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Duties of Director

Stipulation and elucidation of the duties and responsibilities of the directors of a company, especially the public limited companies, are welcome and great contributions of the new company law of India and the Companies Act of 2013, to better corporate governance and security, and the best possible development and prosperity in the corporate world of India.

The former company law of India, the Companies Act of 1956, was disgustingly deficient in this respect and the new CA-2013 can be seen as offering a landmark part of legislation in this esteem, which duly and explicitly clarifies, redefines, and enlarges the ambit of duties and responsibilities of the directors.

These newly introduced provisions by CA-2013 regarding the duties and responsibilities of the directors, including the independent directors, not only provide greater certainty to the directors regarding their ways and responsibilities, thus, ensuring better and impeccable corporate management and governance.

But also enable and authorize the beneficiaries, regulators, and the courts, to judge, regulate, and control the activities and obligations of the directors more accurately and effectively and ours this well-drafted web-article offers very valuable and fertile information wholly about these new provisions of the Indian Companies Act of 2013, connected with the roles, duties, besides responsibilities of the directors and independent directors of public limited companies.

Here, it may also be briefly just mentioned that the Directors are regarded as being the Key Managerial Persons of a company, with special importance to the registered companies and they can hold numerous high and responsible positions in the companies, such as the Managing Director, Manager, Whole Time Director, or an Independent Director.

Thus, efficient, flawless, and rather progressive management of a company, and the anticipated growth and profitability of its businesses, are certainly largely dependent on the capability and trustworthiness of its directors. By the way, a Director means a Director appointed to the Board of a company; and, the Board of a company signifies the collective body of its directors and the position of Director of a Private Limited Company or Limited Company or One Person Company comes with firm duties and responsibilities.

Many Directors of a Company are unaware of these duties and responsibilities expected of them and hold the position just as a namesake and our intention with this article are to modify that mindset and create awareness about the duties and responsibilities of a Director of a Company. This will in turn help create companies that have a strong and decent Board of Directors, thereby helping all the stakeholders of a company.

Duties Of Directors

The term "director" has been defined in law. The Companies Act, 2008 (the Act) defines a director as: "A member of the board of a company..., or an alternate director of a company and includes any person occupying the position of director or alternative director, by whatever name designated".

It is interesting to note that the definition of a director includes not only those individuals that are appointed to the board of the company (as well as alternate directors) but also "any person occupying the position of director or alternate director, by whatsoever name designated". The effect of this wide definition is that the provisions will apply not only to members of the board but likewise to "de facto" directors.

The Act requires private companies and personal liability companies to appoint at least one director, whereas public companies, state-owned companies, and non-profit companies are required to appoint at least three directors and this number would be in addition to the number of directors compulsory where an audit committee and/or social and ethics committee is required. In general terms, the directors of a company are those individuals allowed by the Memorandum of Incorporation of that company to determine its strategic direction.

As a consequence of the nature of a company, being a lifeless corporate entity, human intervention is required to direct its actions and therefore determine its identity and the directors are delegated by the shareholders of the company with the ultimate responsibility for the functioning of the company. While some of the day-to-day runnings of the company are generally delegated to some level of administration, the responsibility for the acts committed in the name of the company rests with the directors

Corporate executives are today possessed of "immense power which must be controlled not only for the public good but also for the protection of those whose investments are involved." Directorships will always be vulnerable to abuse. "Some directors will always be faithless to their trust and they can capitalize their strategic position in the company to serve their interest."

The law, therefore, continues to struggle in contradiction of their wiles and imposes upon them certain duties which, when properly enforced, will, without driving away from the field competent men, materially reduce the chances of abuse.
  1. Statutory formulation of directors' duties [S. 166]
    The Act of 2013 has in Section 166 made a statutory formulation of directors' duties. Such duties have been spelled out in terms of the following seven points:

    166. (1) Subject to the provisions of this Act, a director of a company intends to act by the articles of the company.
     
  2. A director of a company shall act in good faith to promote the objects of the company for the benefit of its members as a whole, and for the best welfare of the company, its employees, the shareholders, the community, and for the protection of the environment.
     
