CHALLENGES OF BEING A
NOMINEE DIRECTOR
BACKGROUND
After implementation of
Companies Act 2013 especially Section 149 of the Companies Act 2013 where every
company to have a Board of Directors consisting of individuals as directors and
shall have as per sub section 3, at least one director who should be resident
in India, there was opportunities for many consulting firms in India to grab
the opportunity and sell one more Service for Nominee Resident Director for Foreign
entities who wishes to set up their businesses in India. This move to have
Resident Director in the company was to keep track of the company in case of
foreign promoters through resident Director. The Resident Director is first
chased by the different authorities like GST, Income Tax, ROC or any other law
if the company makes any default.
However, many don’t even know
that in addition to the statutory duties of different laws the Directors have
fiduciaries duties as the Directors are "Trustees" of the company
hence they must act diligently, in good faith and honestly even if
they are Directors in the company just to fulfill the compliance of Resident
Director.
Directors are responsible for management, success and failures in performance
of affairs of the company, including violations of various Statutes applicable
to the company
Some foreign companies are
set up for some tenders or contracts and their intention is not doing the
compliances, like holding regular Board Meetings, Annual General Meetings,
filling annual returns, maintenance of registered office, minutes, GST
compliances, Income tax compliances, RBI compliances and so on, as a result they
are on a verge to receive notices for non-compliance from the departments.
Thus, it is very important
for Resident Director to save themselves for penal actions for the non-compliances
done by the company and ensure the good corporate governance.
APPOINTMENT OF RESIDENT
NOMINEE DIRECTOR
We
in this article will talk about the nominee resident director appointed by the
foreign company on board to represent the interest of such company along-with
the compliance of Sec 149
However, the foreign company can
appoint a resident nominee director to grab hold on the compliances, by
entering into the Service Agreement between the director and the company, but
this agreement will not invalidate the accountability, the director is liable
for as per the provisions of Companies Act, 2013, i.e. the director even after
entering the service agreement are liable for penal provisions under the
Companies Act, GST Act, Income Tax Act, and any other act for the time being in
force, they cannot escape on from their liability just because of the contract
entered, they will still be liable for the actions.
DUTIES AND RESPONSIBILITY OF
THE RESIDENT NOMINEE DIRECTOR
The Companies Act holds all
Directors and Company Secretary liable for offences committed by the company.
The same can be authenticated from the definition of "Officer who is in
default" u/s 2(60) of the Companies Act, which is reproduced below:
(i) whole-time director;
(ii) key managerial
personnel;
(iii) where there is no key
managerial personnel, such director or directors as specified by the Board
in this behalf and who has or have given his or their consent in writing
to the Board to such specification, or all the directors, if no director
is so specified;
(iv) any person who, under
the immediate authority of the Board or any key managerial personnel, is
charged with any responsibility including maintenance, filing or
distribution of accounts or records, authorises, actively participates in,
knowingly permits, or knowingly fails to take active steps to prevent, any
default;
(v) any person in
accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act, other than a person who
gives advice to the Board in a professional capacity;
(vi) every director, in
respect of a contravention of any of the provisions of this Act, 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;
(vii) in respect of the
issue or transfer of any shares of a company, the share transfer agents,
registrars and merchant bankers to the issue or transfer.
Even for other applicable
enactments of Taxation, Corporate, Labour & Industrial Laws, Pollution
laws, etc. do invariably contain a section as "Offences by
Companies". e.g. Section 278B of Income Tax Act, Section 141 of Negotiable
Instruments Act & Section 14A of the Employees P.F. (Misc. Prov.) Act, all
of these specifically provides that in case of default every person who at the
time of offence was 'Incharge of and was responsible to the Company for the
conduct of its business as well as the company shall be guilty of the
offence and be punished accordingly. Hence all the Directors on Board are
normally liable for any default in compliance with various Act.
