Directors: Duties and Liabilities

Introduction:

With the advancement in the business, the companies are expanding their scope. Companies now are creating an aura of democracy in their affairs. Shareholders are considered supreme power who appoint ministers in the form of directors to run the business and make money for them. These directors hold the necessary power and responsibility required for the business.

Since a corporation is intangible, artificial, invisible, and can only foresee from the eyes of the law, it neither has a mind, body, or soul, thus needs a living person to carry out its activities. A living person holds the senses and the knowledge/intention to carry out the activities in the most favourable form. The Companies Act, 2013 tries to maintain a balance between the shareholders and the directors via the rights and responsibilities entitled to them[1]. Penal and legislative laws consisting of strict judicial reforms endorse company law to strengthen it. It also ensures that the provisions of this law are abiding and the legal sanctity of the organization is maintained, avoiding any hindrance in corporate governance.

Initially, Company Law, 1956 didn’t talk about the role of the directors in the mainstream.  Responsibilities were assume based on the rights granted to them. Section 291 of the Companies Act, 1956, talked about the general powers and duties of the board. The role of directors got derived from Section 291 as well as other applicable laws[2]. Later with the growth and expansion of the corporate sector, Section 291 turned out to be vague in defining the responsibilities of directors. It also affected the role of directors in the company. Various legal precedents provided a bit of clarity, but there was an immediate need for a well-defined proviso stating the responsibilities of directors.

The company law was amended in 2013 and is now known as Company Law 2013.  The amendment in same gave a detailed analysis of the role and responsibilities of the directors. Section 149 even recognizes the concept of the independent director, initially part of listing agreements only. It codifies the duties and liabilities of the same. 

These amendments are supported and supplemented with some corporate governance norms of SEBI, ensuring harmony and consistency with the provisions of the Companies Act, 2013. This law came into effect on 1st April 2014.

Directors are key managerial members of the company, with diverse rights.  They hold a crucial position, with some mainstream responsibilities of the company. The flawless growth, profit, and efficiency of the company, highly depend on the judgment of directors. Henceforth, it becomes of utmost importance for the company to define its roles and responsibilities backed with some legislative provisions. A director appointed by the board of the company mainly includes directors.

Directors

The term “director” as defined in Section 2(34) of the Companies Act, 2013, states that, “a director appointed by the board of the directors” wherein board of directors means “the collective body of the directors of the company.”  This definition is restricted, whereas the aura of director in correspondence to Companies Act, 1956 could refer to anyone holding the position of director by whatever name called.

Section 149 makes it mandatory for the company to have a Board of directors, which includes:

• In case of the public company, Minimum three and maximum 15 nos. of directors; at least 1/3rd of Independent Directors;
• In case of private company: Minimum 2 and Maximum 15 nos. of Directors;
• In case of one person company: minimum one director
• Anyone women director;
• At least 1 Director stayed in India for a minimum of 182 days in the previous year.[3]

The Companies Act, 2013 also gave a separate recognition to the independent director, which was previously part of the listing agreement. Directors are other than the full-time director or the Managing Director or a nominee director who fulfils the criteria mentioned in Section 149.

Section 2(54) of Companies Act defines managing directors as, a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called[4].

A director being granted a Director Identification Number (DIN) under Section 266A and 266B needs to submit a declaration stating that he is decertifying from becoming a director, ensuring that he gets nominated in the general board of meeting.  DIN refers to the unique identification number issued to the existing or potential directors of the corporation.

The Board of Directors holds the authority to appoint an additional director, who can discharge its duties till the next general meeting. The alternate director can act as director for not less than three months and should not exceed the time allotted by the director, appointed in replacement.

As per the principle of proportional representation, Section 161(4) provides the article of the company to appoint directors not less than 1/ 3rd of the total number of directors, and such appointment be made once in 3 years filling the casual vacancies.

Section 164 talks about disqualification. It talks about the minimum requirement for the eligibility of a person to be a director. It states a person with an unsound mind, undischarged insolvent, convicted of imprisonment of 7 years or more, convicted of the offence dealing with related party transactions under Section 188 during the past five years; are disqualified from appointing to be the director. It also includes the person who hasn’t received the DOI, someone who has not paid the calls in the context of shares held in the company, someone disqualified by the court through an order. The director who has failed to repay deposit, debentures, or distributed dividend for one year, till the expiry of 5 years, is also debarred from the same. Private companies can pronounce additional requirements in their articles related to disqualification.

Directors do not hold any financial relationship with the company, nor do they owe any share in the company other than the sitting fees they receive.

Duties of Directors

With the increase in the collapse of corporate governance in this modern era, there was a need of amended in Company Law, 1956. Therefore, after the battle of 50 years, the newly amended law known as Company Law, 2013 came into force. It depends upon the responsibilities of the board, protection of shareholders, self-regulation, and openness through disclosures. This amendment brought a clear explanation of the liabilities and rights of directors. It also talks about the penal action against the directors on the failure to comply. Section 166 of the Companies Act, 2013 talks about the duties of the directors.

