DUTIES OF DIRECTORS

Directors are entrusted with a magnanimous amount of power as to the functioning and conduct
of the business affairs of a company. In order to ensure that such powers are not being abused
by the Board to serve their own self-interest, the Act imposes certain duties which must be
fulfilled:

General Duties
Directors owe their duties owing to the position and role they have in the company. Duties
which are stipulated under Section 166 of the Act are general duties which must be fulfilled
in all transactions and conduct of the Directors. These include:

• Subject to the provisions of this act, a director shall act in accordance with the MOA
and Articles of the company.

• A director 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 interest of the company, its
employees and the shareholders as well as the community and the environment.

Thus, a director should not make any secret profits. He should also not exploit the
corporate opportunity to his own use. In Cook v. Veeks [1916] AC 554 it was observed
that "men who assume complete control of a company's business must remember that
they are not at liberty to sacrifice the interest which they are bound to protect and while
ostensibly acting for the company, direct in their own favour business which should
properly belong to the company they represent.”

• All duties of a director must be exercised with due and reasonable care, skill, and
diligence and shall exercise independent judgement.

He is expected to act with that much of skill and diligence which an ordinary man would
take in his own case. A director need not exhibit in the performance of his duties a
greater degree of skill than may reasonably be expected from a person of his knowledge
and experience. He cannot be held liable for mere errors of judgment. “If directors act
within their powers, if they act with such care as is to be reasonably expected of them
having regard to their knowledge and experience and if they act honestly for the benefit
of the company they represent, they discharge both their equitable as well as legal duty
to the company.”
 The directors’ duty of care has been explained by Roamer J. in Re. City Equitable Fire
Insurance Co.:

(i) A director need not exhibit in the performance of his duties a greater degree of
skill than may be reasonably expected from a person of his knowledge and
experience.
(ii) (ii) 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 at the meetings of committees of the board of which he is
the member. He is however, not bound to attend all such meetings, though he
ought to attend whenever, in the circumstances he is reasonably able to do so.
(iii) (iii) In respect of all duties that, having regard to the exigencies of business and
the Articles of Association, may properly be left to some other official, a
director in the absence of grounds of suspicion, is justified in trusting that
official to perform such duties honestly.

• A director of a company shall not involve in a situation in which s/he may have a
direct or indirect interest that conflicts, or possibly may conflict, with the interest
of the company. Where a person was a director in a running business but started her
independent business in competition with her own company, the Delhi High Court held
her act to be prima face not bona fide as it was done for monetary purposes and same
was in violation of her fiduciary duties as a director under Section 166. Rajeev
Saumitra v. Neetu Singh [2016]

• A director shall not assign his office to any other person unless permitted by law; if
any assignment is made, the same shall be void.

• A director 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 equal to that gain to the
company.

• If a director of the company contravenes the provisions of this section such director
shall be punishable with fine which shall not be less than one lakh rupees but which
may extend to five lakh rupees.
Statutory Duties
Statutory duties are the duties and obligations imposed by the Companies Act.

• Section 34, 35: Duty not to mislead and misrepresent in the prospectus circulated.
The prospectus which has been issued and circulated should indicate a true representation
of the business operation and affairs of a company. Any statement or omission of matter
which is misleading can lead to criminal and/or civil liability for the same.

• Section 36: Duty to not to induce investors for share subscription

Directors should not knowingly or recklessly make such statements, promises or forecasts
which are false, deceptive and misleading or deliberately conceals facts which are material
in order to induce investors to subscribe to shares.

• Section 55: Duty not to issue irredeemable preference shares

A company which is limited by shares imposes a duty on the director to not issue any
preference shares which are irredeemable.

• Section 92: Duty to file annual return to Registrar

Directors must ensure that every company files their annual return with the Registrar of
Companies in the prescribed form signed by himself/herself as well as the company
secretary.

• Section 96: Duty to hold statutory meetings of the company

Directors are entrusted with the duty to ensure that statutory meetings such as the Annual
General Meetings are conducted as required under the Companies Act, 2013.

• Section 100: Duty to hold extraordinary general meetings

• Section 128: Duty to maintain books and auditing of the books, appoint auditors
• Section 134: To authenticate annual financial statement including consolidated
financial statement.
• Section 135: Duty to ensure the execution of the company’s CSR
Every company which has a net worth which is more than 1000 crore or net profit is more
than 5 crores or more are mandated to constitute a Corporate Social Responsibility
Committee of the Board. Such a board must consist 3 or more directors of which one should
be an independent director.
• Section 139: To appoint first auditor of the company.
• Section 148: To appoint cost auditor of the company.
• Section 156 and 159: Duty to get the Directors Identification Number (DIN)
Within a month of receiving the Directors Identification Number, every existing direction
must intimate his DIN to all the companies where he serves as a director

• Sec. 166: Duty to perform certain things as enumerated in section 166.

• Section 173: Duty to attend Board meetings
If a director fails to attend all meetings held by the Board for a period of 12 months
irrespective of whether leave has been sought, his office shall be automatically deemed to
be vacant.

