Position of a Director in a Company

Introduction:

A company in legal terms is just an entity acting as per the laws and is an artificial entity working and serving the interests of a large number of people. It doesn’t have a soul or body of its own that’s why it is termed to be artificial in the legal sense. It functions as per the provisions mentioned in the Companies Act, 2013. The person who is having supreme authority and is entrusted with the management of its affairs is the director.

Directors function as the brain of the company and are responsible for making decisions for the benefit of the company. Director needs to act within his designated powers and comply with the company’s policies. The most important role which a director plays while being in charge of the pivotal position is that he/she should act in good faith and take decisions rationally which promotes the success of the company and supports its allies.

Who is a Director?

According to section 2(34) a director is a person of top most authority and is expected to perform certain duties and fulfill required responsibilities which are meant to be performed for the smooth functioning as a director of a company as per Companies Act,2013. Director is said to be the brain and backbone of the company.

Collectively all the directors are known as the board or board of directors. The supreme authority to take decisions vests in the hands of the directors. A person who is given the position of a director is entrusted with responsibilities and has to look after the best interests of the owners and shareholders. The position of the board is a position of holding trust as they need to look after the interests of a large number of people: employees, shareholders, owners, public and external environment as well. 

Minimum and Maximum no. of Directors

According to section 149(1)[1] , the minimum number of directors which are mandatorily needed for the functioning of a public company is 3 whereas in the case of a private company minimum of 2 directors are needed for its smooth functioning. For a one-person company as the name of the type of company suggests 1 person is needed to being a director.

Resident ship of Director

Now there a question arises as to the resident ship of the director?

As for the person in question he/she has to stay in the home country i.e., India for at least a period of 12 months. in the case of a public/private company at least 1 director has to fulfill the aforementioned criteria for opening a company in India as per section 149(3) of CA,2013.  

Board of Directors

The Board of directors represents the shareholders of the company and is usually a group of people who are unanimously elected by the shareholders. The board is a lawful governing body that holds meetings at regular intervals to assess the company’s operations, ventures, profits & losses.

Duties and Responsibilities of the Board

The board of directors is under the obligation to fulfill certain duties and responsibilities given under the company law, which are as follows:

1. They need to prepare and deliver an annual report of the company within 6 months from the close of the ongoing financial year which includes financial statements of the company.
2. They need to formulate a business plan – relating to the expenses and revenues i.e., budget prior to the commencement of the next financial year, and get approvals from the shareholders according to the articles of association.
3. They need to hold an annual general meeting either annually or when necessary and have to send invitations to all the shareholders with all the details of the meeting.
4. They need to notify the creditors of the company in case there is any reduction in the capital at least 7 days ahead of the same through any newspaper.
5. Also, in transactions such as mergers, acquisitions, segregation, or dissolution, they have to prepare transaction plans and make the announcements for the same in newspapers, etc.

Liabilities of the Board

The board of directors will not be held liable in case:

1. He/she proves that the loss suffered by the company is not due to his/her act.
2. He/she does not have any conflicting interests with regard to the company.
3. He/she is acting in good faith and for the benefit of the company in accordance with the rules and regulations mentioned in the company law.
4. He/she has taken all the necessary precautionary measures to control the damage or reduce the amount of loss faced by the company.

Duties of the Director

According to section 165, certain duties [2]are enlisted in the act, which is as follows:

• He/she needs to act in accordance with the articles of association of the company.
• The person needs to act with utmost sincerity and integrity in order to promote the objects of the company and with a bonafide intention for the people associated with the company such as employees, owners, shareholders, external environment, etc.
• The person needs to perform his duties with utmost sincerity and honesty as well as with due care and diligence. Moreover, he needs to pass independent judgment for the matters of the company.
• He/she must not get himself/herself involved with such matters that may come in conflict with the interests of the company and the company incurs any loss due to his/her actions.
• He /she must not intend to achieve or accrue any personal gain or for his/her relatives or any whatsoever family member. If the director is found doing such an attempt and is found guilty then he needs to pay an equal amount to the gain as compensation in the name of the company.

If the director is found doing any act which is in or may contradict the provisions mentioned in the act then the director is liable to pay a minimum amount of Rs. 1,00,000 which is extendable to Rs. 5,00,000 as well.

Position of a Director

In the Act, there is no certain position defined for the director of a company. In the companies act, even the definition of a director is not mentioned exclusively. There is no restriction mentioned in the act for the position of the director. A director can be a trustee, agent, employee, managing partner, etc. [3]

Director as an Employee

In Lee v. Lee’s Air Farming Ltd [4], the privy council gave the judgment that the director may work as an employee in the company in different capacities as to the regular employees. The council stated that both the director and the company are separate legal entities. Therefore, there can be a contract in between the two.

Director as an Agent

In Ferguson v. Wilson [5] , it was held that the company has no existence and is artificial in nature and the only way the company can function is by way of its directors. The court gave the name of the relationship between director and company as the relation between a principal and an agent. Further, the liability of all actions will be taken by the company and not the director.

In Elkington & Co. v. Hurter [6] , the goods were supplied on the orders of the chairman where he promised to issue debentures for the price but did not do so and the company, later on, went into liquidation. It was held that where a contract is signed between a party and the director, the director acts on behalf of the company and is the company’s legal representative. Further, the director can’t be held liable for any actions of the company.

Director as the Trustee

Here a question arises as to whether the directors work as a trustee for the shareholders or the company? In the case of Percival v. Wright,[7] it was held that directors of the company are trustees to the company and don’t hold any obligation towards individual shareholders.

In the case of Ramaswamy Iyer v. Brahmayya & Co[8] , proper boundaries were set and clarity in the working of directors as trustees was laid down. It was held that directors are trustees as for the allocation of funds and proper functioning and if there is any misuse of funds then they can also be held liable for the same. In the event of their death, the powers will be transferred to their legal representatives.

Conclusion

Directors of the company are mainly people who are just entrusted with the management of its affairs. They maintain a fiduciary relationship with the shareholders as well as with the company as they act both as the agent and trustee.

They work in different capacities at different times in order to ensure smooth and efficient working of the company. They also need to work in accordance with the laws and are expected to take proper actions in case the company does any default.

Therefore, according to the companies act the director holds a responsible position and is obliged to undertake responsibilities as they hold an important position in the company both in its administration and management.

---

References:

[1] Companies Act, 2013

[2] https://www.icsi.edu/media/portals/0/APPOINTMENT%20AND%20QUALIFICATIONS.pdf

[3] http://www.legalservicesindia.com/article/287/Position-of-Directors-In-A-Company.html

[4] 1961 AC 12

[5] (1866) 2 Ch App 77: 15 LT 230

[6] 1892) 2 Ch 452

[7] [1902] 2 Ch 421

[8] {1966} 1 Comp LJ, 107, Madras