Duties & Liabilities & Powers of Directors of the Company01/03/2020
The position of Director of a Private Limited Company or Limited Company or One Person Company comes with certain 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. Our intention with this article is to change 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 ethical Board of Directors, thereby benefitting all the stakeholders of a company.
Duty to act in the best interests of the Company
Directors are in a fiduciary position in relation to the company. So the Director must exercise his/her power for the benefit of the company or in the best interest of the company. A Director must also consider the interests of the company supreme and, in any case, above their personal interest. Therefore, a Director acting honestly but not in the best interests of the company is in breach of duty.
Fiduciary: A fiduciary is a person who holds a legal or ethical relationship of trust. Typically, a fiduciary prudently takes care of money for another person.
Duty NOT to misapply company assets
Directors do not have legal ownership of the company’s assets. They only have effective control of them, and they must use them and employe them for the proper purposes of the company, and in the best interests of the company.
Duty NOT to make secret profits
A Director holds a key position in relation to the company. Therefore, in the course of management of the business, the Director may get confidential and sensitive information concerning the company’s business and affairs, or trade secrets. This privileged information cannot be used by the Director for his/her personal benefit and gain to the detriment of the company.
Duty of confidentiality
Directors would have access to all the relevant information about the operations and financials of a company. However, a Director has a duty to ensure that such information is not, directly or indirectly, divulged. A Director must not disclose or make use of that confidential information for any purpose other than for the benefit of the company.
Duty to NOT permit conflict of interest
A Director of a company has a duty to not enter into any arrangement which will possibly impair the Director’s interest and cause conflict of interest with the Company. A conflict of interest arises when a person is in a position to derive personal benefit from actions or decisions made in their official capacity.
Duty to attend meetings
A Director of a company must make best efforts to attend as many board meetings as circumstances permit. In India, if a Director is absent from three consecutive meetings of the Board, or from all meetings held in three months, whichever is longer, without obtaining leave of absence from the Board, then the Director could lose his/her Directorship in the Company.
Duty NOT to exceed powers
The Memorandum of Association (MOA) of a Company states what the company is authorized to do. Whereas, the Articles of Association (AOA) of the Company state what powers are given to the Directors of the Company. It is the duty of the Directors to ensure that not only do they keep within the company’s powers but also that hey keep within the powers actually given to them in the Articles of Association.
Liability of directors:
The liabilities of directors may be discussed under three heads:
- Liability to outsiders:
The directors are not personally liable to outsiders if they act within the scope of powers vested in them. The general rule in this regard in that wherever an agent is liable, those directors would be liable, but where the liability would attach to the principal only, the liability is the liability of the company. The directors are personally liable to third parties of contracts in the following cases:
- They contract with outsiders in their personal capacity
- They contract as agents of an undisclosed principal
- They enter into a contract on behalf of a prospective company.
- When the contract is ultra-vires the company.
In default of statutory duties, the directors shall be personally liable to third parties in the following cases:
- Mis-statement in prospectus.
- Irregular allotment.
- Failure to repay application money if the minimum subscription is not subscribed.
- Failure to repay application money if allotment of shares and debentures is not dealt in on the stock exchange as provided in the prospectus.
Liability to company:
The directors shall be liable to the company for the following:
(a) Where they have acted ultra-vires the company.
It is not necessary to prove fraud in such cases or that they acted bonafide. For example, where they apply the funds of the company to objects not specified in the memorandum of association or when they pay dividends out of capital.
(b) When they have acted negligently.
Negligence may give rise to liability; there need not be fraud. But they will not be liable where they have acted bonafide and for the benefit of the company.
(c) Where there is a breach of trust.
Directors being the trusted of the company, they should discharge their duties in the best interest of the company; they should discharge their duties in the best interest of the company. Where they commit a breach of trust resulting in a loss to the company. Where they commit a breach of trust resulting in a loss to the company, they are bound to make god the loss. For example, where the directors apply company property of their own benefit they are guilty of breach of trust.
Directors are liable to the company for misfeasance. The word misfeasance covers willful negligence. Mere failure on the part of the director to take necessary steps for recovery of debts due to the company does not constitute misfeasance. If the company is in the course of winding up, the court may, on the application of the liquidator, creditor or contributory examine in to the conduct of a director for any misfeasance or breach of trust in relation to the company.
- Criminal liabilities of directors:
So far we have dealt with the civil liability of directors. For act of fraud, default in discharging their duties and misdemeanor, the act provides penalties by way of fine or imprisonment. Section 75, 95, 113,115, 143, 162, 168, 303, etc. impose penalties upon the directors for omitting to company with or contravening certain provisions of the act.
The directors are considered as the head and brain of a company. When the brain functions, the company is said to function. For the proper functioning, the directors should be properly entrusted with some powers. The directors generally acquire their powers from the provisions of the Articles of Association and then from the Companies Act.
- General Powers of a Company Director
As per Sec. 291 of the Act, the Board is entitled to exercise all such powers and to do all such acts and things as the company is authorized to do. The exceptions are the acts, which can be done by the company only in the general meetings of the members as required by law.
Specific Powers of a Company Director
- A) As per Sec. 262, in the case of a public company or a private company, which is a subsidiary of a public company, the power to fill a casual vacancy of directors is to be exercised at a Board meeting.
- B) As per Sec. 292, the following powers of the company shall be exercised by the Board by means of resolution passed at the meeting of the Board:
- To make calls,
- To issue debentures,
- To borrow moneys by other means,
- To invest the funds of the company, and
- To make loans.
The last three powers cannot be delegated to the Manager or to a Committee of Directors but must be exercised only at a Board meeting.
- Powers of Director subject to the Consent of the Company
The directors of a public company or of a private company can exercise the following powers, which is a subsidiary of a public company only with the consent of the company in the general meeting:
- To sell, lease or otherwise dispose of the undertaking of the company.
- To remit or give time for repayment of any debt due to the company by a director.
- To invest the sale proceeds of any property of the company in securities other than trust securities.
- To borrow moneys where the moneys already borrowed (other than temporary) exceeds the total of the paid-up capital and free reserves of the company.
- To contribute to charities and other funds not directly relating to the business of the company or to the welfare of the employees in any year in excess of Rs.50,000 or 5% of the average net profits of the three preceding financial years whichever is greater.
- Powers of Director subject to the Consent of the Central Government
A) As per Sec. 268, any provision relating to the appointment or reappointment of a Managing Director can be altered by the Board with the consent of the Central Government.
B) As per Sec. 295, the Board, subject to the Central Government’s consent, has the power to appoint a person for the first time as a Managing Director.
C) As per Sec. 295, the Board, only with the previous approval of the Central Government, can make any loan or give any guarantee or provide any security in connection with a loan made by any other person to:
- Any of its directors or any director of its holding company, or
- Any partner or relative of such director, or
- Any firm in which any such director or relative is a partner, or
- Any private company of which any such director is a member or director, or
- Anybody corporate, 25% or more of whose total voting power may be exercised or controlled by any such director or two or more directors together, or
- Anybody corporate, whose Board or Managing director or Manager is accustomed to act in accordance with the directions or instructions of any director or directors of the leading company.
Subject to the approval of the Government, the Board has the power to invest in the shares of another company in excess of the limits specified in Sec. 372.