04/14/2024

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Non-executive director vs independent director

Non-executive director vs independent director

This article is written by Monesh Mehndiratta. The present article deals with non-executive directors and independent directors in a company. It further provides the meaning of the two kinds of directors, their roles and responsibilities, duties and differences between each other. The article further provides relevant case laws along with their analysis.

It has been published by Rachit Garg.

Who regulates the business of a company?

You might have definitely heard of several companies. But have you ever thought about the above question?

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Well, no issues if you haven’t, because the present article will answer the question. A company is regulated by its board of directors and the Companies Act, 2013 provides provisions about the functions and duties of directors, their appointment, qualifications, removal, resignation, etc.  This board of directors consists of several directors. Two of those are non-executive directors and independent directors. Now, you must be wondering who these are and what role they play. Are they the same?

The non-executive directors are not a part of the executive team and are different from other directors in a company, as these directors are not employed in the company. On the other hand, independent directors are not related to the company or its promoters or members of management. This might sound confusing at the moment, but after reading the entire article, you will understand the difference between the two. Let us try to understand the meaning of the two directors, their roles and responsibilities, duties and differences between each other. 

Every company has a board of directors that regulates its operations and internal affairs. In the case of Tesco Supermarkets Ltd. v. Nattrass (1972), it was held that a company does not function on its own but acts through living persons. Section 2(10) of the Companies Act, 2013 defines the term board of directors as a collective body of directors in a company. While the term director has been defined as people appointed to the board of directors (Section 2(34)). The board of directors is responsible for regulating the operations and business of the company. They, along with key managerial personnel, are responsible for internal affairs and the management of the company. Key managerial personnel, as defined under Section 2(51) of the Act, consist of the following people who also help in formulating strategies and policies in the interest of the company and its shareholders:

  • Chief Executive Officer or the managing director or manager of the company,
  • Company Secretary,
  • Whole time directors in a company,
  • Chief Financial Officer of the Company,
  • Officers not below one level from the director are employed as whole time employees in the company and further designated as key managerial personnel.  

Section 152 of the Act deals with the appointment of directors. It provides that the subscribers of the memorandum of association are considered the first directors of a company unless the directors are appointed. The first director’s hold office until the first general meeting of the company, after which subsequent directors have to be appointed according to Section 152 of the Act. In the case of Dr. Mrs. Usha Chopra v. Chopra Hospital (P) Ltd. (2006), two directors were appointed without following the proper procedure; hence, the appointments were held to be wrong. 

Further, the Act provides that every director will be appointed at the general meeting of a company. However, no person can be appointed as a director until he has been allotted the Director Identification Number, which will be furnished by such a person along with a declaration that he is not disqualified from being a director. 

According to Section 153, a person who is willing to be appointed as a director has to make an application for the allotment of a Director Identification Number (DIN) to the Central Government. The same will be allotted to him by the government within one month of receiving the application (Section 154). In order to obtain DIN, a person has to file form DIR-3. The following documents must be attached with the form:

  • Photograph of the applicant. 
  • Passport as identify proof and the same must be attested.
  • Address proof.

The application for DIN can be rejected if required documents are not submitted or documents submitted are not properly self attested or there is a mistake in the form or application is invalid. The director so appointed has to intimate his DIN to the company (Section 156). However, no person can make an application for more than one Director Identification Number as per Section 155 of the Act. 

Types of directors

However, the board consists of a Chairman and other directors. These directors also play their individual roles and discharge duties mentioned under the Act. There are several types of directors in a company:

  • Nominee directors, 
  • Whole time directors, 
  • Executive directors, 
  • Non-executive directors, 
  • Independent directors, 
  • Additional directors etc. 

Meaning of non-executive director 

The term non-executive director has not been defined in the Companies Act, 2013. However, as the term suggests, a non-executive director is the one who is not an executive director. Such a director is not involved in the day-to-day business and operations of a company but is involved in policy making and planning useful strategies for the company. They do not participate in the daily affairs of a company and, hence, are regarded as the custodians of the governance of the company. 

A non-executive director is not an employee of a company but is a member of the board of directors. Mostly, they act as policy makers and advisors for a company. One of the major reasons for having non-executive directors on a board is public relations, as they help in making connections, getting expertise from outside, and improving the public relations of a company. They are paid in the form of fees, cash or equity, which usually depends on the size of the company and the time spent by the non-executive directors for the company. 