1. A director needs to comply with the provisions of the Article of Association. 
2. It is the responsibility of the director to keep the interest of the company and shareholders ahead of his. He must have a fiduciary relationship. In furtherance above-stated point, the director must act in good faith and promote the purpose of a company. This duty also comes with an inbuilt liability known as pre-incorporation liability.[5]Under this, the company cannot agree to its incorporation as it does not have legal existence. If subscribing to a contract, the company cannot endorse that contract after incorporation. It has to make a novel contract else the body acting on behalf of the company may find themselves personally liable, as held in the case of Kelner v. Bexter[6].
3. He holds the power of independent judgment but needs to exercise it with due care and diligence, skill. In the case of R.K. Dalmia v. The Delhi Administration[7], the court held, directors are agents of the company. Consequently, if a director has claimed his liability in a company contract, either expressly or impliedly, he will be personally liable.    
4. A director must be prudent enough to know the aspect of conflicting interests and handle those conflicts reasonably.
5. With compliance to point number 5, he must act as a mediator in the contingency of conflict between the shareholders.
6. A director must maintain the secrecy of the company. He must maintain the confidentiality of the documents, transactions, commercial secrets, technologies, sensitive proprietary information, unpublished price. The disclosure of such a secret is prompted when the board of directors approves it. This piece of information can also be disclosed in the case when its revelation is made mandatory by law.
7.  Before approving the party related transactions, a director must ensure adequate brainwork is been done and it is in the interest of the company.
8. A director cannot delegate his responsibility or his office if made becomes void.
9. Must hold an honest, candid attitude against impartial behaviour, violation of code of conduct, or any suspected fraud of the company. There is a maxim which says, delegatus non- potest delegare, which means that“delegated powers can further not be delegated.” Shareholders appoint a director who is faithful or trustworthy on competency, integrity, skill. The faith in a company cannot deputize to someone. Directors holding control of the company’s affairs cannot get rid of their managerial responsibilities by nominating a person on their behalf, as quoted in the case of J.K. Industries Limited v. Chief Inspector of Factories.[8]
10. A director must ensure the deliberate mechanism of the company, and make reasonable decisions so that the users of a company aren’t affected.[9] In the case of violation of any duties, the director can be held liable for a fine of INR 2,500 may extend to 25 crores. In the case where the director is proved defaulter by the court, he shall be fined the amount of INR 1 lakh extending to 5 lakhs. 

Liabilities of Directors

The obligation of the directors can either be joint or collective depending upon the act of bitterness caused in the interest of the company. Since directors are the agents of the company, hence they can be held liable, on behalf of the company, in the circumstances talked below:

1. Commission of fraud. The fraud here signifies the act, omission, or concealment of any fact, abuse, or
   intentional act to benefit himself or to injure the person deceived.
2. Default of Tax Liability. The directors will be liable for non-payment of the amount in case of his default. Under Section 179 of the Income Tax Act, 1961, all persons are liable for the outstanding payment also the accounts of directors can freeze. In the case of Gurudas Hazra v. P.K.Chowdhry[10], it was held that the default on the part of the company was not attributable to any breach of duty on the part of directors. 
3. Failure to refund the share application or excess in application money.
4. Failure to pay for qualification shares.
5.  Civil Liability in case of misstatement in Prospectus.
6. Cheque Bounced or dishonoured: Under the Negotiable Instrument Act, 1881, the signing of the dishonoured might lead the director into trouble. This act can lead to the prosecution of the director or the company.
7. Offences under Income Tax, 1961
8. Offences under Labor Law, notably the case of Employees Provident Funds and Miscellaneous Provision Act, 1952, and Factories Act 1958.
9. Fraudulent Business Conduct and all associated debts and contracts implemented
10. Director’s failures in making disclosures prescribe by the SEBI (Acquisition of Shares and Takeovers) Regulations Act, 1997 and the SEBI (Prohibition of Insider Training) Regulations Act, 1992, might attract legal proceedings by SEBI[11].

Conclusion

The directors must attend the general board meetings. He must be fully aware of the circumstances of a company, promising transparency between shareholders and the company. They must prepare themselves for the board meeting, holding appropriate answers to all the aspects of the company. The directors must prepare a report answering all the questions of the situation in a company providing a clear view on the position of the company. All the questions and the suggestions shall be jot down and solved to neglect any legal hassle in the life span of the company.  Proper training must be given to the directors on corporate governance to ensure the best movement of the directors in the interest of the organization. With the amendment in Company Law, 2013, Directors liability insurance is an integral part for directors.

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References:

[1]Anubhav Pandey, ipleaders, Duties of Directors under the Indian Companies Act, 2013; May 19, 2017; https://blog.ipleaders.in/directors-duties/

[2]PranjaliSahrma, Latest Laws,All About Roles and Duties of A Director Under Companies Act, Sep 14, 2018;https://www.latestlaws.com/articles/roles-and-duties-of-a-director-under-companies-act/

[3]Avtar Singh, Company Law, 17^th Edition, Page No. 265

[4]The Companies Act, Act 18 of 2013

[6] (1866) LR 2 CP 174

[7]1962 AIR 1821, 1963 SCR (1) 253

[8] 1962 (SC) 1351

[9]Avtar Singh, 17^th Edition, Company Law, Page no. 297

[10] 2002 109 CompCase 530 Cal

[11]CS S. Dhanpal, Tax Guru, Roles and Responsibilities of Directors under Companies Act, 2013,31 Jan 2014;https://taxguru.in/company-law/roles-responsibilities-directors-companies-act-2013.html