  3. A director of a company shall exercise his duties with due and reasonable care, skill and industry and shall exercise independent judgment.
     
  4. A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or perhaps may conflict, with the interest of the company.
     
  5. 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 and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equivalent to that gain to the company.
     
  6. A director of a company shall not assign his office and any assignment so made shall be invalid.
     
  7. If a director of a company contravenes the necessities of this section such director shall be punishable with a fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Fiduciary obligation (Duty of Good faith] [S. 166(2)]
This duty conforms to the duty stated at point number 2 in Section 166 Point number 1 is a restatement of the all-pervading principle of company law which requires directors to act by the company's art class and the first duty stated here corresponds to point number 2 which says that the directors of a company have to act in good faith to promote the company's objects for the advantage of its members as a whole. They have to act in the best interest of the company, its employees, shareholders, and community, and similarly for the protection of the environment.

Liability for breach of trust.-Traditionally the duties of directors was non-statutory and they were fashioned out essentially from the common law as developed through the cases, but now company legislation in some countries has departed from this tradition and the Nigerian Act covers the following provision on the point.

"A director of a company stands in a fiduciary relationship towards the company and shall observe the extreme good faith towards the company in any transaction by it or on its behalf."

The first and the most obvious obligation of persons in a fiduciary position is to act with honesty. "Greatest good faith is expected in the discharge of their duties and the good faith requires that all their endeavors must be directed to the benefit of the company and thus were a director of a company is also a member of another company, received bonuses from the other company by providing approximately business facility of his company, he was held liable to account for such profits, though the company had itself lost nothing and also could not have earned the bonus.

Directors' personal profits:

In Hirsche v Simons, on the eve of issuing a prospectus for additional capital, the assets of the company were revealed used by a leading firm of surveyors, and revised values were quoted. This brought about an increase in the market price of the company's shares and the directors sold some of their existing shares and got benefit from the market situation.

They were held by the House of Lords to be not accountable for this profit and the directors exercising their powers in a normal way are not accountable if the sensitive market is incidentally influenced creating opportunities for helpful disposal of existing shares. In Albion Steel and Wire Co v Martin, a director sold certain goods to his company out of his stock but at the market price of the day, but even so he did make a profit because he had got the stock earlier at lower rates. He was required by the court to account for his profit.

Business opportunities (Diversion of business:

Similarly, a director should not feat to his use corporate opportunities. "The doctrine of corporate opportunity has been described as an act of a director or controlling shareholder in diverting from the benefit of the corporation. any enterprise or transaction in which sensible persons would agree that the corporations had some expectancy or interest.

Competition by directors-In a decision on the point, the judicial opinion was that there is no breach of duty if a director competes with his company or holds some interest in a rival company or is a competing company, but accountability will chase a director if he uses the company's assets for the benefit of a rival apprehension and this includes its business connection, goodwill, trade assets, and the list of customers, and if a company has invested resources in providing some working out to a director or skills.

He may be restrained from using such skills for the benefit of a rival concern. A director can also be restrained by the terms of his appointment from rivals with the company or from joining any other concern as a director whatever it's business. A whole-time director has by the very nature of employment to confine himself from joining any other company.

Misuse of Corporate Information:

Exploitation of unpublished and confidential information belonging to the company is a breach of duty and the company can ask the director in question to make good its loss if any and any knowledge or information made by the company is the property of the company, commonly known as intellectual property.

Turnover of business, profit margins, list of customers, plans, and any personal use of such knowledge is equivalent to the dishonesty of property and the use of such information can be restrained using an injunction. Any gain made by the use of confidential information has to be accounted for by the company.

Thomas Marshall (Exports) Ltd v Guinle
A company was importing foreign goods for resale in the UK. Its managing director formed a new import company and solicited orders on its behalf from UK buyers and he imported goods from those very firms with whom he had recognized contact while acting for the company. He was restrained from this course of conduct and it was a breach of the service contract and also of the fiduciary duty.

