Nominee Directors Not Liable for Company Defaults - Punjab and Haryana High Court Quashes Proceedings Against Former Employees

In a recent judgment, the Punjab and Haryana High Court today quashed the criminal proceedings against former employees of Punjab State Industrial Development Corporation and Industrial Development Bank of India, charged under Section 58A(10) of the Companies Act, 1956. The court's decision, pronounced by Hon’ble Mr. Justice Harpreet Singh Brar, has set a significant precedent regarding the liability of nominee directors in corporate legal disputes.

The petitioners, A.K. Sud and others, and B. Das Gupta, were implicated in a case involving the failure of Euro Cotspin Limited to repay deposits, despite orders from the Company Law Board. Justice Brar, in his observation, stated, "Nominee Director cannot be held liable for any default made by the Company as they are not responsible for day to day business of the Company." This key legal point underlines the limited role and responsibility of nominee directors, shifting the focus away from them in corporate compliance issues.

The crux of the matter was the non-compliance of Euro Cotspin Limited in repaying the deposits as directed by the Company Law Board. The petitioners, serving as nominee directors, argued their non-involvement in the company’s day-to-day affairs and decisions. They highlighted their role as merely representational, based on their official positions in their respective financial institutions.

The court referenced the case of Lok Manya Negi Vs. Registrar of Company Punjab, HP and Chandigarh, where similar proceedings were quashed, suggesting a need for parity in judicial decisions. Furthermore, the judgment cited the case of S.K. Sharma Vs. Registrar of Companies, which established that nominee directors are not liable for a company's operational defaults.

This judgment has significant implications for the roles and responsibilities of nominee directors in corporate governance. It clarifies the extent of their liability and protects them under Section 41-A of the State Financial Corporation Act in actions taken in good faith. This decision is expected to have a far-reaching impact on corporate legal practices and the interpretation of corporate governance norms.

Date of Decision: 09.01.2024

A.K. SUD AND OTHERS.  VS REGISTRAR OF COMPANIES PUNJAB.