Role and Responsibilities of Nominee Director – An Analysis - MMJC

Introduction.

If a company is an artificial person, then the board of directors can be called the brain of such person, as they are the natural persons through whom the company functions. For the convenience of better functioning of companies, the Companies Act 2013 allows for appointment of various types of directors[1]. The explanation to sub-section 7 of section 149 defines nominee director as, “nominee director” means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests” Subject to the article of association of the company the board of directors may appoint any person as a director nominated by any institution in pursuance of the provision of any law for the time being in force or of any agreement or by central government or state government by virtue of shareholding in the company[2].

From the above analysis, it is amply clear that nominee director is appointed on the board of the company to take care of someone else’s, that is his nominating institutions interest. Therefore, generally it is observed that the nominee directors are involved only in those matters which relate to the interest of the nominators and no other matters. This situation gives rise to a question that whether the nominee director is answerable only to the nominators or he should be concerned with the best interest of that company as well on whose board he is appointed as director?

In this article, we shall try to find an answer to this dilemma with the help of judicial pronouncements.

Provisions of section 166 of the act.

Section 166(2)[3] of the act requires all the directors to act in good faith and in the best interest of the company. This section does not provide any exception to nominee directors. Therefore, even if they are appointed by nominators and not by shareholders, ones appointed on the board of directors, they are required to adhere to provisions of section 166 which makes all the directors responsible for the wellbeing of the company. We shall now see judicial pronouncement in this regard.

Judicial pronouncements.

Question with respect to the role of nominee director was addressed by the Hon’ble Supreme Court of India in the matter of Tata Consultancy Services Limited and Ors. v/s Cyrus Investments Pvt. Ltd. And Ors[4]. While discussing about the affirmative voting rights given to nominee directors nominated by majority shareholders of Tata Sons (‘the Tata trusts’), the Hon’ble Supreme Court of India held as follows, “19.30 Coming to the argument revolving around the duty of a Director, it is necessary that we balance the duty of a Director, under Section 166(2) to act in the best interests of the company, its employees, the shareholders, the community and the protection of environment, with the duties of a Director nominated by an Institution including a public charitable trust. They have fiduciary duty towards 2 companies, one of which is the shareholder which nominated them and the other, is the company to whose Board they are nominated.

19.34 The question as to (i) what is in the interest of the company, (ii) what is in the best interest of the members of the company as a whole and (iii) what is in the interest of a nominator, all lie in locations whose borders and dividing lines are always blurred.”

Reference in this regard can also be made to one more judgment pronounced by Hon’ble Delhi High Court in the matter of Bhardwaj Thuiruvenkata … vs Ashok Arora on 23^rd February 2017.In this case, the Hon’ble Delhi High Court was to determine the vicarious liability of a nominee director in the case of cheque bounce. The Hon’able High Court referred to section 149(12)[5] and held that, a nominee director can be held liable only inrespect 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. Therefore, a nominee director cannot be held vicariously liable in absence of clear and specific allegations. In this judgment the Hon’ble High Court has referred to a judgment of division bench of Hon’ble Gujarat High Court in the matter of Ionic Metalliks v. Union of India[6], where in the Hon’ble High Court has explained the types of directors and about nominee directors as follows,

“8. Nominee Directors: They can be appointed by certain shareholders, third parties through contracts, lending to public financial institutions or banks, or by the Central Government in case of oppression or mismanagement. The extent of a nominee Director’s rights and the scope of supervision by the shareholders is contained in the contract that enables such appointments, or (as appropriate) the relevant statutes applicable to such public financial institution or bank. However, nominee Directors must be particularly careful not to act only in the interests of their nominators but must act in the best interests of the company and its shareholders. The fixing of liabilities on nominee Directors in India does not turn on the circumstances of their appointment or, indeed, who nominated them as Directors. Chapter 4 and Chapter 5 set out certain duties and liabilities that apply to, or can be affixed on, Directors in general. Whether nominee Directors are required by law to discharge such duties or bear such liabilities will depend on the application of the legal provisions in question, the fiduciary duties involved and whether such nominee Director is to be regarded as being in control or in charge of the company and its activities. This determination ultimately turns on the specific facts and circumstances involved in each case.”

Analysis of pronouncements.

By referring to all these judgments, we may say that the nominee directors are duty bound to their nominating institutions as well as to the company on whose board they are appointed. They cannot think of interest of nominating institution itself in isolation. They must strike a balance between the interests of both the parties. Even though they are not involved in day-to-day affairs of the company, they attend all the board meetings and therefore, are answerable for all the acts carried out through board processes.

Conclusion.

To conclude, we can say that it would be incorrect to derive a straight conclusion that nominee directors are not responsible answerable for activities of the company and are answerable only for safeguarding the nominator’s interests. As mentioned in section 149(12) and the above-mentioned pronouncements, he is also answerable for those acts of the company which are attributable through board processes. He must fulfill the duties of directors as prescribed under section 166 of the act. However, as far as regulatory actions are concerned, nominee director cannot be punished just because he is a director of the company. Specific allegations must be made and proved against him for making him liable for punishment.

[1] 161 (3)

[2] 161 (3)

[3] 166(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.

[4] https://indiankanoon.org/doc/5416696/

[5] 149(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

[6] Ionic Metalliks v. Union of India, 2014 SCC Online Guj 10066; (2015) 2 GLH 156.