An Investor nominee director is a non-executive director who is appointed to the board of the company to ensure that the interests of the investors are properly safeguarded. At the same time, the nominee director acts as a monitoring agent of the activities of the functioning board of directors.
However, it has been noticed, that most venture capitalists and Investors back down from being appointed as nominee directors due to liability provisions of such directors under various laws.
Liability of Nominee Directors under the Companies Act, 2013:
As per the provisions of section 149(12) of the Act, the nominee director shall be held liable for all such acts of omission or commission by a company that is done with the connivance, knowledge, or consent or where such director did not act diligently.
Provided that a nominee director is a person who is not involved in the day-to-day decision-making of the company but holds the primary responsibility towards the investors. Hence every investor nominee director shall analyze the consequences before participating in any decision making.
Liability of Nominee Directors under Income Tax Act, 1961 and various other laws:
As per the provisions of the Income Tax Act, if any amount of tax is due from the Private Company pertaining to any previous year and cannot be recovered then every director who was a director for such relevant previous period shall be held jointly and severally liable for payment of such tax unless they prove that he didn’t have any knowledge or he has not committed any gross negligence or breach of duty on his part.
Various other laws such as the Goods and Services Act, Securities Laws, Labor laws, etc. hold the directors of the company liable for any non-compliance as specified under the respective laws.
Hence, the inclusion of the Investor Nominee Directors being non-executive directors under the ambit of directors to be held liable if the company pushes them back from being appointed as investor nominee directors on the board of the company.
How to Minimize the Liability of Nominee Directors:
- Proper distinguishment of rights and liabilities in contractual agreements:
In order to protect the nominee directors from being held liable for every act of the company, it is preferable that the duties, rights, and liabilities of such directors are defined properly in the contractual agreements made at the time of their appointment on the board.
- Appointment of such persons as the Observers in place of non-executive directors of the company:
The appointment of an observer allows the investors to protect their interests by having them on the board and at the same time protecting such observers from the potential liabilities following their appointment as an investor nominee director.
- Directors and Officers Liability Insurance should be taken by the company:
In order to protect the investor nominee directors and other non-executive directors from personal liability is the proper requisition of directors and officers liability insurance which will act as a security cover in the situation of uncertainties.
- Provision of Proper Indemnification clause or separate indemnification to be entered between the director and the company:
If the investor nominee director suffers any loss for any act for which he was not liable or which didn’t take place with his connivance, he shall be indemnified for such loss being incurred.
The investor nominee director is the face of the investors as he represents and protects the interests of the investors. We all know that it is very important to keep the investors satisfied with the progress and long-term viability of the company as the appointment of investor nominee directors contributes to improving corporate governance in the company.
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