There are certain objectives behind having non-executive directors in a company:

Control on the executive directors

One of the major purposes of having non-executive directors is that they help to control the activities of executive directors and the members of the management team, which further makes them accountable. 

Expert advice

Non-executive directors are people with high expertise, skills, experience and knowledge for the company and, hence, add value to the company. They render expert advice and opinions on the strategies formulated by the management and board of companies and help them rectify mistakes and formulate the required plans and policies. 

Monitor risks and policies

Another objective of having non-executive directors is that they monitor policies and strategies made in a company, which helps in regulating and preventing risks and other factors in a company like performance of the board, audit reports, compliance with the memorandum and articles of association, etc. 

Improve public relations

Non-executive directors help improve public relations for the company by promoting their business and making valuable connections outside the company which further leads to growth and expansion.  

Roles and responsibilities of non-executive directors

Non-executive directors are not employees of a company and do not hold any executive offices. They act as independent advisors for a company but cannot be involved in its daily affairs. However, they are responsible for making policies and strategies in the interest of the company and keeping an eye on the other directors and managerial personnel of the company. A non-executive director plays an important role in a company and has the following responsibilities:

Review performance

A non-executive director is responsible for reviewing the performance of the company and its management. He holds the executive directors and other members of the management of a company accountable. Such directors bring out the loopholes so that they can be avoided and worked upon. They are also responsible for protecting the interests of shareholders and ensuring that the company achieves set targets and goals. 

Formulate strategies

Non-executive directors help in formulating necessary strategies for the betterment of a company. They provide a broad perspective to the board and critically analyse the policies made by executive directors and other members of the management. 

They also play an important role by providing external factors affecting the affairs of the company and challenging its operations and policies. This helps a company strive for success and avoid mistakes. 

Commit time to the company

A non-executive director is expected to dedicate a substantial amount of time to the company they are associated with. This also requires them to disclose their previous commitments when they are appointed as non-executive directors. Further, they must inform the board if they are not available or have other commitments. 

Management of risk

These directors help in making strategies and policies for a company, controlling the activities of managerial personnel, developing a framework, challenging existing business plans etc. They also monitor the policies framed. All this helps in regulating and managing risks for the proper management and success of a company.

Another major responsibility of these directors is to assure the shareholders that the financial information and information about the affairs and operations of the company they receive is accurate and that they are working towards achieving their goals and have secured robust risk management systems. 

Make connections

Non-executive directors add value to the company by making valuable connections outside the company. They can help in promoting the business of the company. They also help in bringing expertise and required knowledge to the table, which helps in the growth and development of the business. 

Participate in the meetings 

They might also be required to participate actively in the meetings of the board and committees, if any. Further, they can give advice and discuss the issues and risks faced by the company in the meetings. They are expected to act objectively and provide a wider perspective to the board. This will ultimately contribute towards the growth and development of the company.

Duties of non-executive directors 

The duties of executive and non-executive directors are similar. In case there is a breach of duty on their part, they can be held liable for the same. Section 166 of the Act provides duties to be discharged by directors in a company. It further provides that if the duties are breached by a director or he or she fails to exercise those duties, the punishment would be a fine of not less than one lakh rupees and can extend up to five lakh rupees. 

However, Section 149(12) provides that a non-executive director, not being a promoter, a part of the management of the company, or an independent director, can be held liable only for those acts of the company that were in his knowledge, and he consented to such acts or situations where he did not act with diligence. The Kerala High Court in the case of Brij Gopal Daga v. State of Kerala (2013) observed that non-executive directors cannot be exempted from liability merely on the ground that they are not involved in the daily affairs of the company, and thus, the proceedings were not quashed against the directors.  

The non-executive directors are further responsible for:

Monitoring policies and plans

The non-executive directors are responsible for monitoring the policies and strategies made by the board and key managerial personnel. They help find loopholes in the existing strategies, which further helps the board improve their existing plans and make new strategies. They must demonstrate their willingness to debate, listen and question the policies formed. 

Scrutinise performance of the board

Another duty of non-executive directors is to scrutinise the performance of the board and whether the executive directors and members of the management team are performing their duties with diligence. This further makes them accountable to the company and its shareholders.  

