Duties of Directors of Ailing Hotel Companies

 Asian Hotels (West) Limited (Owner) was recently in the news on account of suspension of operations of Hyatt Regency, Mumbai. Apropos such suspension, the Owner has been beset by several challenges, one of which is the resignations tendered by the independent directors of the Owner. The independent directors have cited the financial crunch faced by the Owner and alleged non-compliances of applicable laws by the Owner. It was also contended that the Chairperson and other directors of the Owner failed to convene a meeting of the board of directors to discuss the financial condition of the Owner. This incident, coupled with the financial constraints faced by several hotel companies across the country, begets the question as to what duties directors have in such circumstances.

With the enactment of the Companies Act, 2013 (Companies Act), the duties of directors were codified. Section 166(2) of the Companies Act requires a director of a company to “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.” While the erstwhile jurisprudence only contemplated fiduciary duties of a director towards the company, the Companies Act has now extended the duties to not just the company but also the company’s employees and shareholders, the community and for the protection of environment. This provision has significantly broadened the scope of duties of directors. 

Further, questions also arise as to which duty of director would be foremost pursuant to Section 166(2) under a given set of circumstances. Unlike jurisdictions where the company law specifies a hierarchy of duties, the Companies Act does not have any guidance on that. If we were to take the issue that has plagued most hotel companies during this pandemic, employee lay-offs within the permit of applicable laws could have helped most companies stay solvent by cutting down on their operating expenses. By ensuring the solvency of the company, the directors would have been compliant towards their duty to the shareholders of the company. However, they would at the same time be in breach of their duty to the employees of the company. On the other hand, if the board of directors were to act in the best interests of the employees, they would run the risk of the company becoming insolvent in the long run. Accordingly, until there is clarity from the legislature as to the manner in which effective compliance of Section 166(2) can be ensured, it would be important for directors to strike a balance and ensure that the interests of all relevant stakeholders are borne in mind whilst taking any decision.

As regards independent directors of a company, Schedule 5 of the Companies Act offers legal advice on hospitality to the directors of ailing hotel companies in the manner in which they are to conduct themselves. The Schedule also prescribes a wide range of duties some of which include assisting in protecting the legitimate interests of the company, shareholders and its employees. Further, where they have concerns about the running of the company or a proposed action, independent directors are to ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting. However, Section 149(12) of the Companies Act and Regulation 25(5) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 do accord some level of protection to independent directors by stipulating that they could be held liable, only in respect of such acts of omission or commission by a company which had occurred with their knowledge, attributable through Board processes, and with their consent or connivance or where they had not acted diligently. 

Another aspect that all directors ought to bear in mind is whether the company meets the insolvency test. Under Section 66(2) of the Insolvency and Bankruptcy Code, 2016 (whose operation was suspended for a year on account of the outbreak of Covid-19), directors of a company would be personally liable to make such contribution to the assets of the company if such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of the company and such director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the such company. Effectively, personal liability would accrue if a director allows a company to trade or incur debts knowing fully well that the Company was unlikely to meet its liabilities.

What then can the directors of hotel companies do in the present circumstances apart from playing by the book and exercising his/her duties with due and reasonable care, skill and diligence? The legal advice on hospitality is that the directors could revisit their directors and officers (D&O) liability insurance policies to ascertain the nature of liabilities that would be covered. Like other insurances, D&O policies also come with several exclusions and it would thus be important to get a sense of the level of protection accorded to them. Given the case of the Owner, it would also be important to check the extent to which the policies cover the directors for matters that may relate to issues during their term but arising only post their resignation. The D&O policy should help protect the interests of the directors of ailing hotel companies considerably.  

Disclaimer: The views are the authors’ personal and do not necessarily reflect those of the firm.