Duties and Liabilities of Directors

Under Companies Act, 2013

Group 6:
B14119
B14071
B14077
B14083
B14089

Vasu Sharma (Ms)

Arun Chandran V
Jamesh Bharadwaj
Keshav Srinivas Dhavile
Mayur Umdekar

Section 166 of Companies Act, 2013

Directors 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
Care,
Skillofand
Independent
Judgement
endeavors
the directors
must be directed
to the benefit
the company
of
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 directors

Section 166 of Companies Act, 2013

Directors General Duties [Contd]
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. gain
Hyatt {1914}
Directors have to disclose their
Undue
or advantage
personal interest
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

Section 166 of Companies Act, 2013

Directors General Duties [Contd]
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 successor

Penal 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

Liabilities of Director Under Section

447, Companies Act 2013
Section 447 newly
introduced in Companies Act
2013
Omission, Concealment of
Fact or abuse of position

FRAU
D

Intent to Deceive
To Gain Undue
Advantage
Injure interest of
Company/ Shareholders/
Creditors

Provides for Punishment For

Fraud"

PUNISHMEN
Imprisonment of minimum 6
T: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 awrong intent!

Liabilities of Director Under Section

447,
Companies
Act
2013
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.
First directors
of the company are liable under section
Incorporation
of Company

Misstatement
in Prospectus

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.
Authorizing the issue of a prospectus which includes
statements which are untrue or misleading makes
the director liable under Section 447

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 with
liable.
Serious Fraud Investigation Office buttressed
a legal status under the
Fraudulent
Conduct of
Business

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 companys revenue crossed USD 2 bn, Maytas buyout was
proposed and rejected
Raju confessed to inflating revenues in a letter to SEBI
Case 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 companys reported cash was fictitious
Verdict:
Fine of Rs. 5.5 crore imposed on Raju and his brother Rama Raju, exmanaging 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

Section 195 of Companies Act, 2013

Prohibition of Insider Trading of Securities
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
conflictingregimes arise
governing the
offense of
insider trading

No person including any Director or Key Managerial Personnel

of a Company shall enter into insider trading.
Scope
Price sensitive information refer to any information which
could materially
Impact the prices of securities of any company.
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
Insider Trading
respect of securities of the company
Digressing such information directly or indirectly, or
counselling any other person based on the non-public
Imprisonment up to 5 years and/or
information
Punishment
Monetary fine: Minimum 5 lakhs, and maximum 25
Crores or 3 times the profit made out of Insider Trading

Insider Trading: SEBIs Jurisdiction

Section 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

DEFENCES: Insider trading
REGULATIONS
under
the Companies Act 2013
doesnt 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 legitimate

APPLICABILITY: the
Companies
Act 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

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

Rajat Gupta Insider Trading Case

Implications:
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 governments 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

THANK YOU