Author : V S Warrier
The law relating to companies in India is contained in the Companies Act, 1956. The Companies Act, 1956 (The Act) is a consolidation of existing laws, statutory rules and certain principles laid down in decisions of the Courts in India and England. The Act of 1956 substantially incorporates provisions of the English Companies Act, 1948.
A company means, a company formed and registered under the Companies Act, 1956 or under any of the preceding Acts. A company is a legal person who is living only in the eyes of law. It’s a creation of law which lacks both body and mind. It cannot act, just like a human being. It can act only through some human agency. Directors are those persons through whom company acts and does business. They are collectively known as Board of Directors.
Sections 252 – 323 of the Companies Act, 1956 deal with the appointment of directors, remuneration of directors, disqualification of directors, vacation of office by directors, Meeting of Board of Directors. Board of Directors is the brain and the only brain of the company which is the body, and the company does act only through the board of directors.
A director is a person who has control over the direction, conduct, management, or superintendence of the affairs of the company. Only an individual can be appointed as a director. An association or a firm cannot be appointed as director of a company.
However, there are no specific provisions under The Act, as to the duties of directors. Instead these are governed by the Common Law, where the Judges are required to apply to a given sets of facts and circumstances. Under common law, there are two broad sets of director duties, they are;
Fiduciary Duty of the Director: Every director is bound at common law by a separate and distinct fiduciary duty to the company. Directors owe their fiduciary duty to the company as a corporate being in its own right and not to the members individually, not even to a member who is a majority shareholder. Even if a director occupies his position on the board by virtue of another position he holds a director’s fiduciary duties rest upon him as an individual. The fiduciary duty is likewise not owed directly to creditors, employees or other stakeholders of the company, although there is a range of circumstances in which a director may, by virtue of the neglect of his fiduciary duty to the company, be held personally liable to the company’s stakeholders.
In this fiduciary capacity, a director assumes two roles, as an agent acting on behalf of the company, and as a trustee who controls company assets. These roles give rise to the following directors’ duties:
a) to act in good faith towards the company
b) to act only within their powers and use their powers only for purposes which benefit the organisation. Directors who act outside their powers bind the company to the transaction but may be held personally liable if a loss results
c) not to use for personal gain any information acquired in their capacity as a director
d) to act in the best interests of the company and to avoid a conflict between personal and company interests
e) to exercise independent judgment in decision-making. A director who is appointed to represent an interest group, for example employees, is nevertheless obliged to act in the best interests of the company as a whole
In this fiduciary capacity the director has to act in the interests of the company, to avoid conflicts of interest and to act for proper purposes. A conflict may sometimes arise between a director’s personal circumstances and that of the company. The law is unequivocal as to the course of action a director who has a conflict of interests must follow and a director may never prefer his interests over that of the company he is entrusted to direct. A director who does so may be liable to account to the company in respect of any profits he makes as a result of such a transaction.
Duty to act with skill, care and diligence: The degree of care and skill required is determined objectively by considering how a reasonable prudent man with similar knowledge and experience would have acted, and then comparing this to the director’s actions. Each case is considered individually taking into account the nature of the business and the director’s specific obligations. As indicated earlier, no distinction is made between executive and non-executive directors.
The Companies Bill of 2011, give a full clarity with respect to the duties of directors. The duties of Director which under The Act is considered to be that of trust or fiduciary relationship has been attempted to be codified under the Bill. Clause 166 of the Bill specifically deals with this issue. It is substantially similar to the provision contained in the Companies Bill, 2009, with some repetition.
Following are some primary duties of directors mentioned under the provisions of the Bill;
a) A director of a company shall act in accordance with the articles of the company.
b) 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, shareholders, community and for the protection of environment.
c) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
d) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
e) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates.
f) A director of a company shall not assign his office. And any such assignment so made by any director shall be void.
Further the Bill introduced a penal provision. As per this provision, if a director of the company contravenes the provisions of Clause 166 such director shall be punishable with fine which shall not be less than One Lakh rupees but which may extend to Five Lakh rupees.
part from Clause 166 listed above, a few other changes have been introduced. For example, the concept of compulsory Independent Directors for some companies has been introduced, and some classes of companies have to compulsorily have women directors. The clause also seeks to provide that every company shall have at least one director who stays in India for a total period of not less than one hundred and eighty –two days in the previous calendar year.
The clause further provides the minimum number of independent directors in the prescribed companies. The clause also seeks to define the terms “independent director”. The company and independent director shall abide by the provisions specified in Schedule IV.
However it is necessary to note that this is only a partial codification of directors’ duties. It is not possible to prescribe rules for every situation in which directors’ actions can be judged. That necessarily has to be left for a principles-based determination, usually by judges in specific cases, and hence the role of courts in implementing these duties cannot be taken away.
There are two conflicting points of view here. The first advocates that there be minimal legal restrictions on the role of the Directors, their powers, rights and duties. The company, according to this view, should be free to decide what exactly its directors should and should not do. The other point of view believes that good corporate governance requires that at least the basic duties, responsibilities and powers need to be spelled out in law, and the company should be allowed to fill in the details.
The previous Bill required directors to act in the best interest of the company. This epitomizes the shareholder model of corporate governance wherein the primary role of the directors is to protect the interests of the shareholders, and at most the interests of creditors in the event of insolvency. However, the new Bill also requires directors to act in the interests of “employees, the shareholders, the community and for the protection of the environment”. This encapsulates the stakeholder model of corporate governance wherein the directors are required to take into account the non-shareholder constituencies as well.Overall, Clause 166 brings no great advance to the law, nor does it go far beyond the tenets we have already spelled out earlier.
Author : V S Warrier