• Section 182: Duty not to make political contribution which is in contravention of the Act.
All companies, except Government companies or those companies which are in existence
for less than 3 financial years can contribute, directly or indirectly, a maximum aggregate
of seven and a half percent of its average net profits during the three immediately preceding
financial years.

• Section 184: Duty to Disclose interest

Under Section 184 of the Act, a director who is interested in a transaction of the company
is mandated to disclose such interest to the Board at the first meeting of the Board held
after the director has become interested. If such interest is not disclosed, the director is
liable to be punished with imprisonment for a term up to one year or a fine of fifty thousand
rupees extending up to one lakh rupees or both. That being said, as has been held in
Venkatachalapat v. Guntur Mills, if the entire Board is aware of such interest, a formal
disclosure is not necessary.

Another scenario: Where general notice of disclosure was given by directors but same
could not be taken on note in Board Meeting as no board meeting was conducted, there
was non-compliance of section 184 (Section 299 of the Companies Act, 1956).

• Section 185: Duty not receive loans from company

Apart from what is provided for in the provisions of the Companies Act, 2013, no director
or any person in whom a director is interested is liable to receive a loan, security connected
to a loan or any guarantee from the company either directly or indirectly.
• To disclose receipt from transfer of property (Section 191):
Any money received by the directors from the transferee in connection with the transfer of
the company's property or undertaking must be disclosed to the members of the company
and approved by the company in general meeting. Otherwise, the amount shall be held by
the directors in trust for the company. This money may be in the nature of compensation
for loss of office or as consideration for retirement from office but in essence may be on
account of transfer of control of the company. Contravention of this provisions shall be
punishable with fine which shall not be less than twenty-five thousand rupees but
which may extend to one lakh rupees.
• Sec. 197: Duty to receive remuneration in confirmation of provisions
• Section 305: Duty to declare solvency against a proposal to wind up voluntarily
In circumstances where voluntary winding, up of a company has been proposed, its director
or majority of directors, must at a meeting of the Board make a declaration of solvency
indicating that after due inquiry into the affairs of the company, the company has no debt
or if there are debts, the same shall be paid from the proceeds of the assets which shall be
sold in voluntary winding up.

Punishment

Punishment for continuing to be a director:

Section 167 (2), If a person, functions as a director even when he knows that the office of
director held by him has become vacant on account of any of the disqualifications specified
above, he shall be punishable with imprisonment for a term which may extend to one year
or with fine which shall not be less than one lakh rupees but which may extend to five lakh
rupees, or with both.
Disqualification of all the directors: Section 167 (3), Where all the directors of a company
vacate their offices under any of the disqualifications specified in sub-section (1), the promoter
or, in his absence, the Central Government shall appoint the required number of directors who
shall hold office till the directors are appointed by the company in the general meeting.
Section 167 (4), A private company may, by its articles, provide any other ground for the
vacation of the office of a director in addition to those specified in sub-section (1). [MCQ].
 Liability of Directors
Liability to outsiders
Ordinarily no personal liability to the outsiders if directors act for the company and within the
scope of their powers. Except:
i. Acts in their own name rather than in the name of the company.
ii. Acts ultra vires to the company
iii. Where the prospectus issued by them contains an untrue statement
iv. Where the directors fail to repay the application money within the specified time
v. When the director fails to repay the application money if allotment of shares or
debentures are not dealt in on stock exchange when it is intended in the prospectus
to be so dealt.
Liability to the company
i. When acts ultra vires of the company
ii. negligent in performance of his duties
iii. breach of trust
iv. guilty of misfeasance
v. Act mala fide
 REMUNERATION
• Managerial Persons: MD, WD, and Manager
• An executive does not come within the definition of Managerial personnel
• Sec. 2 (78) Companies Act: remuneration‖ means any money or its equivalent given
or passed to any person for services rendered by him and includes perquisites as defined
under the Income-tax Act, 1961
• No provision in Company Act that they should be paid for their services.
• But, Sec. 197 (5) and (6) lay down the manner of payment of remuneration to directors
and the limits thereto.

(5) A director may receive remuneration by way of fee for attending meetings of the
Board or Committee thereof or for any other purpose whatsoever as may be decided
by the Board:
Provided that the amount of such fees shall not exceed the amount as may be
prescribed:
Provided further that different fees for different classes of companies and fees in respect
of independent director may be such as may be prescribed.

(6) A director or manager may be paid remuneration either by way of a monthly

payment or at a specified percentage of the net profits of the company or partly by
one way and partly by the other
 Note:
- The managerial remuneration payable to the directors (including MD/WTD or
manager) shall be determined by-
- By AOA of the company
- By Ordinary resolution passed in the GM
- By a special resolution, if the AOA so requires passed in the GM
Unless there is a clear provision to that effect in AOA, directors cannot determine the
remuneration amongst themselves at the Board meeting.
The provisions don’t apply to private companies
READ THE PROVISION FROM STATUTE
1. Definition of Remuneration (Section 2(78))
• Remuneration includes any money or its equivalent paid to a director for services
rendered.
• It includes perquisites, as defined under the Income Tax Act, 1961.

