directors responsiblity under companies act 2013

TECHNICAL SESSION I: DIRECTORS

RESPONSIBILTY

BY MVSK RUTHVIK

TOPICS TO BE DISCUSSED

• INTRODUCTION• BASIC TERMS• BREIF DISCUSSION ABOUT THE DIRECTORS• DIRECTORS REPORT• DIRECTORS RESPONSIBILTY STATEMENT• CONCLUSION

INTRODUCTION• Companies Act, 2013 is enacted to gradually replace the

old Act of 1956, with the objective to bring more accountability and good corporate governance. The Act appears to place a higher degree of responsibility on the Board members for good corporate compliance.

• In the Act, the Section 160 to 170 speaks about provisions related to director like appointment, role, duties and removal of directors. In the context of the Board of a company, the legislators have focused on the role of independent directors and have codified the duties of directors, which were missing in the old Act.

Continued…….• Stipulation and clarification of the duties and

responsibilities of the directors of a company, especially the public limited companies, are welcome and great contribution in the Companies Act of 2013, for better corporate governance and security. The Companies Act of 1956, was disgustingly deficient in this respect.

• Before we Get into the topic lets discuss some basic definitions so that we all are on the same path………

BASIC TERMS WHO IS A DIRECTOR????• Section 2(34) of the Companies Act, 2013 defines a director

as – “director” means a director appointed to the Board of a company.

• An appointed or elected member of the board of directors of a company.

• He has the responsibility for determining and implementing the company’s policy.

• Directors derive their powers emanating from board resolutions

• Unlike shareholders, directors cannot participate through proxy.

• A company director need not to be a shareholder or an employee, and May hold only the office of director under the provisions of

the Act.• Directors are regarded as being the Key Managerial Persons of

a company, with special importance to the listed companies.• They hold multiple positions in a company like Managing

director, Manager, Whole time director and Independent Director.

.

DISQUALIFICATIONS FOR APPOINTMENT AS DIRECTOR UNDER SECTION 164

DUTIES OF DIRECTORS UNDER THE COMPANIES ACT 2013

• The following duties and liabilities have been imposed on the directors of companies under Section 166: -– A director of a company shall act in accordance with the

Articles of Association (AOA) of the company.– He shall act in good faith, in order to promote the objects of

the company, for the benefits of the company as a whole, and in the best interests of the stakeholders of the company.

– He shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

– He 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.

• He 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.

• 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 Lac Rupees.

INDEPENDENT DIRECTOR

• An Independent Director is that member of the board of a company, who does not possess any financial relationship with the company (except the sitting fees), nor can own shares in the company.

• The Companies Act 2013 dictates that every listed company must contain at least one-third of the total directors, as the independent directors and it also empowers the Government of India to include other categories of companies within the scope of this provision or requirement (Section 149 of the CA-2013).

Continued…..

• Public limited companies composited as per the former CA-1956, are granted a transition period of one year for making strict compliance with this mandatory provision. Again, the independent directors are not permitted to hold office for more than two consecutive terms of five-year periods.

LEGAL POSTION OF DIRECTOR

PERSONAL LIABILITY OF DIRECTORS

• Directors can be made personally liable – When the directors enter into contract in their own name.– When they enter into contracts on behalf of company but

fails to use “LTD. Or PVT LTD.”– When directors exceeds their powers.– The BOD should act an agent of company, not of a single

director. Therefore a single director cannot enter into a contract on behalf of company unless the BOD authorizes.

Sections which cover Personal Liability of Directors

Section 35 – Civil Liability for Mis-statement in prospectus • If it is proved that a prospectus has been issued with intent to

defraud the applicants for the securities of a company or for any fraudulent purpose, every person concerned shall be personally responsible, without any limitation of liability.

Section 75 – Damages for Fraud• Where a company fails to repay the deposit or part of them along

with the interest and if it proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose.

Section 339 – Liability for fraudulent conduct of business

• If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, every person concerned shall be personally responsible, without any limitation of liability.

DIRECTORS REPORT• The Directors Report is the part of Annual Report in

which the details of Company has been mentioned. There is no restriction to put any matter in the Directors Report if the Directors have intention to mention there apart from legal provisions.

• Generally various companies put a lot of matters, issues and publications which are not mandatory for putting in the Directors Report but if directors do, they may.

Section No’s DESCRIPTION SECTION 67

RESTRICTIONS ON PURCHASE BY COMPANY OR GIVING OF LOANS BY IT FOR PURCHASE OF ITS SHARES.

SECTION 92

ANNUAL RETURN

SECTION 131

VOLUNTARY REVISION OF FINANCIAL STATEMENT OR BOARD REPORT

SECTION 149

COMPANIES TO HAVE BOARD OF DIRECTORS

SECTION 177

AUDIT COMMITTEE

SECTION 188

RELATED PARTY TRANSACTIONS

SECTION 197

REMUNERATION RELATED

SECTION 204

SECRETARIAL AUDIT FOR BIGGER COMPANIES

SECTION 67 -RESTRICTIONS ON PURCHASE BY COMPANY

• The disclosers in the Board Report shall be required in case of the voting rights not exercised directly by the employees in respect of shares to which the any scheme relates. The manner of reporting in the Board Reports shall be prescribed.