Directors' duty of care, diligence, and skill [S. 166(3)]

This duty is spelled out in Section 166(3) in the subsequent words: "A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment." The Supreme Court has described it as a failure of corporate governance on the part of directors if they fail to exercise due care and diligence thereby allowing fabrication of figures and false disclosure and they would be liable for such errors and commissions.

Liability for negligence-Fidelity alone is not enough. A director has to perform his functions with reasonable care and he has to attend with due diligence and caution to the work assigned to him the Nigerian Act contains a set of provisions on this aspect of directors' duties:

"A director shall act at all times in what he believes to be the best interests of the company as a whole to preserve the assets, further its business, and endorse the purposes for which it was formed, and in such manner as a faithful, diligent, careful and ordinarily skillful director would act in the circumstances."

Standard and degree of care and skill-Quite apart from this statutory development, the courts have also been trying to review the standard of care expected of directors. ROMER J formulation is largely subjective, as a director has to use only such "skill as may reasonably be predictable from a person of his knowledge and experience". The standard of care required of directors at common law has traditionally been light associated with their duties in other areas. Usually, it took gross negligence for directors to be liable and the current trend is toward objectivity.

Duty of non-executive director:

It has been laid down that in the application of the standards of care and skill, no difference can be made between the executive and non-executive directors. The two non-executive directors were held guilty of negligence since they signed blank cheques which enabled the executive director to act at pleasure in finishing the cheques.

They were held liable to reimburse the company for its Joss Summarizing the present position of the duty of care and skill, the court crystallized it into the following three points:
  1. There ought to be an exhibition of such a degree of skill as may reasonably be expected after a person with the particular director's knowledge and experience;
  2. The director has to exercise in the performance of his duty such care as an ordinary man might be predictable to do on his behalf, and
  3. All powers conferred on directors must be exercised in good faith and the interest of the company.

Nominee directors-Where the directors failed to carry out directions of the court for positioning payment to the workers of the sick industrial company, the court said that the nominee director representing the BIFR in the company's Board was not to be held liable for contempt of court Nominated directors do not have control over day-to-day affairs of the company and they are thus permitted to be protected and the court quashed the summons, orders, and subsequent proceedings against such directors.

North Midland Railway Co v Hudson (1853) 61 Beav 485: 22 LJ Ch 529
It was held that directors have been selected to manage the affairs of the company for the benefit of the shareholders and it is an office of trust which if they undertake; it is their duty to accomplish fully and entirely and since the directors hold a fiduciary position of trust, the first and most obvious obligation is to act with honesty.
  • Duty to attend Board meetings
    Negligence by non-attendance -Duties of directors are intermittent to be performed at periodical Board meetings and in other words, they are not bound to pay continuous attention to the matters of the company. "They do not undertake to manage the company."

    A director is not even bound to attend all the meetings of the Board, although he is under an obligation to attend whenever in the circumstances, he is reasonably able to do so and according to Section 167(1), (b) the office of a director will be vacated if he absents himself from all meetings of the Board for a consecutive period of 12 months, with or without obtaining a leave of nonappearance from the Board.

    Moreover, a director's habitual absence from Board meetings may, taken in the light of other circumstances, develop evidence of negligence on his part, and in an early case in which liability was imposed for failure in this respect, the court said: "If some persons are guilty of gross non-attendance, and leave the supervision entirely to others, they may be guilty by this means if breaches of trust are committed by others."
     
  • Duty not to delegate [S. 166(6)] (Assignment of duty)
    Section 166(6) says that a director of a business shall not assign his office and any assignment so made shall be void.
     
  • Liability for co-directors defaults:
    Generally, a director has to perform his functions personally and he is bound by the maxim delegatus non potest delegare. Shareholders have appointed him because of their faith in his skill, competence, and honesty and they may not have the same faith in another person. The rule is, however, not inflexible and in the following two cases, at least delegation is proper and valid.

    Firstly, a delegation of functions may be made to the extent to which it is official by the Act or articles of association of the company, and secondly, there are certain duties which may, having regard to the exigencies of business, properly be left to some other officials.
     
