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Litigation
Published in Litigation, Volume 41, Number 4, Summer 2015. © 2015 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not 17
be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Shareholder Disputes
In the context of various shareholder dis-
putes, the increased liability under the
2013 Act could be a useful tool to increase
pressure on defaulting directors, nomi-
nating shareholders, or promoters. In
addition, while resignation may protect
a director from subsequent defaults, an
erstwhile director may still continue to
be liable for any defaults that took place
during his or her tenure, as now clarified
under section 168(2) of the 2013 Act.
The 2013 changes to the act prompted
concerns about the role, accountability,
and responsibility of nonexecutive, nom-
inee, and independent directors, who
could be caught on the wrong side of the
company’s disputes.
Illustration by Sawsan Chalabi
Published in Litigation, Volume 41, Number 4, Summer 2015. © 2015 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not 18
be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
presents myriad
vere backlash given their failure to detect pany is sufficient to state a claim against
the fraud. In another example, Nimesh an officer who is in default.
and growing
Kampani, one of the leading investment In cases of fraud, it may be difficult
bankers in India and founder of the JM to have a clear line of demarcation as
opportunities, but
Financial Group, faced arrest stemming to whether the director could have pre-
from his role as an erstwhile independent vented the fraud if he or she had used due
would-be corporate
director of Nagarjuna Finance, a company diligence. While the role of nonexecutive
embroiled in fraud due to failure to return directors may consist of providing strate-
carefully.
2013 Act only for acts of omission or com- an inquisitive approach and question the
mission by a company that occurred with company’s background information, how
the director’s knowledge—attributable it was obtained, and the decisions that are
through board processes—and the di- While it is difficult to provide any taken based on such information.
rector’s consent or connivance or where particular standard that will determine With increasing global interest in
he or she failed to act diligently. This, to an individual’s exposure to liability, a Indian companies and a changing legal
a certain extent, alleviates the concern person will generally be held liable for landscape, new players will continue to
surrounding independent director liabil- wrongdoing committed by a company if enter the domain unaware of the possible
ity. However, questions such as whether he or she falls into either of the following consequences. Consequently, director in-
a director acted diligently and whether categories: demnification clauses in shareholder and
knowledge could be attributed to a direc- director agreements should be cautiously
tor by mere presence at board meetings 1. any person who, at the time the of- and thoroughly negotiated. Directors’ and
still remain unanswered. Moreover, li- fense was committed, was in charge officers’ liability insurance is also a tool
ability faced by independent and nominee of and responsible to the company that is becoming increasingly popular in
directors under various other enactments for the conduct of its business; or India. Such insurance and indemnifica-
remains a legitimate concern. 2. any director, manager, secretary, or tion should sufficiently cover the director
Directors may also face liability under other officer of the company: even after resignation.
other Indian laws. Such liability may not a. with whose consent and conniv- The Indian economy presents myriad
always be foreseeable, and actions such ance the offense was committed, and growing opportunities, but would-
as the dishonor of checks, offenses un- or be corporate directors and their lawyers
der the Income Tax Act of 1961, violation b. whose negligence resulted in the should tread carefully. Rapidly modern-
of foreign exchange regulations, breach offense. izing laws on director and officer liability
of securities regulations, nonpayment of require their full attention. q
provident fund contributions, violation The Indian Supreme Court has, in
of the Shops and Establishments Act, or this context, ruled that a managing di-
food adulteration could result in liability rector is prima facie in charge of and
that may not always be limited to the ex- responsible for the company’s business
ecutive directors. and can be prosecuted for misdeeds by
In addition, some statutes do not the company. But only those officers of
disting uish between executive and the company who fall within the scope of
Published in Litigation, Volume 41, Number 4, Summer 2015. © 2015 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not 19
be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.