Generally, a Director plays a dual role,
- as an agent of the company; and
- as a person with a fiduciary duty to the company, while discharging his duties.
A Director rarely has the power to discharge his duties as an individual Director. It is the Board that has the power and authority to carry on the activities of the company and to meet the business objectives of the company as a team.
Each Director has a fiduciary duty towards the company. All the powers entrusted to the Directors are only exercisable by them in this fiduciary capacity. The duties of Directors can be discussed under the following broad heads: A. Fiduciary duties; B. Common law duties; C. Specific duties prescribed under the Companies Act; D. Additional duties in case of a listed company; and E. Other statutory duties.
- Fiduciary Duties A Director owes fiduciary duties towards the company, and not to individual shareholders, creditors (other than during winding up when their interest has to be taken care of), or fellow Directors. These generally consist of the following: Good faith and bona fide acts: Directors must act honestly, without negligence, and in good faith in the bona fide best interests of the company.
Proper use of powers: Directors must not exercise the powers conferred upon them for purposes different from those for which they were conferred.
Unfettered Discretion: Directors must not fetter their discretion for any reason whatsoever.
Lack of Conflicting Interests: Directors must not, without the informed consent of the company, place themselves in a position in which their personal interests or duties to other persons are liable to conflict with their duties to the company or where there is a real and distinct possibility of conflict.
Common-Law Duties A Director is required to discharge certain common law duties towards the company, which generally consist of the following: Duty to exercise reasonable skill and care: This rule consists of two elements: i. an (objective) duty of care; and, ii. a (subjective) duty to exercise skill.
Duty to act within the powers of the company: Directors must act within the powers of the company
Duty to exercise independent Judgment: Directors should not take decisions at the direction of others
Duty of Supervision: The Directors have a duty to supervise the officers of the company to whom they delegate powers.
Duty of Confidentiality: The Directors have a duty of confidentiality towards the company and should not disclose or make use of confidential information relating to the company for any purposes, other than for the benefit of the company
- Specific Duties prescribed under the Companies Act In addition to those already specified above, the Board, as against the individual Directors, is also required to discharge the following specific duties as prescribed under the Companies Act
- Administration and Compliance Directors are vested with several administrative responsibilities to enable them to manage and administer the company.
- Restriction on Activities and Disclosure of Information The Companies Act has prescribed and/or supplemented the common law duties with certain other obligations on Directors that relate to their position
Declaration of Interest
Declaration of Interest: Directors, who are concerned or interested in a proposed contract or arrangement with the company in any way, must disclose the nature of their concern or interest to the Board. Receipt of Compensation: Directors must not receive, in connection with a transfer of property or shares of the company, any payment as compensation for loss of profit or in consideration for retirement from office.
Notice of resolution for Winding-up: In the case of a voluntary winding up, the Directors must ensure publication of the notice of the resolution in the Official Gazette and a newspaper in circulation in the district where the registered office of the company is situated, within fourteen (14) days of the passing of such resolution.
Declaration: Where it is proposed to wind up a company voluntarily, the Directors of the company may at a meeting of the board, make a declaration verified by an affidavit, to the effect that they have made a full inquiry into the affairs of the company
Notice of appointment of Liquidators: Directors must give to the concerned Registrar of Companies a notice of the appointment of the liquidator of the company, so appointed by the company in the general meeting, and also give notice to such Registrar of Companies of the filling of any vacancy occurring in the office of such liquidator of the company.
Meeting of Creditors: In case of creditors’ voluntary winding up, the Directors must cause a meeting of the creditors of the company to be called on the day or the next day on which general meeting is to be held and shall cause notices of the meeting to be sent to the creditors.
- Additional Duties in case of a Listed Company, SEBI prescribes the following additional duties:
Declaration of Pecuniary Relationships: All pecuniary relationships and transactions of the non-executive Director vis-à-vis the company shall be disclosed in the annual report of the company.
Duties under the Negotiable Instruments Act: Under the Negotiable Instruments Act, 1881, if a company issues, and later dishonors a cheque which was presented for discharge of a debt or other liability, every person who at the time of such dishonor was in charge of overall control of the day-to-day business of the company (both under the law and as a matter of fact), shall be deemed to be guilty of the offense and shall be liable to be proceeded against.
Duties under Labour Laws: In legislations such as the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Payment of Gratuity Act, 1972, the term ‘employer’ concerning any establishment (in cases other than a factory), means the person who, or the authority which, has the ultimate control over the affairs of the establishment.
Liabilities of Directors;
Persons who can bring Actions against the Directors Directors can be held liable both jointly and collectively, for any and every act, commission, or omission which is prejudicial to the interests of the company and violates any of the duties to be discharged by them.
- Director’s personal liability As a general rule, since the company and its Director are separate entities, the Director has no personal liability on behalf of the company. However, under certain circumstances, a Director may be held liable on behalf of the company. These circumstances are:
2. Liability for Tax: Under the Income Tax Act, 1961, where any tax due from a private company in respect of any income of any previous year cannot be recovered from such private company, then, every person who was a Director of such private company at any time during the relevant previous year is liable, jointly and severally, for the payment of such tax.
