There is no concept of 'Sleeping Directors' under the Companies Act or under IBC: NCLAT
The National Company Law Appellate Tribunal (NCLAT) in the case of Shailesh Chawla & Anr. vs. Vinod Kumar Mahajan, RP & Ors. held that one cannot find the term 'Sleeping Directors' either under the Companies Act, 2013 or under the Insolvency and Bankruptcy Code, 2016 (IBC).The appellate tribunal further stated that the 'Independent Directors' are part of 'Board of Directors' and...
The National Company Law Appellate Tribunal (NCLAT) in the case of Shailesh Chawla & Anr. vs. Vinod Kumar Mahajan, RP & Ors. held that one cannot find the term 'Sleeping Directors' either under the Companies Act, 2013 or under the Insolvency and Bankruptcy Code, 2016 (IBC).
The appellate tribunal further stated that the 'Independent Directors' are part of 'Board of Directors' and have similar duties and responsibilities as other directors. Even if a Company constitutes different committees for an efficient conduct of its affairs, the said 'Committee' which carries out those functions is duty bound to report its decisions. Indeed, some 'Committees' have important statutory functions and must include 'Independent Directors' as per Law.
The NCLAT further held that 'Independent Directors' are an integral part of the 'Board' and, therefore, their duties and functions should be read in conjunction with statutory provision mentioned in Section 166 of the Companies Act, 2013 which speaks of 'Duties of Directors' and not in isolation.
The Appellants contended that in the view of the express provision of 149(12) of the Companies Act, 2013, an 'Independent Director' 'Non-Executive Director' etc should not be held responsible in any civil or criminal proceedings under the Act, unless the same criteria as specified is fulfilled. The appellants contended that they were 'Sleeping Directors' and have no role to play in the day to day affairs, management and conduct of the company.
In this case, the Appellants submitted that they were aggrieved against the impugned order passed by the National Company Law Tribunal Chandigarh Bench (NCLT/Adjudicating Authority) and therefore approached the NCLAT under Section 19(2) of the IBC.
The Appellants expressed their views that the order passed by the 'Adjudicating Authority' is in violation of the 'Principles of Natural Justice.' Further the Appellants pleaded that the mitigating factors for the independent and non-executive directors have been designed so as to protect and prevent them from being held liable for the acts of the company which are beyond their control or not within their mandate, in their capacity as 'outside directors' who are not involved in the day to day affairs of the company.
The Respondents argued that the key-ingredients of Section 19 of the IBC are not limited to the Directors of the 'Corporate Debtors' but extends even to a person who is associated with the management of the 'Corporate Debtor.' They contended that there is no concept of a "Sleeping Director" under the Companies Act nor under the IBC. The Respondents while addressing the Jurisdictional limits asserted that, the impugned order passed by the 'Adjudicating Authority' is well within its 'Powers' and the 'Authority' had neither exceeded its jurisdiction nor exceeded the jurisdiction vested in the 'IBBI' or the 'Central Government', as the case may be. Apart from that, only an information was submitted, upon which 'IBBI' has to act independently and the impugned order was passed after providing due opportunity and consideration of all relevant material on record.
The NCLT on 4th October, 2019 among other things had passed an order that the Respondent Nos. 1 to 5 were found in misconducting themselves in the course of 'Corporate Insolvency Resolution Process' by not extending their Corporation and Assistance to the Resolution and were withholding the information, which was supposed to be furnishing the books and documents belonging to the 'Corporate Debtor' which were supposed to be maintained by them.
The tribunal after hearing both the parties came to the conclusion that as far as 'Independent Director' is concerned, the burden of proof to establish that act of commission or omission by a company which are contrary to Law was carried out without his knowledge lies on the 'Independent Director'. Continuing further, an 'Independent Director' and a non-executive Director, promoter or key managerial personnel shall be held liable for such acts of commission(s) or omission(s) in relation to any actions of the company, which is within its knowledge and could be attributed to him through Board Processes.
The NCLAT went on to hold that in so far as the 'Independent Director' is concerned, the burden of proof to establish that act of commission or omission by a company which are contrary to Law was carried out without his knowledge lies on the 'Independent Director'. An 'Independent Director' and a non-executive Director other than promoter or key managerial personnel shall be held liable for such acts of commission(s) or omission(s) in relation to any actions of the company, which is within its knowledge and could be attributed to him through Board Processes.
According to the NCLAT, an examination of the ingredients of Section 19 of the IBC, shows that there is an obligation on the personnel and promoters of the 'Corporate Debtor' to extend all assistance and co-operation which the 'Interim Resolution Professional' will require in running / managing the affairs of the Corporate Debtor'.
The NCLAT thus dismissed the appeals stating that the impugned order passed by the 'Adjudicating Authority' does not suffer from any patent illegality in the eyes of Law.