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An Overview On The Role Of Non-Executive Director With The Recent Supreme Court Judgement

Non-Executive Directors

The non-executive directors are independent advisors to the company and are members of the company's board of directors. They assist in the development of strategy within the company through positive criticism, external experience and expertise. They oversee the activities of the executive partners and help ensure that their objectives are met. They ensure that obligations to stakeholders are consistently met.

Roles Of Ned:

Non-executive directors spend part of their time overseeing the company, attending management team meetings or board meetings. They add value by providing a broad view of the company's problems and protecting the interests of shareholders.

They are responsible for the following:
  1. Performance check
    Non-executive directors are obliged to evaluate the performance of the management team in terms of the fulfillment of goals and objectives. They also monitor executive board members, can even remove senior management and plan for further appointments.

    Directors are also required to oversee the company's performance reporting. In addition, they ensure that responsibilities to stakeholders are understood and consistently met.
  2. Strategic direction
    The non-executive directors are responsible for objectively assessing the plans drawn up by the executive team. They help formulate and oversee corporate strategy by providing constructive criticism and a broader perspective on external factors affecting the business.

    They provide an outside perspective and challenge existing plans, thereby helping to improve business strategies. Non-executive directors also establish company values​​and standards in cooperation with executive partners.
  3. Commitment of time
    A non-executive director must devote a significant amount of time to overseeing the company. Thus, at the time of appointment, the director should communicate to the board his other important time commitments. They should inform the board of any significant changes in his/her schedule.

    They should obtain the approval of the Chair before accepting any other commitments that may affect his/her role. A non-executive director is required to make time in his schedule to meet the expectations set out in the appointment letter.
  4. Risk management
    Non-executive directors share responsibility with executive partners for developing frameworks and controls for risk management and access. They should assure stakeholders that financial information is accurate and that financial controls and risk management systems are robust and secure.
  5. People
    Non-executive directors can make connections outside the company and add additional value to the company. External links can help a company achieve its goals and mission.

    In addition, a non-executive director may represent the company vis-�-vis external companies. In cooperation with other members of the board of directors, they ensure sufficient financial and human resources to meet business goals.
  6. Professional Development
    Non-executive directors may receive advice on certain matters and discuss them at board meetings. They may be entitled to receive independent training necessary to perform their duties at company expense.
  7. Participation in committee meetings
    A non-executive director may be required to actively participate in committee meetings and perform his or her duties as a committee member. They should be aware of the committee's purpose and other responsibilities, if any.

    As per Section 197 of the Companies Act, non-executive directors in 2013 must receive salary as a monthly payment or a certain percentage of the company's profit/revenues.

Will Non-Executive Directors Be Liable For The Day-To-Day Affairs Of The Company?

Case Comment:
In the matter of Mr.Satvinder Jeet Singh Sodhi and Mr.Sakti Kumar Banerjee Anr. Versus State of Maharashtra and Anr.

This case is relating to the liability of non-executive directors. The matter of dispute was whether the non-executive directors can be held liable in the cheque bounce case where the Supreme Court on Monday held that non-executive directors of a company would not be liable under a cheque bounce case and no criminal proceedings can be initiated against them, as they are not involved in the day-to-day affairs of the company or in the running of its business.

Facts of the case:
The complaint was filed for the dishonour of the cheque where the company's directors were held liable for such dishonour of cheque of Rs. 29,31,849.30 with reasons of "Insufficient funds". The non-executive directors of the company alleged that they should not held liable as they had no knowledge about the transactions of this case.

  • Whether non-executive directors to be held liable for the day-to-day affairs of the company?

Critical Analysis:
The Supreme Court held that non-executive directors of a company are not liable in case of bounced check and cannot be prosecuted as they are not involved in the day-to-day affairs of the company or running its business.

The court quashed a criminal case against a group of independent non-executive directors of MBL Infrastructure in the bounced check case (Sunita Palita vs Panchami Stone Quarry) and said that "liability depends on the role one plays in the affairs of the company and not on the determination. or the very status as held by this Court in the earlier judgment of SMS Pharmaceuticals Ltd.'

The court said that the Calcutta High Court had overlooked the roles played by the petitioners in the company and the bench headed by Justice Indira Banerjee said that the provisions of Section 138/141 of the Negotiable Instruments Act, 1881 creates a statutory presumption of dishonesty by the signatory of the check and if the cheque is drawn on behalf of the company, including persons responsible for the company or the company's business.

However, any person associated with the company does not fall under the purview of Section 141 of the Act, the judges said, adding that a company executive who was not managing or responsible for running the company's business at the relevant time would not be liable.

The court was hearing an appeal against a HC order refusing to quash a magistrate court summons against non-executive board members in 2018. The case was based on the return of a check of Rs 1.71 million issued by the company.

While the HC said that any person who is a director, manager, secretary or officer in a company can be prosecuted under NI, the law governing bounce-related offences, the SC clarified that the main case will proceed against the company, its executive and the check signatory.

According to the supreme court, the HC took a hyper-technical approach when rejecting the proposal to cancel the criminal prosecution according to Section 482 of the Criminal Procedure Code, during a cursory reading of the formalistic statements in the complaint, while agreeing to the content of Section 141 of the Criminal Procedure Code., without any details.

"What the HC overlooked was the contention of these appellants that they were non-executive independent directors of the accused company based on undisputed materials on record. The SC noted that the petition expressly stated that all accused persons were liable and responsible for all business management of the accused company and held that the allegations in the complaint were sufficient to meet the requirements of Section 141 of the NI Act," the judgment stated.

The non-executive directors play a vital role in the company. They play many roles which builds the company strong externally by negotiating and dealing with external people affecting the growth of the business. But they are not liable for day-to-day affairs of the company which was made clear by the recent judgement of the supreme court. Written By: Jinal Jain M, Chennai

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