Can Independent Directors evade liability of the board?
Barrister Aiman R. Khan:
On the race to achieve good corporate governance and impactful presence in the market, public listed companies tend to think outside the board. Therefore, they broaden their horizons to make room for extrinsic opinion. They introduce ‘independent directors’ to become part of their board to evaluate their own performance and adapt to diversified concepts on how to meet targets.Directors promoted from within the company are in a fiduciary relationship with it while Independent Directors, although being part of the board are disconnected with the daily affairs of the company.
Independent Directors, also referred to as outside directors or external directors(“hereinafter IDs”) are known to bring in experience, knowledge which can improve the overall performance of a company. IDs act as a guide and a watchdog on the activities of the existing members. Listed companies appoint IDs to ensure progress is monitored objectively without any undue influence or bias.
What does the law say about IDs?
Public listed Companies in Bangladesh, like any other companies are constituted under the Companies Act 1994. However, it says nothing about IDs or their role in a company. In order to fill up the hollow and in response to the practice of appointing IDs becoming popular, the term “Independent Director” was first mentioned in the Corporate Governance Code (“hereinafter The Code”) published on February 20, 2006.The Code is laid down by the Bangladesh Securities and Exchange Commission which is constituted under the Securities and Exchange Ordinance 1969, along with the provisions of the Securities and Exchange Commission Act 1993.
With time the Code was amended to include new provisions once on August 07, 2012, and more recently on June 10, 2018.The Code which has been formulated under Section 2CC of the Securities and Exchange Ordinance 1969is imperative upon Public listed Companies in Bangladesh. It lays down conditions that companies listed with any stock exchange must comply with. It was introduced to the Public listed Companies on a ‘Comply or Explain’ basis, meaning if they did not comply with it, they had to explain the non-compliance in their public annual reports.
According to the Condition 1(2) (a) of the Code, at least 1/5 of the Board members (but not less than 1) must be independent for the listed companies. It defines Independent Directors to be one who does not hold any share in the company or holds less than one percent (1%) shares of the total paid-up shares of the company. Condition 1(3) of the Code specifies the core competencies for independent directors, namely, the independent directors are expected to be from law, economics, and business studies academic backgrounds.
The independent director shall have at least 10 (ten) years of experiences in any field mentioned in Code. It restricts individuals who have relationships, whether pecuniary or otherwise, with the company or its subsidiary or associated companies and is not a member, director, or officer of any stock exchange.Notably,Condition1 (2) (b) of the Code lays down the parameters of the qualification of an ID which may be relevant in determining their liabilities in their capacity as board members.
Should IDs be held liable for the acts of the other board members?
The purpose of welcoming IDs on board is to ensure that any action for wrongdoing by the majority Directors is brought under check. But what if an ID actually discovers an illegal activity of the board in the course of his monitoring?Should he/she, being a member of the board, share the liability with the other directors of a company involved in a wrongdoing?
Section 90 (1) of the Companies Act 1994 states that every company shall have at least three directors while Clause 1(1) of the Corporate Governance Code 2018 stipulates the total number of members of a company’s board of directors shall not be less than five and more than twenty. Hence it may be argued that although Public listed Companies are constituted under the Companies Act, nothing in the Act binds IDs of a Public listed Company as they are not appointed under the provisions of the Companies Act and are not responsible to discharge the duties of the company as per provisions of the 1994 Act.IDs are governed by the provision of the Corporate Governance Code and are guided by only those provisions which are specifically provided in the code.
According to the Code, the board shall have at least two sub committees to ensure good corporate governance, namely the Audit Committee and the Nomination and Remuneration Committee (NRC). The Code also states that the chairperson of both the sub committees of a company must be an ID. Although there is no explicit indication of an ID’s liability as a board member, it may be argued that they will be specifically liable for any wrongdoing of the two committees which are a chairperson of.
Complex legal disputes are on the rise to determine when and to what extent and Independent Director may be held liable for any illegal activity done by the company. Even when an ID may be successful in proving his role, the gap in the statutory provisions regarding liability is largely contributing to this chaos and unending debate.
While our primary law on companies is yet to recognize the role of IDs in a company, our neighbour country India had already laid down relevant provisions on its Companies Act of 2013. According to Section 149(12) of the 2013 Act, “An independent director under the law can be held liable only for those acts of omission or commission that occurred with their knowledge, attributable through Board processes, and with their consent or connivance, or where the directors did not act diligently.”Besides this dedicated provision in its governing law, there are several case laws where the apex court of India had recognized the role of independent directors.
In the Indian case of Chintalapati Srinivasa Raju Vs Securities and Exchange Board of India, the court held that they are not liable for the activities in course of the business of the company.
The Independent Directors as Board members are generally not mandated by the Code to bear specific responsibilities or liabilities, except assisting the Board for enhancement of Corporate Governance of the public listed companies in the interest of investors and the capital market. Due to the issue not being specifically mentioned in the Code, there is a rising number of cases related to it. Hence, it may be said that IDs will not be liable for the non-compliance of law, or any offences done by other directors of the board.
Barrister Aiman R. Khan, Associate Advocate of Rahman Law Associates and Company