Confederation of Indian Industry (CII) has called for legislative amendment to company law to expressly exempt independent directors from vicarious criminal liability as they are not involved in the day-to-day running of a company.
The legal principle of vicarious liability applies to hold one person liable for the actions of another when engaged in some form of joint activity.
The liability of an independent director under the Companies Act may be limited to the extent of such contraventions / defaults, which are committed by the company with the knowledge or consent of the said independent director, said the CII.
While there are several case laws that set out legal principles on interpreting vicarious liability under various statutes, initiation of proceedings itself can involve significant personal hardship and costs for the concerned individuals, according to the CII.
While wrong doers must be prosecuted, there need to be procedural guidelines/safeguards across laws to restrict and minimise proceedings against individuals who are not actually and demonstrably in charge of the management, the industry chamber said.
There is a need to create legal and procedural safeguards relating to personal liability of independent directors, and initiation of prosecution itself should be an exception rather than the rule, to keep risk and rewards of being an independent director proportionate. The whole idea of decriminalising civil duties is essential to conserve faith in the institution of independent directors, the CII paper said.
The CII paper asserted that it is important to put clear safe harbors in place for independent directors. Proceedings against independent directors may be initiated only when there is prima facie evidence of their possible involvement in the matter, rather than as a matter of course. Establishing clear safe harbors will go a long way towards addressing concerns of talented individuals wishing to join company boards as independent directors, said the CII.
It has highlighted that increasing liability of independent directors is a worrying trend, and has led to increasing resignations of independent directors and paucity of availability of talented independent directors for board-level positions. There have been recent instances involving non-executive and independent directors, where the adjudicating authorities have given directions to freeze personal assets and restrained independent directors from transferring their personal assets, the CII paper noted.