Develop new plans and strategies

Non-executive directors are skilled, knowledgeable and persons with experience. They bring the required expertise  to a company. With the help of their skills, knowledge and experience, they help the board develop better strategies and policies for the expansion of  business and the betterment of the company. 

Accuracy of financial information 

The non-executive directors have to ensure the accuracy of financial information about the transactions and business of the company. This information is also added to the audit reports of the company and further shared with the shareholders. Thus, it is necessary to have accurate information. 

Risk management mechanism 

Another important duty of non-executive directors is to secure a robust and effective risk management mechanism in the company. This mechanism helps the company prevent foreseeable risks in the future and be ready with an action plan in situations of risk. 

Act reasonably and promote the business of the company

Non-executive directors are expected to act reasonably and with due diligence at all times in the interest of the company. They are required to take effective measures and take proper care while exercising their duties. This reduces the chances of mistakes. Another duty of these directors is to promote the objectives of the company and help in expanding its business. 

Safeguard confidential information

One of the most important duties of non-executive directors is not to disclose any confidential information to any outsider. They should not abuse their position or gain any unfair or undue advantage. 

Avoid conflict of interest

Non-executive directors must avoid any kind of conflict of interest with the company. They must not be involved in situations where the risk of conflict of interest arises. 

Difference between non-executive directors and executive directors 

An executive director, as the name suggests, is a member of the executive team of a company. These directors are actively involved in the daily affairs of a company and play an important role in decision making. They are also key managerial personnel and are responsible for managing and regulating the operations of the company. On the other hand, non-executive directors are not interested in the daily operations and transactions of a company. They are required to keep a check on the performance of all the executive directors and other members of the management team. They also help in formulating strategies for the company with the help of their knowledge, skills, expertise and enriching experience. 

Executive directors are full-time employees of a company, unlike non-executive directors, who are often considered external directors. The major difference between the two is that the former is responsible for the management of the company, its internal affairs and daily transactions, while the latter is independent and critically analyses the existing policies and plans of the company along with the performance of the managerial personnel and further evaluates them. This, in turn, helps the company formulate better strategies,  regulate risks and avoid mistakes. 

Thus, the difference between the two can be summarised as:

Basis of difference  Executive directors  Non-executive directors 
Meaning Executive directors are responsible for managing and regulating the daily affairs, transactions, operations and internal management of a company.  Non-executive directors are not concerned with the daily affairs of the company, rather they are regarded as the custodians of a company. 
Responsibilities  They usually have leadership roles in the company, like Chief Executive Officer etc.  These act as independent advisors, monitor the performance of a company, regulate and evaluate possible risks and provide knowledge, expertise, etc. 
Employment  They are full time employees of a company.  They are not employees of the company. 
Independence  They are not independent.   They are not involved in the management of a company but act as independent advisors. 
Representation  They represent the internal operations, business and management of a company.  They represent the company and its business in the outer world, which helps in promoting its objectives. Hence, they are referred to as external directors. 
Remuneration  They are paid salaries.  They are not the employees of a company but bring expertise, knowledge and experience to the table and hence, paid remuneration in the form of fees. 

Meaning of Independent directors

The Act defines the term “independent directors under Section 2(47) as directors that have been referred to in Section 149(6). Section 149(4) provides that every public company that is listed must have a minimum of one-third of its directors as independent directors. Further, the Central Government has the power to prescribe a minimum number of independent directors that must be present in a class of public companies. However, it must be clearly understood that an independent director is not a managing, whole-time or a nominee director. An independent director is a non-executive director who has no pecuniary relationship with the company or its management other than remuneration. 

Independent directors are the directors who are related to the daily affairs, operations or transactions of a company. They act as guides for the company and are selected from a data bank. These directors also help a company improve its credibility and standard of governance. They neither have any pecuniary relations with the company, its promoters, members of the senior management team, or affiliated companies, nor are they a part of the executive team. 

Qualifications of independent director 

The Allahabad High Court observed in the case of Indian States Bank Ltd. v. Sardar Singh (1934) that the competency and integrity of directors are major factors that determine the success of any company. In this case, an application was filed by the official liquidator to make the promoter and directors of the company liable for misfeasance and fraud. Thus, it is necessary to have proper management in the company. 

