Duties of Directors (The Companies Act of 1956)

The duties of directors of a company have been elaborately explained by Romer L. J.

in Re city Equitable Fire Insurance Co1. The important duties are quoted from this
case and summed below:-

1) Distribution of work2:-
The manner in which the work of a company is to be distributed between the board of
directors and the staff is a business matter to be decided on business lines.

2) Good faith:-
Every director must act honestly and in the interest of the company .

3) Reasonable care:-
A director, must exercise such degree of skill and diligence as would amount to the
reasonable care which an ordinary man might be expected to take in the circumstances
on his own behalf.

4)Degree of skill:-
A director, need not exhibit in the performance of his duties a greater degree of skill
than what can be reasonably expected from a person of his knowledge and
experience,in other words, he is not liable for mere errors of judgment.

5) To attend meetings:-
A director, “is not bound to give continuous attention to the affairs of his company, his
duties are of an intermittent nature to be performed at periodical board meetings and
the meetings of any committee to which he is appointed, and though not bound to
attend all such meetings, he ought to attend them when reasonably able to do so.

6) The director’s duty of disclosure:-

The Companies Act of 1956 makes it obligatory upon directors to disclose certain
facts to the company:-
i) If a director is interested in any contract or arrangement proposed to be entered into
by the company, he must disclose the interest to the board of directors - Section 299
Ii) He must disclose, for the purpose of entry in the register of directors his
name,address, occupation, nationality and certain other particulars - Section 303 and
305
iii) He must disclose the number of shares of the company which he holds - Section
308

Other duties:-
In addition to the duties mentioned above every director has the following duties:-

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Year and full citation
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Section?
i) A director has to send to the registrar stating his consent to the post of director-
Section 266
ii) Every director must obtain the qualification share of directorship according to the
article of the company- Section 270
iii) Every director must pay his share monies according to the “call” of the board of
directors.
iv) A director must not participate in the meeting of the Board of directors, when they
decide his contract with the company.

Rights and Duties of Directors - section 166 (The Companies

Act of 2013)

We have noticed above how the 1956 Act was not completely silent on the duties of
directors as is popularly believed as a cause of downfall of companies. However, what
has happened under the 2013 Act, is that, there has been more clarity and specificity
reflected in the sections.

The 2013 Act has now codified directors’ duties more holistically than was previously
present under the 1956 Act (similar to the UK Companies Act) under Section 166.

The Companies Act, 2013 has was now been passed by the Parliament in August,
2013.It received the assent of the President on 29th August, 2013 and is was notified on
30th August 2013. It will come into force from the date to be notified by the
Government. The new Act will replacehas replaced the existing Companies Act, 1956.
98 Sections out of 470 Sections of the Act have comehas come into force from
12.9.2013. The provisions relating to duties and rResponsibilities of Directors are
contained in the following sections of the New Act.

Section 166 of Companies Act 2013 prescribes duties of director.

The duties provided under section 166 are applicable to all types of companies and to
all directors.

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.

=>A. Fiduciary Duties3

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:-
Duty to act as per the articles of the company :-
The director of a company shall act in accordance with the articles of the company.

Good faith and bona fide acts:-

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

Proper use of powers:-

Directors must not exercise the powers conferred upon them for purposes different
from those for which they were conferred. Notwithstanding that Directors have
acted in honest belief for what they believe to be for the benefit of the company,
they may nevertheless be liable for improper use of their powers, especially for
purposes collateral to what they have been conferred for, for instance, furthering
the Director’s own interests or diluting the majority shareholding. A breach occurs
when the dominant purpose of the act is improper.

Unfettered Discretion:-
Directors must not fetter their discretion for any reason whatsoever. They cannot
validly contract or act pursuant to any arrangement either with one another or with
third parties as to how they shall vote at board meetings or otherwise conduct
themselves in the future. However, this does not include contracting to take further
action to give effect to a contract entered into in a bona fide exercise of such

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discretion. Nominee Directors must be particularly careful not to act only in the
interests of their nominators, but must act in the best interests of the company and
of its shareholders as a whole.

Duty to avoid conflict of interest:-

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.

i.Directors have to make continuous disclosures of their interests in the various

transactions of, and with, the company. A Director cannot enter into a contract
with the company without its informed consent, even if there is no unfair
advantage to be gained, or abuse of position, by such Director.

ii.Directors cannot use, without the consent of the company, the company’s
properties, opportunities or information for their own profit. In order to establish a
breach of this duty, it must be shown: (1) that what the Directors did was so related
to the affairs of the company that it can be said to have been done in the course of
their management and in utilization of their opportunities and special knowledge as
Directors, and (2) that what they did resulted in a profit to themselves. The
English Courts, adopting a strict approach, have held directors to be in breach of
this fiduciary duty, even if the opportunity was not one which would have been of
use to the company. Indian courts generally follow this strict English law
approach.

iii.Directors have a duty not to compete with the company, which is in many
respects a corollary of the immediately preceding rule4.

v) Duty not to make any undue gain:-

A director of a company shall not achieve for 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
equal to that gain to the company.
Example:-
If a direct takes from another person a Commission on a transaction or contract
entered into on behalf of company, he commits a breach of duty and amount so
received belongs to company.