• If the company or its officer shall not disclose the matter in the Board Report or violate the provisions of this section, they shall be penalized a sum of Rs. 5 lacs which is extended up to 25 lacs along with imprisonment for a term which is extended to three years.

SECTION 92 ANNUAL RETURN

• For every company, it is mandatory to prepare Annual Return for the previous financial years as per detailed in the Section 92 of the Act.

• Under subsection (3) of this Section, it is also mandatory to enclose the extract of the Annual Return with Director Report. The extract of the Annual Return shall be prescribed and it is the part of Director Report.

SECTION 131 VOLUNTARY REVISION OF FINANCIAL STATEMENT OR BOARD REPORT

• Financial statement of the company or report of director shall be revised for period at least preceding three years, in any case, with the permission of Tribunal. In this connection, the revision shall be disclosed in the director report for the current year also.

• The section specially force that the Director Report must disclose the composition of Corporate Social Responsibility Committee.

SECTION 149 COMPANIES TO HAVE BOARD OF DIRECTORS

• Independent Director shall be appointed for a term of 5 years but they shall be re-appointed by passing of Special Resolution. In this regard, the company must disclose the appointment or re-appointment of Independent Director in the Board Report.

SECTION 177 AUDIT COMMITTEE

• The Board of Directors report shall disclose the composition of an Audit Committee. In case of the board has not accepted any recommendation of audit committee, the same shall also disclose in the Board Report with reason.

• Apart from above, every listed company or prescribed companies shall establish a vigil mechanism for directors and employs to report genius concern in such matter as may be prescribed.

• Such mechanism shall be disclosed by the company on its website, if any, and in the directors report.

SECTION 188 RELATED PARTY TRANSACTIONS

• The directors Report shall also include the related party transaction. Whatever transaction which is mentioned under this section, if the company transact, the disclosure shall be mandatory in the Director Reports along with the justification about each transactions. So that shareholder of the Company may be aware such transactions.

SECTION 197 REMUNERATION RELATED

• Every listed company shall disclose in the Board’s report, the ratio of the remuneration of each director to the median employee’s remuneration and such other details as may be prescribed.

• Apart from above, if any director who is managing director or whole time director of the company receive any commission from company, in that case, such director shall not be disqualified to take commission or remuneration from holding or subsidiary of its company.

• In that case the disclosure in the Board Report shall also be mandatory.

SECTION 204 SECRETARIAL AUDIT FOR BIGGER COMPANIES

• The Board of Directors shall be contained any qualification or observation or other remarks made by the company secretary in practice in his secretarial report.

DIRECTORS RESPONSIBILITY STATEMENT

• Sub section (5) of section 134 of the companies’ act 2013 provides the provision/contents of the director responsibility statement have to be included in the board report of the company.

• The scope of the responsibilities of the directors of a company be it private or public have been expanded to include also in its preview the areas mentioned in for director responsibility statement ultimately aiming at safeguarding the interest of the shareholders.

The Directors' Responsibility Statement states the following:1. In the preparation of the annual accounts, the applicable

accounting standards had been followed along with proper explanation relating to material departures.

2. The directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period.

3. The directors had prepared the annual accounts on a going concern basis.

Continued…….4. The directors had taken proper and sufficient care for the

maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.

5. The directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.

6. The directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

CONCLUSION

• Thus, the new Indian Companies Act of 2013 is certainly a very innovative and landmark legislation in respect of the duties and responsibilities of the directors (of companies) also.

• Both broad categories of directors, namely, the directors having pecuniary relationship with the company, and the independent directors, have been properly considered under this mature legislation for directors.

• It is quite obvious now that the CA-2013 sincerely seeks to make the corporate management and governance in India rather

efficient, fully accountable, transparent, and maximally beneficial to all stakeholders and related professionals, through this intelligent legislation over duties and responsibilities of directors in Indian companies.

ENOUGH OF LECTURE

LETS HAVE SOME HUMOUR

• Banner in front of the Institute of Chartered Accountants of India …. “Drive slowly, don’t kill our students….. leave them to us……”

• Are you-– Emotionally Numb?– Romantically Starved?– Creatively Challenged?– Artistically Void?– Socially Outcast?– Congratulations You are a CA Student!!!!!!!!!!!!

• AUDITOR– A-accounting and others– U-underlying– D-data and– I-information– T-to give an– O-opinion in– R-the audit report

Irritating audits, Fighting on stupid issues,Everyday classes, unknown Office HoursMore expenditure, Less stipend,People call it ARTICLESHIP, We call it LIFE

Nevertheless ………………………………… We got to be Proud of something……………….

• 5 Years• 50 Laws• 500 Lectures• 5,000 Hours of Office Work• 50,000 Sections• 5,00,000 Rules

A normal human being can’t bear it.

The remaining are called

CHARTERED ACCOUNTANTS…………………..

directors responsiblity under companies act 2013

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