Bhumesh

Think before you join a Board

Bhumesh Verma 6 Dec 2017

Think before you join a Board

Hang on before jumping to that offer of coveted directorship of a bluechip company.

A recent Supreme Court order in case of Jaypee Infratech has come as a big jolt to corporate governance as far as the role and responsibilities of independent directors are concerned.

Due to the default committed by Jaypee Infratech in repayment of loan worth Rs 8500 crores, IDBI had filed a bankruptcy plea before National Company Law Tribunal (NCLT), which plea was admitted by NCLT. As a result of IDBI plea, the recovery of the investment made by the homebuyers is uncertain and in jeopardy.  

A plea on behalf of home buyers was filed before the Supreme Court (SC) requesting to issue a stay order of IDBI proceedings before NCLT by pleading that all the home buyers will be left with no remedy as there are unsecured creditors if NCLT passes an order in favor of IDBI. SC issued an order staying the IDBI proceedings before the NCLT.

In this context, SC issued a fresh directive restricting the directors including independent directors of Jaypee Infratech from alienating their personal assets. This SC new ruling comes as a shocker to many people acting as independent directors on the boards of other Indian companies.

As the general rule, a company’s liabilities cannot be fastened to its directors, unless the corporate veil is lifted and a case of fraud can be made out against them. It is a cardinal rule of corporate laws that directors and officers should be accorded immunity and protection from the liabilities incurred by the company except wherein such liabilities are incurred by the company as a result of manipulative or fraudulent or gross negligent acts of such directors or officers.

While it is common for an aggrieved litigant to get sadistic pleasure of having obtained orders against as many people as possible, it does not go well for corporate governance. A company is run by the executive directors on the board of directors – most of the times, family or promoters constitute majority of these executive directors. All major policy decisions are taken and implemented by these executive directors on the direction of promoters, by and large.

Independent directors are, on the other hand, mostly professionals engaged in their respective practice areas and inducted on the board for their specific inputs and expertise. Such directors are not involved with day to day functioning of the company or operations or management of the company. Their role is very limited in corporate governance and they do not have access and information about a lot that is going on in a company.

To bracket independent directors along with executive directors seems to be unduly harsh and they seem to be hit in the crossfire here. It is the fundamental duty of courts and government to protect the legal rights of law abiding and innocent citizens. If the innocent citizens are forced to face hardships for no fault of them, then there is great possibility that public will lose faith in the judiciary system and ruling government.

Indian boardrooms are already short of good independent directors. Best of professionals refuse to join boards due to hardships caused to them by existing legislations, disclosure requirements, etc. I have seen cases where promoters abscond and independent directors are caught in authorities net for no fault of theirs.

The aforesaid ruling will further alienate professionals to take up directorships in Indian companies.  I hope going forward, hon’ble Supreme Court while issuing orders imposing punishment on the errant directors for mismanagement of the company affairs it will take adequate precautions to ensure that innocent directors do not affected in any way for no fault of them.

Research and inputs by Paruchuri Baswanth Mohan

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