=>B. Common Law Duties

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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.

Imposition of a duty of care on the Director does not necessarily require that a
Director must be a professional. A comparison with a particular Director in the
same position and how such particular Director reasonably ought to have acted is
the question to be asked. Therefore, the question of what functions should be
carried out by a Director will depend on factors such as type and size of the
company; the sector in which it operates; the Director’s own personal skill and
experience; the Director’s position and role in the company; and the remuneration
of the Director.

Duty to act within the powers of the company:-

Directors must act within the powers of the company. They must ensure that they
are familiar with the company’s Memorandum and Articles and being ‘insiders’,
they must ensure they act in accordance with these provisions, since breaching any
of them might lead to strict liability even in the case of an understandable mistake.
Their powers under the company’s Memorandum and Articles must be exercised
for proper purposes in the interests of the company.

Duty to exercise independent Judgment:-

Directors should not take decisions at the direction of others. Even while taking
the advice of others, as and when required, they should exercise independent
judgment in considering recommendations and suggestions made by advisors.
Duty of Supervision: The Directors have a duty to exercise supervision over 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.

Duty not to assign his office:-

A director of a company shall not assign his office and any assignment so made shall
be void.
CASE STUDY

Oriental Metal Pressing Work v. B.K. Thakur5

In the above case, the supreme courtSupreme Court held that in the case of a private
company a managing director who was holding his office for life and was empowered by
the Articles to appoint a successor, appointed by will his son to succeed him as
Managing Director after his death.
Appointment of the successor did not come within the prohibition of the section.
Assignment is different from appointment.

=>C. 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:-

1. Administration and Compliance

Directors are vested with a number of administrative responsibilities in order to
enable them to manage and administer the company. These administrative
responsibilities include, amongst others, the following:-

Filing returns with the Registrar of Companies:-

Directors must file a return of allotment of shares within thirty (30) days with the
Registrar, stating the number and nominal amount of shares comprising the
allotment, the names, addresses and occupations of the allottees, and the amount, if
any, paid or due and payable on each share.

Convening Shareholders’ Meetings:-

Directors must convene the different kinds of shareholders’ meetings provided for
in the Companies Act, within their stipulated periods.

For example:
A statutory meeting should be convened after one (1) month but within six (6)
months from the date on which a public company is entitled to commence its
business;
The first AGM should be convened within eighteen (18) months from the date of
incorporation; and
An extraordinary general meeting must be convened by the Directors on a
requisition by members holding at least ten percent (10%) of the paid up capital of
the company.
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Year and full citation
Approval of Company’s Documents:-
Directors must approve the balance sheet and profit and loss account of the
company before it is signed on their behalf.

Audit Requirements:-
In cases of winding up or liquidation, the Directors must ensure that the books of
account of the company are completed and audited up to the date of winding up
order issued by the Company Court.

2. 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, including
the following:

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. If they do so, they must hold such an amount in trust
for the company.

Attending Board Meetings:-

Directors are under an obligation to attend the board meetings as prescribed by the
Articles, or such as may be called by the chairman (if any) of the Board, otherwise
any absenteeism for three (3) consecutive meetings or for a period of three (3)
months, whichever is longer, without obtaining leave of absence, will result in that
Director or Directors vacating their respective offices.

3. Duties during Voluntary Winding Up of a Company

The Directors must file the petition for winding up of the company (in a voluntary
liquidation situation) before the relevant court. The Directors are also required to
file a statement of the affairs prior to the voluntary winding up of the company,
upon appointment of an official liquidator by the court. The following other duties
are also required to be discharged, in connection with the winding up of the
company.
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 full inquiry into the affairs of the
company, and as to the solvency of the company, i.e., the company has no debts, or
that it will be able to pay its debts in full within such period not exceeding three (3)
years from the commencement of the winding up as may be specified in the
declaration.

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.
Cease exercise of Powers: It is imperative for the Directors to cease exercising all
powers of the Board, and likewise for the Managing or Whole-time Directors to
cease exercise of such powers, except for the purpose of giving the notice of
appointment of the liquidator mentioned in the immediately preceding paragraph.
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. At such creditors’ meeting, the Directors must
present a statement of the position of the company’s affairs together with a list of
creditors of the company and the estimated amount of such creditors’ claims.

Filing Notice:-
The Directors must file the notice of any resolution passed at the creditors’ meeting
mentioned in the immediately preceding paragraph.

4. Duties During Involuntary Winding Up of a Company

In cases of involuntary winding up, the Directors must defend the Company in the
winding up petition filed by a creditor or any other person recognized by the
Companies Act. The requirement to file a statement of the affairs of the company
by each of its directors, upon appointment of an official liquidator by the court,
applies to involuntary winding up as well. In addition, the directors are also
required to assist the official liquidator from time to time, by providing relevant
information and assistance, in case of involuntary winding up of the company.

