NCLT Recognises the Role of a Company Secretary as a Watchdog to Ensure Corporate Governance

The Companies Act, 2013¹ (Act) brought about several developments in the corporate governance regime, including the enhanced role of Company Secretaries in ensuring corporate governance in a company. In recognition of the crucial role played by them, the Act for the first time, placed Company Secretaries within the category of “key managerial personnel”, as defined under Section 2(51)² of the Act, along with the ranks of the Chief Executive Officer, Managing Director, manager, and whole-time director. In addition to the above, Section 205³ of the Act further provides for the various functions to be carried out by a Company Secretary.

These developments are a testament to the increasingly important role now being played by a Company Secretary in a company, particularly in ensuring compliance with corporate governance principles and practices.

The National Company Law Tribunal, Chennai Bench (NCLT) on 1-7-2022⁴ in Technology Frontiers (India) (P) Ltd. v. Global Sports Commerce Pte. Ltd.⁵, considered the contours of the role and powers of a Company Secretary under the Act. While the NCLT may not have gone into the entire scope and extent of a Company Secretary's role, responsibilities, and powers under the Act, it has indeed clarified and highlighted the importance and primacy of a Company Secretary in ensuring corporate governance in a company.

The NCLT while considering the extent of responsibility as well as the power imposed by the Act, on a Company Secretary, considered the definitions of certain key terms under the Act, which highlight the importance of a Company Secretary's role under the Act. The NCLT inter alia considered the definitions of “officer who is in default” and “key managerial personnel” under the Act and highlighted that the era of a Company Secretary occupying the post of a glorified clerk is long gone. The NCLT recognised that with the evolution of corporate governance and incorporation of various compliance requirements in a complex regime, there is a need to protect the interests of both the company as well as shareholders. The NCLT stressing on the prominent role played by Company Secretaries, observed that a Company Secretary is the “Watchdog of protecting the principles of corporate governance as well as the collective interest of all the stakeholders so also the company.”

The NCLT further observed that the law in terms of Section 205 of the Act, has given a statutory dimension to the Company Secretary's role in ensuring compliance and good corporate governance practice in a company. The NCLT identified that to this end, a Company Secretary in terms of Section 205 of the Act read with Rule 10 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014⁶, is even authorised and in fact has a duty to represent the company “before various regulators, and other authorities under the Act in connection with discharge of various duties under the Act”. Moreover, the Company Secretary is answerable for any violation of compliance requirements by the company and is responsible even to face penal consequences if there is any non-compliance by the company.

While highlighting the importance and extent of a Company Secretary's role in a company, the NCLT however, clarified that a Company Secretary is not a “blood hound.”

Elaborating on the role played by a Company Secretary, the NCLT emphasised that a Company Secretary is required to act not only with “adequate” diligence but with “proper” and “necessary” diligence while discharging duties, “by sounding the knell” to bring to the attention of the Board and all concerned, instances wherein there is any apprehension of deviations from sound corporate principles and prudent governance practices. The NCLT went to the extent of stating that the Company Secretary must ensure mandatory compliance by approaching the competent authority if there is a lapse by the Board. In order to ensure compliance, the Company Secretary may not only approach regulators such as Registrar of Companies and Securities and Exchange Board of India (SEBI) but also “quasi-judicial” authorities such as the NCLT.

The NCLT's views shed light on the significant role played by a Company Secretary in the functioning of a company. Primarily, the NCLT recognises the role of a Company Secretary as a “watchdog” to ensure that the company complies with statutory requirements and accepts that the Company Secretary has the power to ensure such compliance as well. As key managerial personnel, a Company Secretary works closely with the management, attends meetings of the Board as well as the shareholders and is responsible for making and certifying the correctness of the statutory filings made on behalf of the company. Having a bird's eye view of the entire functioning of the company, the Company Secretary is in the most suitable position to identify if the company is on the verge of committing any default. Accordingly, if the Company Secretary is of the opinion that the directors have failed to fulfil their fiduciary duties resulting in the company being in default, the Company Secretary is also able to take steps in the interest of the company. Needless to say, a Company Secretary cannot and ought not to misuse their powers and is expected to use the same only in the interests of the company.

Additionally, a Company Secretary cannot be expected to be a “blood hound” in trying to sniff out issues which are neither known nor apparent from the record or facts as known to the Company Secretary. It only follows that a Company Secretary cannot be held liable for such defaults or failures. As a “watchdog” the Company Secretary is expected to be aware of and keep apprised of corporate governance issues in the event they arise and come to the knowledge of the Company Secretary. Once the Company Secretary becomes aware of a corporate governance issue and has relevant facts, the Company Secretary is expected to act in a manner to keep the company's interest paramount and to resolve/rectify the default/non-compliance. This is a crucial guardrail and will ensure that Company Secretaries do not end up becoming scapegoats for lapses committed by the Board of Directors in the fulfilment of their duties.

It is also to be highlighted that a Company Secretary is the Company Secretary of the company and is to assist the company and its Board of Directors as a unit. The Company Secretary cannot be treated as a secretary to an individual director and be expected to cater to their needs or compliances. Each individual is expected to be responsible for their own statutory obligations, including with respect to disclosure or other compliances, which obligation cannot become an obligation of the Company Secretary. While the Company Secretary may be expected to provide reasonable assistance to the individuals, the obligation necessarily still remains that of a particular individual. An apt illustration in this regard would be the duty of directors to disclose their interests in other entities in terms of Section 184⁷ of the Act read with the Rules. A bare perusal of the provision makes it abundantly clear that the obligation to make such a disclosure in the prescribed Form MBP-1 lies solely upon the director concerned. In such cases, one may not be able to shift the obligation of disclosure or any default in compliance on the Company Secretary, in case the director himself has not made the disclosure in the form and manner required under the Act.

The NCLT's decision⁸ is also important as it will serve as a crucial yardstick to test the exercise of powers by Company Secretaries under the Act. The courts in India, including the Supreme Court, have on multiple occasions considered and discussed the important role played by Chartered Accountants/Auditors in a company. In today's corporate structure, the company is headed by the Board of Directors and is to be operated for the interests and benefits of the shareholders and other stakeholders. In addition to the Executive Board of the company, the Act has identified and enhanced both the powers and responsibilities of key stakeholders in a company such as the Independent Directors, Auditors and Company Secretaries. The NCLT has acknowledged the importance placed by the Act on the role of a Company Secretary as a “watchdog” of governance in a company. It will be important to see how the High Courts and Supreme Court decide on the role, obligation, extent, limits, and guardrails applicable to a Company Secretary.