The Act provides the qualifications of independent directors under Section 149(6). A person is eligible to become an independent director if he:

  • Possess qualities of integrity and required knowledge, skills and experience. 
  • Neither is a promoter of a company nor holds any of its subsidiaries or associate companies. He must also not have any direct or indirect relationship with the  promoter or directors of a company. 
  • Has no pecuniary relationship with the company, its subsidiary or associate companies, its promoter, directors, etc for a period of two financial years immediately preceding the current financial year. The only exception to this rule is the remuneration paid to independent directors or transactions not exceeding 10% of his total income or amount prescribed by the company. 

The Act further stipulates certain conditions with respect to the relatives of independent directors. No relative of an independent director must:

  • Hold any security or interest in the company, its subsidiary or associated companies during the two financial years immediately preceding the current one. However, the relative can hold security or interest not exceeding fifty lakh rupees or 2% of the paid up capital of such a company, its subsidiaries or associated companies. 
  • Be indebted to the company, its subsidiaries or associated companies, or their promoters and directors for an amount greater than that prescribed during the two financial years immediately preceding the current year. 
  • Give a guarantee or any security with respect to the debt of any third person to the company, its holding, subsidiaries, associate companies or their promoters or directors. The amount may be prescribed during the two financial years immediately preceding the current year. 
  • Have any pecuniary relationship with the company or its holdings, subsidiaries or associate companies of 2% or more. 
  • Hold any position in the management of the company, its holding, subsidiaries or associate companies or be its employees for three preceding financial years 
  • Not be a proprietor or a partner in an auditor’s firm or company secretaries or cost auditors of the company or any legal or consulting firm having transactions with such a company in which he has to be appointed for three preceding financial years.
  • Hold more than 2% of its total voting power in a company.
  • Hold a post of Chief Executive or director of any non-profit organisation who receives more than 25% of its receipts from the company.  
  • An independent director must also possess any other qualifications prescribed.
  • Such directors must give a declaration with respect to their independence and whether they meet the criteria at the first meeting of the board in every financial year or in case there is any change affecting their status of independence. 

Manner of selection of independent directors 

Section 150 of the Act deals with the manner of selection of independent directors. The Section provides that:

  • A data bank is maintained by a body, institute or association as notified by the Central Government and contains necessary details of people eligible to become independent directors like their names, qualifications, addresses, etc. 
  • The duty to exercise due diligence while selecting an appropriate candidate for the post of independent director from a data bank is on the company making the selection. 
  • The appointment of the candidate must be approved in a general meeting of the company.
  • An explanatory statement must be given, consisting of justification for the appointment of selected candidates. 

The data bank will maintain the details of only those people who are willing to become independent directors. Further, the Central Government has the power to prescribe the manner and procedure for the selection of independent directors who meet the required qualifications and criteria. 

According to the Code for Independent Directors given in Schedule IV of the Act, the appointment of these directors is to be formalised through an appointment letter, which provides the following particulars:

  • Committees of the board are to be served by the director appointed.
  • Expectations of the board from the director appointed.
  • Term of office.
  • Duties and liabilities of the director.
  • Provisions of insurance for directors and officers.
  • Code of business ethics to be followed by such a director.
  • Actions that are prohibited in the company.
  • Remuneration, periodic fees, reimbursement of expenses, etc., to which the appointed director is entitled. 

Term of office of independent directors

The term of office for independent directors, according to Section 149(10), is five years. They can be re-appointed by passing a special resolution in this respect. Information about the reappointment of independent directors must also be mentioned in the report of the board. Further,  Section 149(11)  provides that an independent director is not allowed to hold office for more than two consecutive terms but can be re-appointed only after a gap of three years. 

The only condition to be fulfilled is that during the gap, such a person must not be associated with the same company in any other manner, either directly or indirectly. The Code for Independent Directors given in Schedule IV of the Act provides that they can give their resignation or be removed in the same manner as any other director of the board under Sections 168 and 169 of the Act, respectively. 