=>D. Additional Duties in case of a Listed Company

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. The non-
executive Directors must disclose their shareholding (either held directly or for
other persons on a beneficial basis) in the company in which they are proposed to
be appointed as Director. Such disclosure shall be made prior to his appointment
in a general meeting called for his appointment.

Declaration of Material Contracts:-

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 require
that the prospectus with respect to an initial public offering (IPO), or further public
offer, shall disclose the dates, parties to, and general nature of the contacts
appointing or fixing the remuneration of a Director within or more than two (2)
years before the date of the prospectus. The company also needs to disclose the
dates, parties to, general nature of every material contract not being in the ordinary
course of business entered into more than two (2) years before the date of the
prospectus.

=>E. Other Important Duties-

i) To form policy and determine objectives of a company.

ii) A duty to keep proper records

iii) Duties under Foreign Exchange Management Act:-

The Foreign Exchange Management Act, 1999, and the regulations issued
thereunder, provide the legal framework for any transaction between an Indian
entity and a foreign entity. It specifies that in case of contravention of any of its
provisions or any rule, direction or order thereunder by a company, the person who
at the time of the contravention was in charge of and was responsible to the
company for the conduct of the business of the company shall be deemed to be
guilty of the provisions and shall be liable to be proceeded against. If the offence
is committed with the consent or connivance of, or is attributable to the neglect of
the Director, such Director shall be deemed to be guilty and liable to be proceeded
against.

For example:-under the Foreign Exchange Management (Transfer or Issue of

Securities by a Person Outside India) Regulations, 2000, a foreign entity can invest
in an Indian company that undertakes activities in the construction-development of
real estate sector, by way of Foreign Direct Investment, without requiring any
approvals. However such investment by the foreign entity is subject to certain
guidelines prescribed in that Regulation. Non-compliance of such conditions
would be a contravention and any person being a Director of such company
contravening those conditions can be found guilty.

Duties under the Negotiable Instruments Act:-

Under the Negotiable Instruments Act, 1881, if a company issues, and later
dishonours a cheque which was presented for discharge of 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 law and as a matter of fact),
shall be deemed to be guilty of the offence and shall be liable to be proceeded
against.
If the offence is committed with the consent or connivance of, or is attributable to
the neglect of the Director, such Director shall be deemed to be guilty and liable to
be proceeded against. However, if such person has been appointed as a Director
by virtue of his holding in any office or employment in the central government or
state government or a financial corporation owned or controlled by the state or the
central government, he shall not be liable for prosecution.

Duties under the Competition Act:-

The Competition Act, 2002 prescribes certain specific duties to be discharged by
Directors.

1. Combination:-
The Competition Act, 2002, imposes certain limits to be examined, and adhered to,
by Directors and requires that the merger or amalgamation or acquisition does not
amount to a resultant enterprise being a combination.

2. Duty to file report with Commission:-

Directors must show that such a combination under the Competition Act, 2002, is
not likely to cause an appreciable adverse effect on competition within the relevant
market in India, if the assets or the turnover of the newly created or remaining
company amounts to a combination by exceeding the prescribed limits. Therefore,
it is the duty of the Director under this legislation, to give notice to the
Competition Commission, in the form as may be specified and the fee which may
be determined, by regulations, disclosing the details of the proposed combination,
within seven (7) days of the company’s approval of the merger or amalgamation
proposal. The Commission shall then conduct such investigations, inquiries and
pass any orders. No combination shall come into effect until two hundred and ten
(210) days have passed from the day on which the notice has been given to the
Commission or the Commission has passed orders, whichever is earlier.
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’
with respect to 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. Where the said affairs are entrusted to a Manager or a Managing
Director, such Manager or Managing Director is considered the ‘employer’.
However, this liability is not one imposed on all Directors or Managers uniformly;
it is only imposed on those Directors or Managers who are in overall control of the
affairs of the company (this implies control over the day-to-day affairs of the
company). Those Directors who are only in control of certain aspects, or are aware
of the policy of the company, but are not in charge of it, would not be held liable.
The Managing Director or the Manager, will, in his capacity as the ‘employer’,
have the duty to ensure welfare of the employees. He will also be responsible to
make necessary statutory registrations or contributions, as applicable, from time to
time.

=> Punishment for contravention:-

If a director of the company contravenes any of the above provisions of section 166,
he shall be punishable with fine which shall not be less than Rs.1 lac which
may extend to Rs.5 lacs. It is also provided that if he is found guilty of making any
undue gain during the course of discharging his duties as a director, he shall be
liable to refund an amount equal to such gain to the company.

Section 172 provides that if a company contravenes any of the provisions of

chapter XI (sections 149 to 171), for which no specific punishment is provided, the
company and every officer of the company who is in default shall be punishable
with minimum fine of Rs.50000/- which may extend to Rs.five lacs.