Varah was a Director on the Board of Karunya Jewellers Ltd. The Company was planning to appoint two other directors, one independent director and another executive director. After due procedures, the new directors were a

Directors are expected to perform in the best interest of the company. However, the kind of power they wield in the functioning of the company puts them in a position where it is not difficult for them to bend the rules and due to this, it is quite possible that they may be involved in fraudulent activities. Executive directors can usually be caught in the net of suspicion of fraud, since they are hands on involved in the day to day operations of the company and are aware of where there are loopholes in the systems prevalent within the company. However, the non- executive or the independent directors cannot escape responsibility simply by virtue of their position. Section 2(60) of the Companies Act, 2013 (the Act) implicates 'every director' in respect of a contravention of the provisions of the Act who consented to the fraud or is aware of the contravention can become covered within the term 'officer who is in default'. The method of awareness is also provided for this must be either by participating in the board proceedings without objecting to the same or even by virtue of receipt of proceedings of the board. 'Proceedings of the board' normally be understood to mean the minutes. However, this includes board papers also. Further, section 149(12) of the Act provides for liability of non-executive and independent directors. It provides as below: "(12) Notwithstanding anything contained in this Act,- (i) an independent director; & (ii) a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently." Similar provisions are contained in section 27(2) of the SEBI Act, 1992 and regulation 25(5) of SEBI (LODR) Regulations, 2015. Ministry of Corporate Affairs have also from time to time issued circulars to emphasize that non-executive directors and Independent Directors should not be prosecuted unless there's adequate proof that they had knowledge through Board process or that the acts of omission or commission were committed by the company with their consent, connivance or negligence. There is no bar on commencement of prosecution or any other legal proceedings against such directors, they can however be exonerated by the concerned authorities / courts if their bona-fides are proved. Thus, non-executive and independent directors can be held liable only in those cases which had occurred with their knowledge, attributable through Board processes, AND with their consent or connivance / where they did not act diligently. Resignation may seem to be the immediate recourse to a non-executive director, but that does not absolve someone from liability, since the proviso to section 168(2) of the Companies Act, 2013 clearly provides that the director who has resigned shall be liable even after his resignation, for the offences which occurred during his tenure. Here's where the attendance registers, board papers and minutes which you thought were mundane, suddenly become relevant. Attendance at the board meeting promptly brings a director within the 'awareness' purview just discussed above. A recording of who attended the meeting, where they did not participate in the discussion and voting and where they dissented is very relevant to affixing liability. Secretarial Standard on Meetings of the Board of Directors (SS-1) requires that the draft minutes need to be circulated to all the members of the board of directors, not only those who attended the meeting. Thus, the proceedings of the Board can be available even to those who did not attend the meeting and they can therefore be considered to be aware of a contravention. Hence, it can be concluded that fraud by one director makes liable every such other director, including non-executive or Independent director, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance; as provided under the definition of "officer who is in default" under Sec 2(60) of the Companies Act, 2013.