Roles and responsibilities of independent directors

The Code for Independent Directors given in Schedule IV of the Act provides the role and responsibilities of independent directors. These directors are required to perform the following functions:

  • Bring independent judgement to the deliberations of the board about  strategy, performance, risk management, appointments, etc. 
  • They bring an objective view and evaluate the performance of the board and managerial personnel.
  • They also scrutinise the management of the company and monitor its performance. 
  • They must be satisfied with the integrity of the financial information and that the company has robust and defensible risk management mechanisms. 
  • They must ensure that the interests of minority stakeholders are protected and try to balance the interests that are conflicting. 
  • Determine the levels of remuneration for executive directors, senior management and managerial personnel. 
  • They also play a key role in the appointment and removal of executive directors, managerial personnel and senior management of the company. 
  • In case of any conflict between the management and the interests of shareholders, they must arbitrate in the interest of the company. 

Duties of independent directors 

According to Section 166 of the Act, a director is required to act according to the articles of association. The duties of a director, according to the Section, are:

  • A director must act in good faith and promote the business and object of a company. He must act in the best interest of the company, shareholders, employees and protection of the environment. 
  • The duties must be exercised reasonably and with due diligence and care. They must also exercise independent judgement of their own. 
  • A director must not be involved in any situation where there is a conflict of interest with the company.
  • No director must try to achieve an undue or unfair advantage by himself, his relatives, partners, etc. If he does so, he will have to pay an amount equal to the gain. 
  • The office of the director cannot be assigned to any other person, or else it will be void.
  • If a director is found contravening the provisions of this Section, he will be liable to a fine ranging from two lakh rupees to five lakh rupees. 

An independent director, like any other director, is required to perform the above mentioned duties. In the case of N Narayanan v. Adjudicating Officer, SEBI (2013), the Supreme Court held that if any director fails to act with due diligence, it is a failure of corporate governance,  which can lead to false and fabricated disclosures, and hence, the directors must be held liable in such situations. The other duties of an independent director, according to the Code for Independent Directors given in Schedule IV of the Act, are:

  • To undertake appropriate actions and regularly update and refresh the skills and knowledge required. 
  • They must take and follow the professional advice and opinions of the experts and seek clarification or amplification of information.
  • Attend all the meetings of the board and its committees.
  • Attend the general meetings of a company.
  • Make sure that the concerns are addressed by the board and resolved. They must also make sure that their concerns are recorded in the minutes of the meetings. 
  • They must be well informed about the affairs of the company and external matters related to it. 
  • They must not be an obstruction to the functioning of the board or its committees.
  • Sufficient attention and deliberations must be given before approving any transactions and making sure that they are in the best interest of the company.
  • Independent directors must make sure that the company has a proper and functional vigilance mechanism.
  • They should report any concerns about any unethical behaviour, suspected fraud or violation of the code of conduct or ethics policy of a company. 
  • Every independent director must act within the authority given to them and protect the interests of a company, its shareholders and employees. 
  • No confidential information must be disclosed by them unless it is approved expressly by the board or required by law to do so. 

Guidelines in the Code

An independent must follow certain guidelines given in the code:

  • They must uphold the standards of integrity and probity at all times. 
  • While discharging the duties, an independent director must act objectively and constructively.
  • They must exercise all their responsibilities in a bona fide manner and in the interest of the company.
  • They must take out sufficient time for the company in order to fulfil their professional obligations.
  • If they dissent from the judgement of the board, their independent judgement must not be vitiated by extraneous considerations. 
  • They must abstain from abusing their position detrimental to the interests of the company or its shareholders or gaining any unfair advantage, directly or indirectly.
  • They should refrain from taking actions that would result in loss of their independence. 
  • In case an independent director loses his independence, he must inform the board immediately.
  • Independent directors must assist the company in implementing the best practices of corporate governance. 
  • The code also provides that the independent directors must hold at least one meeting in every financial year, independent of the members of management and non-independent directors. The aim of this meeting will be:
    • To review the performance of the board and non-independent directors and evaluate them. 
    • To review the performance of the Chairperson of the company, taking into consideration the opinions and views of executive and non-executive directors. 
    • To access the quality and flow of information between the management and board of the company. This is done so that the board can exercise its duties effectively and reasonably. 

Number of independent directors in a listed company. 

