Where any financial institution, banker or other creditor is, by way of an agreement entered into with the company, given a right to appoint its nominee as director, such director shall be appointed out of one-third category of non-rotational directors. In a company having several nominee directors from different financial institutions, banks and other creditor pursuant to the respective loan agreement the number of non-rotational directors gets increased and consequently the total number of directors on the Board of Directors are also increased to the extent that two-thirds category of rotational directors is also maintained. Within the overall number of directors prescribed by the Articles and subject to provisions of section 255 of Companies Act, 1956.

The Central Government (Ministry of Finance, Banking Division) framed the guidelines relating to appointment and role of Nominee Directors of the financial institutions of the assisted companies. As per said guidelines of 1984 the nominee. directors need to be given clearly identified responsibilities in a few areas which are important for public policy. 

The nominee directors, the guidelines further stated, should ensure that the tendencies of the companies towards extravagance, lavish expenditure and diversion of funds are curbed. With a view to achieve this object, the institution should seek constitution of a small Audit Sub Committee of the board of directors for the purpose of periodic assessment of expenditure incurred by the assisted company, in all cases where the paid up capital of the company is Rs. 15 crore or more. The institutional nominee director will invariably be a member of these Audit Sub-Committees.

Immunity and Conflict of Interests
By virtue of special provisions in the respective Acts, viz, LIC Act, Unit Trust Act, IDBI Act, IFCI Act, etc. the directors nominated by the financial institutions have been given immunity from action for any liability as a director in the company, and administrative instructions have also been issued by the Department not to launch any prosecutions against such directors.

There may be circumstances where a nominee director finds himself in doubt as to how to protect the interest of nominating agency vis-a-vis the interest of the host company. In a case where the nominee directors pleaded the interest of the nominator and ignored that oftl1e host company resulting in suppression of the share value of the latter, it was held that they were guilty of oppressing the shareholders of the latter company. Scottish Cooperative Wholesale Society Ltd. vs. Meyer, (1958) 3 All ER 66:( 1959) 29 Com Cases I (HL).

Nominee Director's Duty to Act Bona Fide
The position of nominee director is to act bona fide in the interest of the company. Where nominees were appointed by a mortgage as governing directors of the company pursuant to a mortgage, the learned Judge in Levin v. Clark, (1962) NSWR 686 (Aust) noted: "I consider that the nominees did act primarily in the interests of the mortgage once they resumed the exercise of their powers as governing directors. However, I consider that it was permissible for them so to act. It is of course correct to state as a general principle that directors must act in the interests of the company. However, that leaves open the question in each case what is the interest of the company?

It is not uncommon for a director to be appointed to a board of directors in order to represent an interest outside the company  mortgage or other trader of a particular share holder. It may be in the interests of the company that there be upon its board of directors one who will represent these other interests and who will be acting solely in the interest of such a third party and who may in that way be properly regarded as acting in the interests of the company as a whole, The fiduciary duties of directors spring from the general principles, developed in courts of equity, governing the duties of all fiduciaries-agents, trustees, directors, liquidators and others-and it just be always borne in mind that in such situations the extent and degree of the fiduciary duty depends not only on the particular relationships but also on the particular circumstances. Among the most important of these circumstances are the terms of the instrument governing the exercise by the fiduciary of his powers and duties and the wishes, expressed directly or indirectly, by direction, request, assent or waiver of all those to whom the fiduciary duty is owed…..

Lack of Good Faith
In a case re. Geetanjali Mills Ltd. vs. Thiruvengadathan (1989) I Comp 1J 232 (Mad), it was held that if there is a lack of good faith on the part of the person concerned, in the discharge of his functions, then he cannot claim any immunity from such suit, prosecution or legal proceedings. The exercise of good faith in the discharge of a function is a matter, the determination of which is possible only by addiction of evidence either way, only in the course. of trial before the appropriate forum.

If Nominee Director Personally Involved in Default:
When there was a false statement in a verification under Income tax Act and the complaint showed that nominee director wilfilly abetted the making of the false statement, it was held that the complaint against him could not be quashed. His position would be considered on the basis of evidence. J. Seethuraman v IAC of IT, (1992) 74 Com Cases 815 (Mad) 

No Liability in Absence of Fraud or Bad Faith: 
Where a bank nominated two of its employees as nominee directors on the Board of a company carrying on business as money brokers. The company contacted with the trustee of its depositors to give him monthly and quarterly certified statements of its financial position on behalf of the directors. These statements turned out to be false. The company ran into winding up and the trustee was able to recover only half the amount of the deposits. He sued nominee directors and nominating bank for the loss. Rejecting his claim, the court observed: "In the absence of fraud or bad faith, a shareholder or other person who controlled the appointment of a director, owed no duty to a company's creditors to ensure that the director discharged his duties with diligence and competence; that the directors appointed by the bank became the agents of the company and if they had committed any breach oftl1e duty they owned to the plaintiff under the trust deed, they were acting in an individual capacity and as directors were bound to ignore the interests and wishes of their employer; that, accordingly, the bank, against which no impropriety was alleged, could not be liable for the acts of the two directors either as employer or as principal."