The resident director, once
appointed as the director of the company as stated above is liable under the
provisions of the various acts that are applicable on the company, he is
accountable for the actions of the company,
To avoid or mitigate the
problems in future a resident director may perform actions such as
·
Regular
audit of the bank statements and transactions. E.g. to check Money laundering
activities if any or any illegal activities. Bank Statements reveals majority
of activities of the company.
·
Monthly
visit to company premises and having checks on the management of the company
·
Obtaining
compliance certificate from the practicing professionals like Practicing
Company Secretary and Auditors who are Chartered Accountants
·
Regularly
conducting the due diligence
·
To
check whether the GST returns are filled on time or not
·
To
check whether the accurate and effective Income tax returns are filled on time
or not
·
To
make sure that the accuracy and timely RoC returns submission
·
Also,
the Resident Director is required to check that the registered office is
maintained at all times so that all the notices and orders are received on time
·
Any
other activities that can be undertaken to make sure that the risk of penal
provisions get reduced and the company follows good governance.
2018 witnessed many fraudulent
cases which Corporate
Scams in India are more. Given facts and provisions states that the law
relating to the liability of company directors for offences under various laws
has been made more stringent in recent years on account of major corporate
scams.
It is suggested that the
resident director, should be very careful and diligent in the matters of the
company in which he/ she is Director to avoid penal provisions in future.
PENAL PROVISIONS UNDER
VARIOUS ACTS ON THE DIRECTORS
Under Companies Act, 2013
The Company Act prescribes
certain penalties for various offences under the act, like for non filing of
return of allotment within 15 days from the date of allotment the company, its
promoters and directors shall be liable to a penalty for each default of one
thousand rupees for each day during which such default continues but not exceeding
twenty-five lakh rupees, or
Punishment in contravention
of section 73 or section 76 where every officer of the company who is in
default shall be punishable with imprisonment which may extend to seven years
and with fine which shall not be less than twenty-five lakh rupees but which may
extend to two crore rupees,
And many more
Under CGST Act, 2017
Under the CGST Act also where
any tax, interest or penalty due from a private company in respect of any
supply of goods or services or both for any period cannot be recovered, then,
every person who was a director of the private company during such period
shall, jointly and severally, be liable for the payment of such tax, interest
or penalty unless he proves that the non-recovery cannot be attributed to any
gross neglect, misfeasance or breach of duty on his part in relation to the
affairs of the company
Under Income Tax Act, 1961
As per section 278B, where an
offence under the Income-tax Act has been committed by a company, then every
person who, at the time the offence was committed was in charge of and was
responsible to the company for the conduct of the business of the company as
well as the company shall be deemed to be guilty of the offence and shall be
liable to be proceeded against and punished accordingly. However if such person
proves that the offence was committed without his knowledge or that he had
exercised all due diligence to prevent the commission of such offence then he
shall not be deemed to be guilty of the offence.
Under other laws
He should make sure that all
the compliances are followed at time, and in case he discovers any fraudulent
activity, then he should intimate the same to the concerned affected group, so
that he could prove that he was not involved in any activity that has adverse
effect on the members/public or so.
Solutions for avoiding
undue harassment of Directors
To escape or mitigate the
liability of prosecution of all Directors can be done away if you insist the
management to passing appropriate resolution is Board Meeting allocating the
duties and responsibilities for compliance of different laws by different
Individual Director(s) after recording consent of individual concerned Director
in writing.
Generally, the Board is a
blend of different Directors (in our case two are foreign and one would be
resident for the sake of compliance), so we can nominate each one of them with
their specific law compliance duties. Such that as regards to the defaults in
maintenance and audit of Account Books under Companies Act and Taxation Laws,
the Board may make any one functional director responsible and incharge of
finance and accounts (called Director-Finance), liable for proper compliances
with relevant laws. Similarly, other Director may he held responsible for
compliance of various Labour and Industrial Laws like Factories Act, ESI,
Provident Fund, I.D. Act and Gratuity Act, etc. A Company Secretary may be
appointed shall be held responsible for compliance with Companies Act.
