The Securities and Exchange Board of India ("SEBI") recently passed an order, in the matter of Zylog Systems Limited ("Company"), crystallizing the liability of independent directors of a company.

Facts:

  1. The Company had declared a dividend, that was approved at its Annual General Meeting held on 25 August, 2012. However, the Company failed to disburse the dividend, within a period of 30 days, as mandated by Section 207 of the Companies Act, 1956 which resulted in several shareholders filing complaints with SEBI.
  2. SEBI therefore issued a show cause notice, to all individuals who were directors at the time the dividend was declared . Two of the aforesaid individuals, Mr S Rajgopal and Mr V Ramani were independent directors of the Company at the time of declaration of dividend and submitted that they were not involved with the day-to-day administration of the Company.
  3. One of the independent directors Mr S Rajgopal, stated that he came to know of the default in November 2012 and in support of his contention, furnished minutes of the meeting of the Audit Committee, of which he was the chairperson, where the Committee had chastised the Company for its failure to pay dividend distribution tax.
  4. Mr VK Ramani stated that he came to know of the default at the board meeting held on 14 November, 2012. Both individuals relied on their remarks made in the aforesaid board meeting regarding the statutory lapses of the Company, which inter alia included comments on the unpaid dividend. Both individuals had also resigned as directors of the company, soon after the board meeting on 14 November 2012. Mr S Rajgopal on 20 November, 2012 and Mr V Ramani on 2 January, 2013.

Order:

In view of the aforesaid facts and circumstances, SEBI held that since the two independent directors had tried to convince the Company at its board meeting on 14 November 2012 to pay the dividend due, and resigned on account of its non-compliance to do so and owing to the fact that they were not involved in the day-to-day affairs of the Company, both individuals had discharged their duties as independent directors of the Company and no action would be taken against them.

MHCO COMMENT

In order to absolve themselves of liability, independent directors of companies must ensure that they record their objections to the wrongful conduct of the company, in the minutes of Board meetings and take appropriate steps to ensure that the non-compliance is communicated to the management of the Company.

This update was released on 17 July 2017.

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