top of page

Protection of the Environment as Envisioned in Section 166(2) of the Companies Act- a Dead Letter?

Updated: Feb 8

by Piyush Senapati *

Introduction

Historically, corporations have been the driving force behind climate change and environmental destruction. Putting necessary constraints on companies and fostering a positive attitude towards environmental protection amongst them should be a major aim of any state’s corporate governance policy. Directors, being the flagships of the company owe certain duties to the company and its stakeholders, and environmental concerns must fall within the ambit of these duties if the abovementioned aim is to be realised. This article seeks to examine how well the Indian legislature has performed in this regard concerning the ‘protection of the environment’ being enshrined as a duty of directors under Section 166(2) of the Companies Act, 2013. Along with the significance of the same, the article will examine if and how directors can be held liable for breaching this duty under the redressal mechanisms, and whether this provision is a well-thought legislative insertion or merely a dead letter.


Significance of protection of the environment as a duty of directors

Section 166(2) of the Companies Act, 2013 states-

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 noteworthy feature of this section is that it establishes the environment as a stakeholder to which directors owe their duties. Given the role corporations have played in inflicting irreparable damage to the environment and the lives and livelihoods dependent on the same, protection of the environment being made a part of the director’s duties is only apt. While the insertion of this duty was meant as an enabling provision for CSR norms,[1] its significance is broader. The fact that ‘the protection of the environment’ commands its own space in the statute indicates that directors are obligated to consider environmental interests regardless of the associated financial implications.[2] Further, there is a judicially endorsed lack of a hierarchy between the various stakeholders enumerated in Section 166(2), evident from the Supreme Court’s ruling in MK Ranjithsinh v. Union of India-

Section 166(2) ordains the director to act in good faith, not only in the best interest of the company, its employees, the shareholders, and the community but also for the protection of environment.

Thus, the directors’ duties towards the shareholders and the environment are on an equal footing, and directors cannot prioritise shareholder profits at the cost of harming the environment without transgressing Section 166.[3]


The question of enforceability- a duty with no accountability?

While the legislative intent behind providing protection to the environment as a duty of directors is commendable, the real test for any law lies in its implementation and enforceability. Therefore, a critical analysis of whether directors can actually be held accountable for breaching this duty under the mechanisms for redressing violations of directors’ duties, i.e., Derivative Actions, Oppression, and Mismanagement and Class Action Suits becomes imperative.


Derivative actions as a means of enforcing directors’ duty of protecting the environment

Derivative actions are brought on behalf of the company by shareholders representing its interests against the errant directors. The renowned case of Foss v. Harbottle laid down the majority rule, which states that no individual shareholder can bring an action pertaining to a company's management by its directors. However, there are exceptions to this rule, only under which can derivative actions by individual shareholders be bought .First, when the act being complained of is ultra vires (i.e., violating the articles or memorandum of association). Second, when the act being complained of constitutes a fraud on the minority shareholders. The third exception is when an action needs to be passed by a special majority but was passed by a simple one. The fourth exception is when an action violates the shareholders’ individual rights and the last is when the wrongdoers are in control of the company[A1] .

Given that the existence of derivative actions as a mechanism is uncertain in India, with no statutory backing and conflicting High Court judgments on this issue, holding directors liable through this route for failing their duty of protecting the environment seems more than uncertain. Even if it is assumed that derivative actions are maintainable, the fact remains that derivative actions are allowed only on very narrow grounds, i.e., the exceptions to Foss v. Harbottle enumerated above. While the applicability of the exceptions regarding actions requires a special majority, constituting fraud or wrongdoers being in control over the company would depend on the facts of the case, it is hard to imagine that a decision by directors hurting the environment could be considered ultra vires, especially in industries that are polluting by nature. The same goes for the exception regarding actions which violate the individual rights of shareholders. Therefore, the success of a derivative suit by shareholders seeking redressal for the directors’ breach of their duty towards protection of the environment seems unlikely.