Similarly, responsibility for compliance with other laws should be entrusted to
nominated Director(s) and they be held responsible and made incharge of their
functions and the applicable law(s).
This will make such
'nominated Director(s) more cautious, responsible and diligent, knowing his
statutory duties and obligations in case of violation of any one law. All other
Directors in the Board will give him due support for making full
compliance but in case of prosecution for non-compliance he alone
will be responsible and prosecuted by the Authorities and other Directors would
be spared.
What is required is to
create such documents to prove that the Board had after due deliberations and
with written consent of the nominated Director had passed proper resolution in
the Board Meeting to that effect. Further as every Company has to keep
"Register of Directors" and also file "Return of Directors"
with the Registrar of Companies under Section 170(2) of Companies, which
Section reads as under:
"2. A return (Form
DIR-12) containing such particulars and documents as may be prescribed, of the
directors and key managerial personnel shall be filed with the Registrar within
30 days of the appointment of every director and key managerial personnel, as the
case may be and within 30 days of any change taking place."
Thus, in the Register of
Directors maintained by company and also the Statutory Return of Directors in
Form DIR-12 submitted by company to the Registrar of Companies, the company
should indicate against the name of each Director specific Law(s) allocated to
him for compliance of which he has been declared in charge and responsible to
the Company, as per Resolution passed by the Board. This fact must be indicated
by adding 'Remarks' in the Statutory Return of Directors. Similarly, it must
also be recorded in Register of Directors maintained u/s 170(1) of the
Companies Act. Certified copy of such a Return of Directors can be obtained by
anyone from Registrar of Companies, which document will conclusively prove the
responsibility of that Director alone to comply with law. In case of any
violation of that law, only that Director who is declared as In charge and
responsible to the Company, as per Board resolution will have to face the trial
and all other Directors will be saved of the harassment and punishment, if any.
Such kind of resolution is
permissible under provision of Section 2(60) of the Companies Act, 2013 and
other applicable laws. The relevant text of Section 2(60) "Officer in
default" is reproduced below:
(iii) where there is no key
managerial personnel, such director or directors as specified by the Board
in this behalf and who has or have given his or their consent in writing
to the Board to such specification, or all the directors, if no director
is so specified;
(iv) any person who, under
the immediate authority of the Board or any key managerial personnel, is
charged with any responsibility including maintenance, filing or
distribution of accounts or records, authorises, actively participates in,
knowingly permits, or knowingly fails to take active steps to prevent, any
default.
Based on the board
Resolution and the Directors' Registers maintained u/s 170(1) of the Act, no
Governmental authority will prosecute other Directors. However, if per chance
any other Director of the company is wrongly arrayed as an accused person for
an offence, the Court will not take cognizance, if the Director files certified
copy of relevant Board resolution accompanied with certified copy of Directors'
Register and also Certified copy of Return of Directors filed u/s 170(2) of the
Act.
To summarize the resident
nominee director should disclose the mandate between him and the foreign
company and should indulge in the due diligence of the company, such practice
will ensure smooth working for the company and will lower the risk of penal
provisions on the director also.
However, it is very difficult
to understand the real intention of the promoters of the company and Resident
Director cannot control the acts by the promoter group. E.g. if the Promoter has mentioned in the MOA that he would perform
trading of electronic goods and despite this, the promoters carries on Bitcoin
business which is prohibited in India, then, controlling on such fraudulent acts
is difficult for a person who has been appointed as just for compliance of Sec
149 of Companies Act 2013. Being vigilant is a piece of advice given to the
Resident Director and as soon as he/ she gets to know of any illegal acts,
then, he/ she should act immediately.
It is important to enter into
Indemnity Bond, Representations & Warranties, Service Agreement before
being appointed as Director. It is also advisable to get yourself insured under
Director Insurance Policy to safeguard your personal assets in case of frauds.
In case you have any further
clarifications, I would be happy to answer. My contact number is 9540074449
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