Refund of Share application money: A Director is personally liable along with the company to repay the share application or excess share application money, as the case may be if the same is not repaid within the stipulated time limit. Liability to pay for qualification shares: If the Director has not acquired his or her qualification shares within the prescribed time period and the company goes into liquidation the day after this period expires, the Director will be called upon by the Official liquidator to pay for the shares he or she was supposed to have purchased. Mis-statement in the Prospectus:
Civil liability can be imposed on a Director for any untrue statement in the prospectus of a public company if he or she is a Director at the time of the issue of the prospectus unless he or she proves that he or she withdrew consent before the issue of the prospectus or that it was issued without his or her authority or consent or his or her knowledge or that, once he or she came to know of the untrue statement, he or she withdrew consent and gave reasonable public notice of the same, or proves that he or she believed the impugned statements to be true.
Unlimited Liability: The liability of any or all of the Directors of a limited company can be unlimited if so provided by the Memorandum, or can be so done if approved by a special resolution as authorized by the Articles. B. Criminal Liability Dishonoured Cheques:
The Director signing a cheque that is dishonored to constitute an offense under the Negotiable Instruments Act, 1881, can be prosecuted along with the company.
Mis-statement in the Prospectus: The Companies Act imposes criminal liability on any person who was responsible for a misstatement in the prospectus of a public company.
Offenses under the Income Tax Act: An offense committed by a company under the Income Tax Act, 1961 is attributed to the persons who were responsible for and in charge of the business of such company.
Offenses under Labour Laws: An offense committed by a company under the various labor legislation (specifically in the case of Employees Provident Funds and Miscellaneous Provisions Act, 1952 and Factories Act, 1948) is attributed to the persons who were responsible for and had control over the affairs of the company.
- Lifting of Corporate Veil A company is an independent entity and, as a general rule, the Director of the company is not liable for any offense or, breach or liability of the company. However, in certain cases, the common law doctrine of ‘lifting the corporate veil’ is utilized to impose a penalty on the person, or persons, controlling, in reality, the actions of the company (such as Directors), and certain statutes impose liability on such person or persons in charge of, or responsible to, the company for the conduct of its business. Lifting the veil under the Companies Act: If, in the course of winding up, it appears that any business of the company has been carried on with an intent to defraud the creditors of the company or any other person, or for any fraudulent purpose, the persons who were knowingly parties to the carrying on of the business in such fraudulent manner shall be personally responsible without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct. Lifting of Veil as recognized by courts: The scope of this principle as applied by Indian courts is broad and largely dependent on the facts of an individual case. The corporate veil may be lifted where:
- Derivative Action Suits against Directors Courts will not, generally, interfere at the instance of the shareholders with the management of a company by its Directors, so long as they are acting within the powers conferred on them by the Articles, except in cases of derivative actions as explained below. What is a Derivative Action? Derivative action is defined as an action by one or more shareholders of a company where the cause of action is vested in the company and relief is accordingly sought on its behalf. Since the company has a distinct legal personality with its own rights and liabilities which are different from those personal rights of individual shareholders, this action is brought by a shareholder not to enforce his or her own personal rights but, rather, the rights and liabilities of the company on its behalf and for the benefit of the company; which the company cannot itself do, as it is controlled by the ‘wrongdoers.
Ultra Vires: A shareholder may bring an action against the company and its Directors in respect of matters which are ultra vires the Memorandum or the Articles of the company and which no majority shareholders can sanction. For example, Directors of the company sanctioning an action that is contrary to the objects of the company. 22 Fraud on Minority: Directors and the company would also be liable if the conduct of the majority of the shareholders constitutes a “fraud on minority”, i.e., a discriminatory action. For example, where the shareholders have passed a special resolution with an effect of discriminating between the majority shareholders and minority shareholders, to give the former an advantage of which the latter were deprived. Required Resolution: Certain actions of the company can be approved only by passing a special resolution at a general meeting of shareholders. If the majority seeks to circumvent this legal requirement and pass only an ordinary resolution, or do not pass such a special resolution in the manner required by law, any member or member can bring an action to restrain the majority. To safeguard Interests of the Company: For instance, an obvious wrong may have been done to the company by the Directors, but because of the control of such Directors on the majority shareholders, such shareholders may not permit an action to be brought against the ‘wrongdoer’ Directors. Therefore, to safeguard the interests of the company, any member or member may bring a derivative action.
Individual Membership Rights: As a general rule, personal rights per se are not to be enforced through derivative actions; however, some exceptions have been recognized. These exceptions often arise in cases of rights that have been conferred upon the shareholders by the Companies Act itself or the respective Articles (commonly known as “individual membership rights”).
- Indemnifying Directors Indemnification: The Companies Act restricts the ability of a company to indemnify its Directors and officers against losses. Any provision contained in the Articles or any other agreement, to provide indemnity on account of their negligence, default, misfeasance, and breach of duty or trust is void. However, such indemnity will be enforceable if it is against any liability incurred by such Director or officer in defending any proceedings in which judgment is given in his favor or in which he is acquitted or discharged or where it is determined that, although liable, he acted honestly and reasonably and should be excused.