The Listing Obligations and Disclosure Requirement Regulations, 2015 (LODR Regulations) provides provisions regarding effective corporate governance to be followed in a company along with rules related to disclosures by listed companies in India. Regulation 17 of these regulations deals with the composition of independent directors in a board of directors of a listed company. It provides that:

  • The board of directors in a listed company consists of both executive and non-executive directors, with a minimum of one woman director. 50% of the directors in a board must be non-executive directors. 
  • If the board is headed by a non-executive director as its Chairperson, a minimum of one-third of directors on the board must be independent directors. However, where the chairperson of the board is not a non-executive director, a minimum of half of the board must be composed of independent directors. 
  • If the non-executive chairperson is also the promoter of the listed company or related to any of the members of the management team at positions of the same level as directors of one level below the directors, half of the board of such a company must be independent directors.
  • For a listed company to have equity shares of issuers with superior voting rights, the board must have half of its directors as independent directors.    
  • The quorum of meetings of the board in the top 1000 and 2000 listed companies w.e.f. 1 April 2019 and 1 April 2020, respectively, will be one-third of total directors in a company or three directors. However, the quorum must consist of at least one independent director. 

Non-executive directors are the ones who are not the employees of the company and play an important role as the custodians of governance in the company. While independent directors, on the other hand, do not have any pecuniary relationship with the company. The only exception is remuneration. Further, a non-executive director can either be an independent or a dependent non-executive director. 

It can be said that all independent directors are non-executive directors but not all non-executive directors are independent. Independent directors, unlike non-executive directors, do not have a duty to make any connections outside a company.  They rather have a duty to evaluate the performance of the board and key members of the management team. Thus, the difference between the two can be summarised as:

Basis of comparison  Non-executive directors  Independent directors 
Section  The term has not been defined anywhere in the Act. The definition is given under Section 2(47) of the Act.  
Meaning Non-executive directors are those directors who do not hold any executive office or post in a company. They are like the custodians and supervisors in a company and provide expert advice on matters related to business, policies and strategies.  Independent directors are a subset of non-executive directors who have no monetary relationship with the company or its management except for the remuneration paid to them. 
Appointment  The basis of the appointment of these directors is their skills, knowledge and experience in the required field.  Independent directors are selected by the company from a data bank consisting of the details of people eligible to become independent directors. Section 150 provides the manner of selection of independent directors.  
Qualifications  There are no particular qualifications for the appointment of non-executive directors. This indicates that they must possess qualifications as required and notified by the company.  Section 149 of the Act provides the qualifications of independent directors. 
Functions They are responsible for reviewing the performance of other directors and the management team of the company, monitoring policies, regulating risk, making connections for the promotion of the company etc.  The main function of independent directors is to provide their independent judgement in the discussions of the board. They are also expected to act objectively and constructively.  Other functions of these directors are given in the Code for Independent Directors in Schedule IV of the Act. 
Salary They are not the employees of the company and hence, paid fees for their expertise and time given to a company.  They are paid remuneration like any other directors in the company. 
Connections  Non-executive directors make connections outside a company, which ultimately help in the growth and development of the company. Thus, they are also considered external directors.  Independent directors have no such duty. They are rather required to keep an eye on the performance of the board and managerial personnel. 
Term of office The Act does not prescribe any particular term of office for non-executive directors.  The term of office for independent directors is five years and can be re-appointed by passing a special resolution in this regard. However, they cannot serve more than two terms continuously and can be re-appointed after a gap of three years (Section 149 (10)). 
Membership in the board According to LODR Regulations 2015, 50% of the directors on the board of a listed company are non-executive directors.  According to Regulation 17 of LODR Regulations, 2015:If the board is headed by a non-executive director as its Chairperson, a minimum of one-third of directors in the board must be independent directors. However, where the chairperson of the board is not a non-executive director, a minimum of half of the board must be composed of independent directors. If the non-executive chairperson is also the promoter of the listed company or related to any of the members of the management team at positions of the same level as directors of one level below the directors, half of the board of such a company must be independent directors.
Committees  Non-executive directors are not a part of any committee of the board. This is because they are not full time employees in a company.  Committees in a company like risk committee, audit committee, remuneration committee etc. consist of independent non-executive directors. 
Expertise and skills Non-executive directors are people with skills and great experience in the required field. They are expected to bring their expert knowledge to the table which is beneficial for the company. They are like experts in a company.  Independent directors must meet the criteria and qualifications prescribed under the Act. 
Relationship with the management  Non-executive directors work along with the executive directors and managerial personnel while making strategies and policies for the company.  Independent directors have no relationship with the management in the company in order to provide unbiased opinions and views on certain matters like performance of the board and key managerial personnel. 
Decision making authority  Non-executive directors do not actively participate in the decision making process. However, they can render their expert advice or challenge the decisions of the executive directors.  Independent directors are required to participate in the decision making process. 
Status of Independence Not concerned with the non-executive directors  These are independent directors and have to maintain their independence while making independent judgement. If their status of independence is affected due to any reason, they must inform the board. They are also expected to avoid any conflict of interest with that of the company. 

