Liability of Directors

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Abhishek Mahanty (Querist)

10 July 2010 Respected Sirs,

I want to know what are the liabilities of Non-executive directors in a company.

secondly i want to know if there is any case law which differentiates between Executive directors and non executive directors.

Thanking you in anticipation.

CA Sanat Pyne

CA Sanat Pyne (Expert)

06 August 2010 a non-executive director (NED) isn’t bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all meetings, though he ought to attend whenever in the circumstances he is reasonably able to do so, and also that in respect of all duties that, having regard to the exigencies of business and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. However, NEDs cannot remain totally aloof from the affairs of the company and then take shelter behind the plausible defence that they had no hand in the management of the company, as such aloofness may be negligence.

Thus, since all the directors, executive and non-executive, are jointly or collectively responsible to the company, at times even NEDs may be imputed with liability for negligence with regard to the actions of their co-directors who are executive ones. It is of greater interest to know the liability of directors arising out of negligence or lack of proper care in relation to the affairs of a company with special reference to the distinction between executive and NEDs. Although the law does not expressly make any distinction between these two kinds of directors, yet NEDs are concerned with the company’s day-to-day affairs; hence they deserve to be excused.

Executive directors are often subjected to severe test and to liability for lack of reasonable care and skill or for being negligent in managing affairs of a company. Sometimes, however, courts take stricter view of the matter and render even NEDs, for liability. It was held in a 1869 case that a director who signs cheques that causes prejudice to the company cannot say that he did so as a mere matter of routine or as a ministerial act. Reliance on co-directors and officers should not be unquestioning. In determining whether a director has been guilty of negligence, the court will take into account the character of the business, the number of the directors, the provisions of the articles, the ordinary course of management and practice of directors, the extent of their knowledge and experience,...

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