2. Statutory Provisions Governing Director’s Remuneration

2.1 Overall Limit on Remuneration (Section 197)
• Total managerial remuneration to all directors, including:
o Managing Director (MD)
o Whole-Time Director (WTD)
o Manager
o Other directors (including Independent Directors)
• Shall not exceed 11% of the net profits of the company (calculated as per Section
198).
Remuneration Ceilings:

Director Type Limit on Remuneration

MD/WTD/Manager (Single) Up to 5% of net profits

MD/WTD/Manager (Combined) Up to 10% of net profits

Non-Executive Directors (if MD/WTD exists) Up to 1% of net profits

Non-Executive Directors (if no MD/WTD exists) Up to 3% of net profits

 • If the company wishes to exceed these limits, approval from shareholders via a
special resolution is required.
• In cases of inadequate or no profit, remuneration must be paid as per Schedule V.

2.2 Calculation of Net Profits (Section 198)

• Net profits are calculated before deducting:
o Taxation
o Director’s remuneration
o Compensation for breach of contract
o Voluntary donations

3. Remuneration in Case of Inadequate or No Profits (Schedule V)

If a company has no profits or inadequate profits, it can still pay directors, but:
1. The remuneration must comply with Schedule V, which provides slabs based on
effective capital.
2. If remuneration exceeds the prescribed limits, Central Government approval is
required.
Schedule V Limits (Without Government Approval)

Effective Capital Maximum Yearly Remuneration

Less than ₹5 crore ₹60 lakh

₹5 crore - ₹100 crore ₹84 lakh

₹100 crore - ₹250 crore ₹120 lakh

More than ₹250 crore ₹2.4 crore

• If higher remuneration is desired, approval from the Central Government is

required.

4. Modes of Payment of Remuneration

4.1 Fixed Pay Components (Salary & Perquisites)
• Paid monthly as salary, allowances, and benefits.
• Includes housing, medical, insurance, club memberships, car allowance, etc.
4.2 Commission on Profits
 • Directors can be paid a percentage of net profits as commission (subject to Section
197 limits).
4.3 Sitting Fees (For Non-Executive & Independent Directors)
• Directors can receive sitting fees (up to ₹1 lakh per board/committee meeting).
4.4 Stock Options (ESOPs)
• Allowed as per Section 62(1)(b) and SEBI regulations (for listed companies).
• Taxable at exercise and sale.

5. Disclosure & Approval Requirements

5.1 Approval Process
• Must be approved by:
1. Board of Directors
2. Shareholders (if exceeding prescribed limits)
3. Central Government (if required under Schedule V)
5.2 Filing with the Registrar of Companies (ROC)
• A return of appointment and remuneration must be filed within 60 days.
5.3 Disclosure in Board’s Report (Section 197(12))
• Ratio of each director’s remuneration to median employee remuneration must be
disclosed.

6. Special Cases
6.1 Public vs Private Companies
• Public Companies: Bound by Section 197 & Schedule V limits.
• Private Companies: More flexibility, but must comply with AoA and resolutions.
6.2 Remuneration in Loss-Making Companies
• Paid as per Schedule V, but excess requires government approval.

7. Case Laws on Director’s Remuneration

7.1 Ram Pershad v. CIT (1972 SC 637)
Facts:
 • The issue was whether a Managing Director of a company was an employee or an
agent for taxation purposes.
• The MD was receiving remuneration and claimed employment benefits.
Ruling:
• The Supreme Court ruled that an MD is an agent, not an employee.
• Therefore, remuneration to an MD is not "salary" but falls under business
expenditure deductions.

7.2 LIC v. Escorts Ltd. (1986 AIR 1370)

Facts:
• LIC, as a major shareholder, opposed certain board decisions on director’s
remuneration.
• The case revolved around corporate governance and shareholder rights.
Ruling:
• The Supreme Court held that shareholders have a right to question director
remuneration, but only within the legal framework.
• Companies must ensure transparency and fairness in paying directors.

7.3 NOCIL v. Union of India (1989)

Facts:
• NOCIL paid excessive remuneration to its Managing Director.
• The company argued that the profits were not affected and sought government
approval.
Ruling:
• The Bombay High Court held that excess remuneration without proper approvals
is illegal.
• Reinforced Section 197 limits and required government approval for excess pay.

7.4 J.K. Industries v. Union of India (2007)

Facts:
• The company challenged Central Government's intervention in approving
remuneration beyond Schedule V limits.
Ruling:
 • The Supreme Court upheld government authority to regulate excessive pay in loss-
making companies.
• Companies cannot bypass shareholder or government approvals.

8. Taxation of Director’s Remuneration

Type of Remuneration Taxable Under

Salary (for Executive Directors) Income from Salary

Commission, Sitting Fees Income from Other Sources

ESOPs Taxable at Exercise & Sale

The Board Meeting