Director’s Liability and Personal Risk Exposure in Indian Companies

Posted On - 12 June, 2025 • By - Jidesh Kumar

Introduction

In the evolving landscape of Indian corporate governance, the position of a company director is accompanied not only by strategic influence but also by significant legal obligations. While directors are entrusted with steering organizational vision, the growing emphasis on accountability, transparency, and compliance under Indian law has elevated the level of scrutiny applied to their actions. Today, directors — executive and non-executive alike — face personal risk to civil and criminal liabilities in the event of corporate mismanagement, fraud, or regulatory non-compliance.

The Companies Act, 2013 codifies the responsibilities of directors, including duties of care, diligence, and loyalty. Sections 149 and 166 of the Act impose fiduciary and statutory obligations that require directors to:

  • Act in good faith and in the best interests of the company, its employees, shareholders, and other stakeholders.
  • Exercise independent judgment and avoid situations of conflict of interest.
  • Ensure proper disclosure of personal interests in any related party transactions.

Non-compliance can attract penalties, disqualification, or in some cases, imprisonment — especially in matters involving fraud or negligence.

Criminal and Civil Liabilities: An Expanding Spectrum

Directors can be held personally liable under various laws and enforcement regimes. The risk spectrum spans:

  • Corporate fraud (Section 447): Directors involved in or having knowledge of fraudulent conduct can face imprisonment up to 10 years and substantial monetary fines.
  • Non-filing of returns and financials: Persistent default may lead to disqualification under Section 164 and prosecution under Section 92 and Section 137.
  • Statutory non-compliances: Directors can be penalised under statutes such as the Income Tax Act, FEMA, the Environmental Protection Act, and the Factories Act.
  • Cheque dishonour (Section 138, NI Act): Directors of companies issuing dishonoured cheques may be criminally prosecuted if found responsible for company operations.
  • Moreover, courts and regulators have increasingly moved toward lifting the corporate veil in cases where directors are found to have used the company as a vehicle for personal gain or unlawful activity.

Independent Directors and the Presumption of Innocence

Independent Directors were traditionally perceived as insulated from routine liabilities. However, jurisprudence is evolving. While the Companies Act, 2013 provides limited protection under Section 149(12) — stating that they are liable only for acts of omission or commission that occurred with their knowledge, consent, or lack of due diligence — courts have taken a strict view where systemic failures point to board-level complacency.

The Securities and Exchange Board of India (SEBI) has also issued guidelines urging boards to exercise caution in selecting independent directors and ensuring that their appointment is not merely symbolic.

Emerging Compliance Burdens

The proliferation of regulatory frameworks — such as ESG compliance, cybersecurity norms, and the Digital Personal Data Protection Act, 2023 — has added layers to directors’ oversight functions. Directors are increasingly expected to demonstrate not only oversight capability, but also active engagement in implementing internal control frameworks, enterprise risk management protocols, and whistleblower policies.

D&O Insurance: Shield, Not Sword

Most companies now procure Directors and Officers (D&O) Liability Insurance as a safeguard. However, such insurance does not offer blanket immunity. Policies often exclude liability arising from fraud, willful misconduct, or statutory violations. Directors must therefore ensure that their actions remain within the boundaries of law and prudence, as insurance cannot substitute for compliance.

Judicial and Regulatory Activism: A Real Threat

In recent years, Indian courts and regulators such as SEBI, SFIO, and MCA have taken an increasingly assertive stance on director accountability. Notable cases involving companies

like IL&FS, DHFL, and YES Bank have demonstrated that directors — even non-executive ones — may be summoned, investigated, or prosecuted in instances of mismanagement or fraud.

The recent actions by the Serious Fraud Investigation Office (SFIO) and Ministry of Corporate Affairs have reaffirmed that passivity is no defence.

Conclusion

The role of directors in Indian companies has shifted decisively from that of ceremonial advisors to accountable stewards of stakeholder interests. As regulators tighten compliance regimes and stakeholders demand greater transparency, directors must equip themselves with legal knowledge, engage proactively in board functions, and establish a culture of integrity and diligence.

Liability is no longer a theoretical risk — it is a practical reality that must be managed through due care, documentation, legal counsel, and adherence to both the letter and spirit of the law.

Contributed by – Sindhuja Kashyap