Nominee Directors are not simply watchdogs, but have to devote their loyalty to the company:
The nominee directors generally take themselves as watchdogs for those who put them on the Board. However, the law expects them to devote their loyalty to the company as a whole. They have to balance their duties like any other director. In fact, the nominee directors are in the same position and they owe same duties to the companies as any other director. Selangor United Rubber Estates Ltd. v. Cradock (No.3), (1968) 1 WLR 1555: (1969),39 Com Cases 485.

Nominee Director not to ignore realities of the company: 
In re Broadcasting Station 2GB Pty. Ltd., (1964-5) NSWR 1648, the learned Judge observed, "I
realise that, upon this approach, I deny any right in the company as a whole to have each director approach each company's problem with a completely open mind, but I think that to require this of each director is to ignore the realities of company Organisation. Also, such a requirement would, in effect, make the position of a nominee or representative director an impossibility." A nominee director would be wrong, however, to act in his nominator's interests either when they are contrary to the company's interest or without any regard to the interests of the company.

Nominee Director cannot be released unless proved to have acted in Good faith upon trial:
It was held in a case that the nominee director became a director of the company by virtue of his employment in the office secured creditor, the RBI. Being a director of the company, he had a statutory obligation under the Companies Act, 1956. He had a double responsibility to look into the affairs of the company as a director of the company and to watch and control them as a nominee of the RBI. Whether his duties had been performed in good faith was a question to be decided on trial.

The director (who claimed statutory immunity from prosecution) could not be released. The balance of convenience lay in favour of adopting the usual procedure for misfeasance proceedings of filing points of claim and defence etc. A Stock And Co. (In Liquidation) v Dilip Kumar Chakraborty, (1996) 87 Com Cases, 139 (Cal). 

Nominees guilty of Neglect : 
In re, Rashtriya Mill Mazdoor Sangh vs. Khatau Makanji Spg. & Wvg. Co. Ltd. (2000) 100 Com Cases 33 (Born.), the court held that the direction contained in the order dated May 6, 1997, was couched, in terms of a mandate to the company to pay to its workers salary for the month of February, 1997, on or before May 20, 1997. Such order passed by the court in exercise of its extraordinary jurisdiction under article 226 of the Constitution of India, when not complied with and if will fully disobeyed, would definitely render the company liable to civil contempt under the contempt of Courts Act, as well as under article 215 of the Constitution of India. The said order was challenged by filing a Letters Patent appeal and the appeal was dismissed by the Division Bench on 11.6.1997. The direction was required to be obeyed by the company and financial difficulties could not be permitted to be set up as a defence for disobeying the direction of the Court particularly when it related to the payment of wages to the workers. Entire financial powers vested in the board of directors and all directors were equally responsible. Three nominee directors had tendered unconditional apology for their acts and omissions. After receipt of show cause notices, they made efforts to ensure that financial institutions released the funds and the order passed by the court was complied with. Their apologies were to be accepted and the directors were to be cautioned to take immediate steps to implement the order dated May 6, 1997. The director of finance (who was nominee of State Bank of India) and the executive director, even during the pendency of the contempt proceedings, had acted in a manner which compounded their culpability. They failed in discharging their duty and honouring their commitment which had resulted in tremendous hardship to six thousand employees of company and of course non-compliance with the court's order. These two directors were to undergo a sentence of simple imprisonment for one month and fine of Rs. 2000 each which would stand waived if the entire wages for the month of February 1997, were paid to the workers within two weeks.

The role and responsibilities of nominee directors on the boards of assisted companies have been under a great challenge as they are expected to balance the priorities of representing institutions and the overall interests of the companies whom they serve as part-time directors. While following instructions of the institutions whom they represent, they cannot overlook the timely requirements and realities with the company. They have undoubtedly fiduciary duties and are considered equally with other directors on the Board of Directors. They need to be loyal to the company and cannot claim immunity from prosecution without evidence upon trial as to their bona fide.

The growing menace of sickness in industry in general has been attributed to several factors-lack of finance, management incapability, change in fiscal policy, obsolescence in business and industry, poor quality of products, global competition, and so on. Nonetheless the aforesaid position, our policy and programmes have faith and belief in financial institutions on whose behalf nominee directors take more active and aggressive role in corporate governance. Their role has to ensure "best" and not just "good" corporate management and the same can be possible when they keep the entire realities and circumstances with the company in view and provide their wisdom to the needs of it to ensure not only "good" decision but the "best" decision. For this purpose may be that they have to carry out some homework before they participate in deliberations as directors to establish their bona fide as notified by the Securities and Exchange Board of India, the Rules of Corporate Governance (applicable to listed companies) have stated the institutional directors as independent directors. They being independent and responsible directors have in effect to playa much greater role in achieving the objects of bodies corporate efficiently and in bona fide manner to strengthen the companies to face new challenges in global economy.

(By Arrangement with Kaleidoscope)