact or abuse of position

Intent to Deceive

To Gain Undue Advantage

Injure interest of Company/ Shareholders/

Creditors

PUNISHMENT:Imprisonment of minimum 6

months extendable to 10 years And

Fine which shall not be less than amount involved in the

fraud

This definition is so broad that it can conceivably include any act committed by anyone provided there is a wrong intent!

Liabilities of Director Under Section 447, Companies Act 2013

Incorporation of Company

First directors of the company are liable under section 447 if at any time after incorporation of the company it has been found that the information furnished was

false or incorrect or that material facts were suppressed.

Misstatement in Prospectus

Authorizing the issue of a prospectus which includes statements which are untrue or misleading makes

the director liable under Section 447

Fraudulent Conduct of Business

If after investigation, it has been found that any business of the company has been carried out with the intention to defraud the stakeholders of a

company then any person aware of the business shall be liable.

The new Act looks to implicate every director, who is "aware" of any contravention. He need not even participate in any meetings of the

board, but if the information as to a contravention is contained in any of the proceedings of the board received by him, he is deemed liable.

The intent of law here seems to entice an independent director to turn a whistleblower.

Serious Fraud Investigation Office buttressed with a legal status under the new company law.

The Satyam Scandal

Details of the scam:• B. Ramalinga Raju established the firm in 1987• Satyam was listed on BSE in 1991 and its revenues exceeded USD 1 bn

in 2006• As the company’s revenue crossed USD 2 bn, Maytas buyout was

proposed and rejected• Raju confessed to inflating revenues in a letter to SEBICase Facts:• Financial irregularities in Satyam: Rs. 7855 crore• Fictitious Revenue reported: Rs. 5352.8 crore• Fictitious interest income reported: Rs. 899.8 crore• Approx. 94% of the company’s reported cash was fictitious

Verdict:•  Fine of Rs. 5.5 crore imposed on Raju and his brother Rama Raju, ex-

managing director• 7 years rigorous imprisonment for fraud and criminal conspiracy

The Satyam Scandal: effect on Companies Act, 2013• The case created the need for more rigorous laws for director

and auditors• The BOD model in India came under question• The Companies Act, 2013 remedies this to some extent• Mandatory appointment of Independent Directors by companies One-third of the Board of Directors should be independent

directors To be appointed from databank notified by the government Five year term with 2 consecutive terms allowed Independent: The director receives only fee, no stock options Onus on directors to ensure compliance of Board reports to

laws

No person including any Director or Key Managerial Personnel of a Company shall enter into insider trading. “Price sensitive information” refer to any information which could materiallyImpact the prices of securities of any company.

Scope

• Act of or agreeing to subscribing, buying, selling, dealing in any securities of a Company either as Principal or Agent, having access to non-public price-sensitive information in respect of securities of the company

• Digressing such information directly or indirectly, or counselling any other person based on the non-public information • Imprisonment up to 5 years and/or

• Monetary fine: Minimum 5 lakhs, and maximum 25 Crores or 3 times the profit made out of Insider Trading

Section 195 of Companies Act, 2013

Historically, insider trading was exclusively under SEBI and its the SEBI (Prohibition of Insider Trading) Regulations, 1992

With the Companies Act 2013 incorporated some provisions from the SEBI Regulations, 1992. And SEBI has notified SEBI Regulations 2015, changing the previous laws considerably.

Two-sometimes conflicting-regimes arise governing the offense of insider trading

Insider Trading

Prohibition of Insider Trading of Securities

Punishment

DEFENCES: Insider trading underthe Companies Act 2013 doesn’t include communication required in the ordinary course of business or profession or employment or under any law. 2015 SEBI Regulations provide a multitude of defenses, including communication of UPSI in furtherance of a legitimatepurpose, Chinese walls, etc.

APPLICABILITY: the CompaniesAct 2013 prohibits insider trading for public unlisted as well as private companies, i.e., widening the purview but weakens the concept of insider trading relevant only in a market relevant capable of price discovery

Insider Trading: SEBI’s JurisdictionSection 195 seems to bring private companies, public companies and listed companies under its purview. However, the legal community views it to be applicable to only marketable securities.

Section 458 of the Companies Act gives SEBI the power to enforce Section 195 in relation to listed companies. Now, SEBI has jurisdiction of two

different laws.An “insider” now means either a “connected person” or any person who is in possession of unpublished price sensitive information (UPSI). So,, every connected person would be an insider. Apart from that, any outsider who may be in possession of UPSI would also be considered an insider.

INCONSISTENCIES BETWEEN SEC. 195 & 2015 SEBI REGULATIONS

Rajat Gupta Insider Trading Case

About Rajat Gupta :• Engineering Graduate from IIT, Delhi and joined Harvard Business

School on scholarship• Served as head of the consulting firm McKinsey & Company and a

board member Goldman Sachs• He founded the Indian School of Business and the Public Health

Foundation of India.

Case Facts:• Raj Rajaratnam, a Sri Lankan hedge fund manager accused of insider

trading.• Mr. Gupta, in April 2010, was accused of tipping off Mr Rajaratnam of

Warren Buffet's decision to invest $5 billion in Goldman Sachs• Mr Gupta allegedly learned this information on September 23 in 2008

at a board meeting. His tip allegedly allowed Mr Rajaratnam to buy the stock before the news was made public the next day, and Mr Rajaratnam made a profit of $800,000 in just 24 hours.

Verdict:• He has been sentenced to two years in prison for leaking Goldman

Sachs boardroom secrets to the hedge fund manager.• He also lost his appeal of a $13.9 million civil fine by the US Securities

and Exchange Commission.

Rajat Gupta Insider Trading CaseImplications:

• The verdict demonstrates that prosecutors could win an insider trading case largely built on circumstantial evidence like phone records and trading logs.

• Although several questions were raised on the robustness of the evidence in support of the conviction, this ruling effectively stamps a seal of approval on the use of circumstantial evidence (perhaps even as the sole evidence) in insider trading and other securities fraud related cases.

• The signal is clear- the government wants to protect investors, the stock market is a level playing field and not a rigged game favouring Wall Street professionals. Insider trading, in the government’s view, also victimizes the companies whose information is stolen.

• After this episode, SEBI has sought greater investigative and information-seeking powers, which have found its way into the SEBI Act through the recent re-promulgated Securities Law (Amendment) Ordinance, 2014 that was notified on March 28, 2014. A more substantive framework on insider trading is expected to be introduced following the report of the Justice Sodhi Committee Report on Insider Trading

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