Directors And Officers Liability Insurance Under Companies Act 2013

Contents hide

1 D&O Liability Insurance under Companies Act 2013

2 What is a Directors and Officers Liability Insurance Policy?

3 What are the key features of Companies Act 2013 with respect to liability of Directors and Officers?

4 What are the provisions under Companies Act 2013 which are relevant to Directors and Officers Liability Insurance Policy?

4.1 Section 149 (1) of Companies Act, 2013: Company to have a Board of Directors

4.2 Section 149 (12) of Companies Act, 2013: Liability of Independent Directors and Non-Executive Directors

4.3 Schedule IV of Companies Act 2013

4.4 Section 166 of Companies Act, 2013: Duties of Directors

4.5 Section 168 of Companies Act, 2013: Resignation of Directors

5 Get Best Quotes for Director and Officers Liability Insurance Policy with Qian!

D&O Liability Insurance under Companies Act 2013

Companies Act 2013 primarily determines the liability of Directors and Officers in India. This article will explore the provisions of Companies Act 2013 and its impact on the liability of directors and officers in India and how a Directors and Officers Liability Insurance Policy protects them from such liabilities.

What is a Directors and Officers Liability Insurance Policy?

A D&O Liability Insurance Policy (D&O Policy) protects the directors and officers of the company against lawsuits alleging Wrongful Acts committed by them in their managerial capacity. A Wrongful Act includes Breach of Trust, Breach of Fiduciary Duty, Misleading Statement, Error or Omission. Directors Officers Liability Insurance Policy provides coverage for legal fees and compensatory damages incurred because of the lawsuit.

Directors and Officers hold a fiduciary position in a company and are responsible for the acts committed by them in their managerial capacity. The Companies Act, 2013 which replaced the Companies Act, 1956, is the principal act governing the liabilities of directors and officers in India and this act explains the necessity of Directors and Officers Insurance in India.

What are the key features of Companies Act 2013 with respect to liability of Directors and Officers?

One of the key features of the Companies Act 2013 with respect to liability of Directors and Officers relates to the concept of “Officer who is in Default.” An Officer who is in Default will be held liable by way of penalty or punishment by way of imprisonment under the provisions of the Companies Act 2013.

Section 60 of Companies Act 2013 defines “Officer who is in Default” as:

“Officer who is in Default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:

Whole-time Director;
Key Managerial Personnel;
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;
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;
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;
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;
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;

The Companies Act 2013, does not make it mandatory for companies to have a D&O Liability Insurance Policy in India.

What are the provisions under Companies Act 2013 which are relevant to Directors and Officers Liability Insurance Policy?

Following provisions of Companies Act, 2013 are relevant to the Directors and Officers Liability Insurance Policy (D&O Liability Insurance Policy):

Section 149 (1) of Companies Act, 2013: Company to have a Board of Directors

Section 149 (1) of Companies Act, 2013 mandates companies to have a Board of Directors as under:

Every company shall have a Board of Directors consisting of individuals as directors and shall have:

a minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company; and
a maximum of fifteen directors

Provided that a company may appoint more than fifteen directors after passing a special resolution.

Provided further that such class or classes of companies as may be prescribed, shall have at least one-woman director.

Section 149 (12) of Companies Act, 2013: Liability of Independent Directors and Non-Executive Directors

Section 149 (12) specifies the liability of independent directors and non-executive directors for acts of omission or commission by the company as under:

Notwithstanding anything contained in this Act,—

an independent director;
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.

Section 149 (12) of the Companies Act, 2013 makes Independent Director or a Non-Executive Director liable for acts of omission or commission by the Company which occurred with the knowledge of the directors.

Schedule IV of Companies Act 2013

Schedule IV of the Companies Act, 2013 specifies the Code for Independent Directors and enlists the guidelines for professional conduct of independent directors, defines the roles, functions and duties of independent directors. Schedule IV of Companies Act 2013 also specifies the need for D&O Insurance for Independent Directors. Compliance of Schedule IV of Companies Act is mandatory as per Section 149 (8) of Companies Act, 2013.

Section 166 of Companies Act, 2013: Duties of Directors

Section 166 of Companies Act, 2013 pertains to Duties of Directors and states the following:

Subject to the provisions of this Act, a Director of a Company shall act in accordance with the Articles of Association of the Company.
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.
A Director of a Company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
A Director of a Company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
A Director of a Company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
A Director of a Company shall not assign his office and any assignment so made shall be void.
If a Director of the Company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Section 168 of Companies Act, 2013: Resignation of Directors

Section 168 of Companies Act, 2013 reads as follows:

A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in such manner, within such time and in such form as may be prescribed and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company: Provided that a 3[director may also forward] a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may be prescribed.

The resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later: Provided that the director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure.

Where all the directors of a company resign from their offices, or vacate their offices under section 167, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in general meeting.

Thus, Section 168 (2) of Companies Act, 2013 makes it amply clear that the director can be held liable for offences that occurred during his tenure, even though the director has resigned. Thus, a D&O Insurance Policy which provides coverage to retired directors or directors who have resigned for their jobs is extremely important.

Get Best Quotes for Director and Officers Liability Insurance Policy with Qian!

It is not mandatory to purchase a Directors and Officers Insurance Policy under Companies Act 2013.

However, Section 25(10) of SEBI (Listing Obligations and Disclosure Requirements) Regulations or SEBI (LODR) Regulations, which specifies Obligations with respect to Independent Directors, makes it mandatory for public companies ie companies whose securities are listed on stock exchanges to purchase a D&O Liability Insurance Policy for their Independent Directors.

Purchasing a Directors & Officers Liability Insurance Policy requires technical understanding in terms of clauses, coverages and limits. It is advisable to avail the assistance of an experienced D&O Insurance Broker who will provide guidance in terms of D&O Policy Coverages and Limits based on the company’s size, industry and risk exposure. The team will assist you in making you aware of the exclusions in a Directors and Officers Insurance Policy and with the claims process as well.

Qian is an experienced Insurance Broker for Directors and Officers Liability Insurance Policy and the team at Qian can help you in tailoring the D&O Policy to the specific needs of the organization.

You can rest assured of getting best cost for Directors and Officers Liability Insurance Policy with Qian. If you wish to purchase a D&O Insurance Policy, feel free to reach out to us at insurance@qian.co.in or 022-22044989. We will get back to you within 24 hours, guaranteed.

Directors and Officers Liability Insurance under Companies Act 2013