Oppression and Mismanagement as a means of enforcing directors’ duty of protecting the environment

Sections 241 and 242 of the Companies Act, 2013 provide for the remedy for oppression and mismanagement, under which shareholders can file an application before the National Company Law Tribunal( NCLT) seeking redressal for any conduct prejudicial or oppressive towards them, the company’s interests, and the public interest. On a prima facie basis, redressing the directors’ failure to protect the environment through this avenue on the grounds of such conduct hurting the public interest seems viable, since environmental harm naturally brings with it negative repercussions for the public. However, as explained in Union of India v. Delhi Gymkhana Club, the words ‘public interest’ cannot mean the entire section of the Indian society, but only a section of the populace whose rights, economic welfare, and health are affected by the company’s conduct. While such an approach would work favourably if a company’s actions hurt an identifiable segment of the population, for example, a chemical spill in the water sources of a village, this condition effectively rules out seeking redressal against actions of companies that cause widespread environmental harm in general without hurting any particular identifiable segment of the populace.

An alternative line of argument for claiming this remedy could be that failure to protect the environment ultimately harms the company’s interests, as environmental harm brings with it regulatory action, reputational loss, etc. While this seems plausible, the equation of the environment’s interests with that of the company is yet to be judicially endorsed. The biggest constraint on seeking this remedy is that there is a numerical threshold for the admissibility of an application under the same, based on shareholding. While the NCLT can waive these, it can only do so in “exceptional circumstances”, and it is yet to be determined if environmental harm can qualify as an exceptional circumstance, and if yes to what particular degree. Thus, these threshold requirements are definitely a major procedural hurdle for claiming this remedy. Although the Central Government is also entitled to file an application for remedy on the grounds of public interest, it would naturally do so only in rare circumstances and thus even if such an application is allowed, accountability under this duty would become a once in a blue moon event than a regular affair. Therefore, successfully availing this remedy for directors’ failure to protect the environment seems improbable.


Class Action Suits as a means of enforcing directors’ duties of protecting the environment

Section 245 of the Companies Act, 2013 provides shareholders and depositors with the remedy of Class Action suits, wherein they can approach the NCLT if they believe that the affairs of the company are being conducted in a manner prejudicial to the interests of the shareholders or the company. Given that the legislative premise of this remedy is based on damage only to the interests of the suing class, i.e., shareholders and depositors, it is unlikely that it would be so broadly interpreted so as to include within its ambit the interests of other stakeholders, such as the environment.[4] While it is possible to theorize that hurting the environment indirectly hurts the interests of the company and hence class actions against directors failing to protect the environment ought to be admissible, this line of reasoning again remains to be judicially endorsed. A major impediment to claiming this remedy is that there is a numerical threshold requirement for the admissibility of a class action suit, which cannot be waived. Thus, the chances of seeking redressal for a failure by directors to protect the environment through this avenue again remain dismal.


Conclusion

While the legislative intent behind according the environment the status of a separate stakeholder that directors are obligated to consider is to be appreciated, this legislative zeal cannot mitigate the implementational hurdles the Companies Act puts in the way of enforcement of this duty. Given the increased scrutiny corporations have faced as active contributors to climate change and environmental damage, subjecting them to regulatory compliances is not enough; it is the need of the hour to make them active participants in the fight against environmental harm. This goal will never be achieved if the enforcement of the directors’ duty towards protecting the environment through the currently available mechanisms is either unviable or unlikely. Therefore, unless the appropriate legislative or judicial interventions are made to give teeth to the provision, the insertion of ‘protection of the environment’ in Section 166(2) of the Companies Act would remain a perfunctory exercise and a dead letter.

[1] Standing Committee on Finance, Twenty-first Report, The Companies Bill 2009 (15th Lok Sabha, 2010) para 11.77. [2] Umakanth Varotill, ‘Directors’ Liability and Climate Risk: White Paper on India (Commonwealth Climate and Law Initiative, 2021) 20 https://ssrn.com/abstract=3936428. [3] Shyam Divan et.al, ‘Legal Opinion: Directors’ obligations to consider climate change-related risk in India’ (Canada Climate Law Initiative, 2021) https://ccli.ubc.ca/resource/legal-opinion-directors-obligations-to-consider-climate-change-related-risk-in-india/ . [4] Mihir Naniwadekar & Umakanth Varottil, ‘The Stakeholder Approach Towards Directors’ Duties Under Indian Company Law: A Comparative Analysis’ (2016) NUS Centre for Law & Business Working Paper 16/03, 17 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2822109 (accessed 17th March, 2023).


*Piyush Senapati is a second year student at NLU Jodhpur at the time of publication of this blog.

171 views0 comments

Comments


bottom of page