National Small Industries Corp. Ltd. v. Harmeet Singh Paintal & Anr. (2010)

Facts of the case

In this case, a Special Leave Petition was filed by the appellant in the Supreme Court against the order of the Delhi High Court quashing summoning orders of the trial court against the respondent in a complaint under Section 138 of the Negotiable Instruments Act, 1881. Twelve  complaints were filed by the National Small Industries Corp. Ltd. (appellants) against another company and its directors on the ground that the cheque issued to them was dishonoured and thus, the directors must be made liable for the same. 

Issues involved in the case

  • Whether the order of Delhi High Court quashing the summoning orders against the respondent is sustainable?
  • Whether directors must be held liable in the present case?

Judgement of the Court

The Hon’ble Supreme Court observed that  in order to make a person vicariously liable for a criminal offence under Section 141 of the Act, it must be proved that he was responsible for the affairs and conduct of the company. If a director was not in-charge or responsible for the conduct of business at the time when the offence was committed, he cannot be made liable for the offence merely because he is holding the position of director. 

In order to make a director vicariously liable, his role must be specific, and the complaint must provide a specific role played by the director. The court further opined that it is not a presumption that every director is informed about every transaction. Vicarious liability must be proved and not inferred. Thus, the appeal was dismissed on the above grounds. 

Analysis of the judgement 

The Court in this case clearly highlighted the circumstances under which a director can be held vicariously liable for the acts of the company. A director who is not in-charge of the daily affairs of the company and responsible for the same cannot be held liable for any offence or acts of the company. The observation of the court that it is not a presumption that every director of the company is informed about every transaction also indicates towards non-executive directors and independent directors who are neither  involved in the daily affairs and day-to-day business of the company nor manage the same. Hence, they cannot be held liable. 

Pooja Ravinder Devidasini v. State of Maharashtra (2014)

Facts of the case

In this case, an appeal was filed in the Supreme Court against the judgement of the Bombay High Court in a writ petition, whereby the court dismissed the petition seeking quashing of the complaint filed by the respondent against the appellant under Section 138 of the NI Act. The respondent, a financial company, filed a complaint against the appellants for dishonour of cheque due to insufficient funds. The complaint alleged that the appellant was in-charge and responsible for the conduct of the company as a director and must be held vicariously liable for the same. The appellant filed a writ petition in the High Court and requested to quash the complaint as she was a non-executive director of the company and that she resigned before the cheques were issued to the respondent. However, the High Court dismissed the petition. 

Issues involved in the case

  • Whether the appellant will be held liable in this case?

Judgement of the Court 

The Supreme Court observed that it was proved that the appellant was not a signatory to the cheques issued to the respondent. She was a non-executive director and not the managing director. The Court further opined that the non-executive directors are the custodians of governance in a company and are not concerned with its daily affairs. They are only required to monitor the activities of executives. It was further observed that a person cannot be held liable merely because he or she is a director of the company. The complaint did not provide involvement of the appellant in the case in the transaction in issue, and the High Court did not deal with the issue in a proper manner. Thus, the complaint was quashed on the ground that the appellant was neither the director nor involved in the daily conduct of the company when the offence was committed. 

Analysis of the judgement 

The court in this case gave the meaning of non-executive directors that they are not involved in the daily affairs of the company and hence, cannot be held liable for the acts of the company like whole-time directors. 

Sunita Palita v. M/S Panchami Stone Quarry (2022)

Facts of the case

An appeal was filed by the appellants in this case against the decision of the Calcutta High Court dismissing Criminal Revisional Application for quashing the proceedings under Section 138 of the NI Act. A complaint was filed by the respondent against the appellant and its directors in order to make them vicariously liable for the dishonour of cheque. 

Issues involved in the case

Whether the directors can be held vicariously liable in the case or not?