Duty to disclose interest [Ss. 2(49) and 184]
The conflict of interests-Every agent occupies a fiduciary position towards the principal and as such he must see that his interest and his due for his principal do not conflict and for the proper exercise of the functions of a director, he must be disinterested, that is, be free from any contradictory interest. This conflict invariably rises when a director is personally interested in a transaction of the company and naturally, a man is likely to prefer his interest.

What constitutes Interest:
This raises the question as to what constitutes an "interest" within the mischief of the rule. Section 2(49) classifies persons who can be said to have an interest. "interested director means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other overtones of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company."

The interest to be disclosed is that which in a business sense might be regarded as influencing judgment; the essence of the matter being that any kind of personal interest which is material in the sense of not being important must be revealed." In short, the interest must be such that it conflicts with the director's duties towards the company, and thus, for example, where the directors took part in and voted at a meeting of the Board which granted debentures to two of them, the resolve was held to be bad.

Where Board is already aware:
Where the whole body of directors s aware of the facts, formal disclosure is not necessary and it was also contended by the company that his voting on the matter violated the contract. The court was, however, of the opinion that mere voting by an interested director could not render the contract void or voidable able in the nonappearance of that vote, there would have been no quorum qualified contract and the mere fact that voting is an offense punishable with a fine does not ipso facto render the contract void or voidable.

Tax liability:
Where the bank account of a director of a private company was frozen for recovering income tax dues of the company, it was held that it was for the director to show that the avoidance on the part of the company was not attributable to any breach of duty on his part and apart from any provisions of the taxing statute, arrears of the tax amount are not to be recovered from any director personally.

Walchandnagar Industries v Ratanchand, AIR 1953 Bom 285
The director's other duties would include the duty to reveal their interest to the company and to ensure that his interest as an agent of the company and the interest of the company which is the principal, do not conflict.

Suggestions:
  • Directors considering whether to exercise statutory powers and/or powers under their company's articles of association, should take legal advice before taking action, to safeguard they do not breach their fiduciary duty to act only for proper purposes.
     
  • Directors should ensure that information they provide to shareholders is clear and understandable, not misleading, and does not hide material particulars but, in the absence of a special relationship, directors do not owe shareholders fiduciary duties.
     
  • The duties, responsibilities, and liabilities an individual will assume on being appointed a director of a company and as a first appointment, it is strongly recommended that more detailed information is obtained and in larger companies, however, the company secretary will be able to give appropriate guidance.

Conclusion
The board of directors is the company's heart and soul, and they are the key to its success. Since greater power comes with greater responsibility, the company management should be in the hands of responsible people who can use their power in the right way and the organization is governed by a board of directors, who make all of the company's decisions together in an organizing meeting and even though a substantial number of incidents of company mismanagement have been experiential and the directors are the first to be held responsible in this case.

The above analysis may be enough to convince someone to become a Director, but it is not difficult to follow whether the Directors are acting in the best interests of the stakeholders and to prevent any serious consequences against them or the company, the Board of Directors must be more prepared than ever before and they should attend as many board meetings as possible and have a thorough understanding of the company's operations and before attending a board meeting, they must be well-prepared and alert.

The Directors need to be more prepared now than before to avoid any grave circumstances against them or the company and they should attend as many board meetings as possible and should be fully aware of the company's business and they need to come very equipped and alert before joining a board meeting. Only participation in the meetings is no more enough, it also needs to be ensured all questions or expressed disagreements are properly recorded in the minutes of the meeting, this is extremely important and is relevant evidence to avoid the legal hassles at a later date.

Proper training for directors on Corporate Governance is essential and will equip them to work in the best interest of the organization. It needs to be ensured by self that the Directors are not residual unadvised, however knowledgeable or experienced someone maybe it will be prudent practice to legal advice in case of doubts or dangerous situations and the Directors Liability Insurance is very important for Directors now.

References
Bibliography:
  1. Company law by Avtar Singh Seventeenth Edition

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