Judgement of the court 

It was contended that the appellants are the independent non-executive directors of the company and were not involved in its daily affairs and conduct, and that these directors are inducted for their skills, experience and expertise in a particular field. They are not part of the management team of the company. The Supreme Court held that the High Court failed to observe that the appellants in this case were not managing directors or joint directors who are responsible for the conduct of a company but independent non-executive directors. They did not sign the cheque issued to the respondent. The liability of a person depends upon his role and responsibilities, not on his designation alone. Thus, the judgement of the High Court was set aside. 

Analysis of the judgement 

In the present case, the court distinguished independent non-executive directors from the managing directors or joint directors who are in-charge of the affairs and conduct of the company and can be held liable, but independent non-executive directors cannot be held vicariously liable. 

Ashok Shewakramani and Ors. v. State of Andhra Pradesh & Anr. (2023)

Facts of the case

An appeal was filed in this case by the appellants against the judgement of the High Court dismissing a petition filed by them to quash the complaint made by the respondent under Section 138 of the NI Act. It was contended that the appellants were directors of the company against whom the complaint had been filed. It was further argued that the directors must not be held liable as the requirements of Section 141 have not been complied with. 

Issues involved in the case

  • Whether the judgement of the High Court is correct or not?
  • Whether the directors be held vicariously liable in the present case or not?

Judgement of the Court 

The Supreme Court observed that Section 141 of the Act requires that in order to make a person vicariously liable, it must be proved that he was in charge and responsible for the conduct and affairs of the company. It was further observed that in the present case, the appellants have neither signed the cheque issued to the respondent nor were whole time directors in the company. It was opined by the Supreme Court that a person does not become in in-charge of the conduct of a company or its affairs merely because he is managing it. For example, a manager cannot be referred to as in-charge of the conduct of the company and be held liable just because he is managing its daily affairs. It was held that this condition of Section 141 was not fulfilled in the present case hence, the judgement of the High Court was set aside. 

Analysis of the judgement

This is one of the recent cases related to the vicarious liability of directors in a company. The Supreme Court held that a director can only be held liable if he is in-charge and responsible for the daily affairs of the company. This means that independent directors or non-executive directors cannot be held liable as they are not involved in the day to day affairs of a company, unlike managing directors and other whole-time directors. 

From the above article, it can be concluded that independent directors and non-executive directors are different from each other and have significant differences. Not all non-executive directors are independent, even though all independent directors are non-executive. Those who are not involved in the daily operations of the company but may have commercial relations with the management can be referred to as non-executive directors. On the other hand, independent directors have to fulfil stringent independence requirements in order to oversee the company with fairness and impartiality.  

The case laws added in the article also provide that non-executive directors and independent directors cannot be held liable in the same manner as whole-time directors, managing directors, etc. This is because they are neither in in-charge of the conduct of the company nor responsible for its daily affairs and business. However, they can only be held liable for those acts to which they consented, had knowledge or did not act with diligence. 

Therefore, while independent directors must be free from conflicts of interest, non-executive directors offer the board an outside viewpoint and level of experience. Both of these positions are necessary for efficient corporate governance and making sure that the company operates in the stakeholders’ best interests.

How many directors must a public company and a private company have?

According to Section 149(1)(a), the minimum number of directors in a public company is three, while in a private company, it is two. 

Can a non-executive and an independent director be held liable for the acts of a company?

Yes, they can be held liable for the acts of the company. However, Section 149(12) provides that independent directors and non-executive directors  will be liable only for acts of the company which were in their knowledge or to which they consented and where they did not act with due diligence. 

What are the disqualifications of a director?

According to Section 164 of the Act, an independent director will be disqualified under the following circumstances:

  • He is of unsound mind or declared one by a competent court.
  • A person becomes an undischarged insolvent.
  • He made an application to be adjudicated as insolvent.
  • He is convicted of any offence involving moral turpitude or any other offence. Further, he has been sentenced for not less than six months and a period of five years is not over from the expiry of such sentence.
  • The court or tribunal disqualified him from being a director. 
  • He did not answer the calls regarding shares held by him either alone or jointly with someone else. 
  • He is convicted of offences under Section 188 dealing with related party transactions, during the last five years. 
  • He did not comply with Sections 152(3) and 165(1) of the Act.