Name of Author- Anukriti Mathur, HPNLU
Edited by – Sulesh Choudhary
INTRODUCTION
The Company is considered as an artificial person who can own property, sue and can be sued but the collective body of individuals known as the Board of Directors conducts all activity on behalf of the company. The Board of Directors are vested with adequate power to act on behalf of the company and is the brains of the company. The Directors are defined as persons appointed to the Board of the company[1]. Indian law recognises various forms of directors including whole time, director non-executive directors, nominee directors and independent directors. The Whole Time Directors and the Managing Director are the individuals who are responsible for the day-to-day affairs of the company by their whole-time employment, with the company. The executive nominee and Independent directors are not concerned with the day-to-day activities and take part in board meetings and committee meetings, where the key corporate decisions are undertaken. [2]
Thus, the liabilities for the Whole-time Director, Managing Director and non-executive Director are different. The concept of officer-in-default is an English law concept borrowed from the English Companies Act 1948. The idea was to fix liability on officers and directors who oversee the management, for any contravention. The term officer-in-default includes whole-time director, key managerial personnel, such director(s) as specified by the board and director who had knowledge or participated in such wrongdoing and such contraventions had taken place with his/her consent or connivance. [3] The liability of directors does not merely arise on account of holding the office but actual participation and express statute which punishes such contravention committed by the company.
Sunil Bharti Mittal’s case provided for the director’s active role in the offence is a pre-requisite to hold them liable. The concept of vicarious liability on the director when a company is accused of wrongdoing.[4]
Thus, looking at the position of the director, the company law provides the director with certain powers and duties to perform its official duties.
Keywords (Minimum 5): Companies Act 2013, Directors, Powers of Directors, Duties of Director, Section 166, Section 179
POWERS OF THE DIRECTORS
General Powers Vested In Board
According to Section 179 of the Company Act, 2013, the Board of Directors are vested with powers to perform acts and things which are authorised to be performed by the company.[5] The section hereby draws a boundary wherein the director is restricted from performing any action which is inconsistent with enactment governing companies, memorandum and articles of association previously regulations made in general meetings, etc.[6] The Power of directors is crucial to the company and when in control the director exercises complete power over the working of the company until removed from the position, this highlights the director’s autonomy over the company’s affairs and hence calls for restrictions. [7]
Section 179 (3) read with Rule 8 of Companies (Meeting of Board and its Power) Rules 2014, the power enshrined to directors shall be exercised, exclusively by passing of resolution, in Board Meetings:
“ (a) asking for unpaid share money from shareholders;
(b) sanction buying back of company’s securities issued
(c) to issue securities, including debenture, whether in or outside India;
(d) to borrow money;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statements and the Board’s report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in another company;
(k) any other matter which may be prescribed:”[8]
Rule 8 Companies (Meeting of Board and its Power) Rules 2014, stipulates the following powers of directors
- Making contributions to political parties
- Matters related to appointment and removal of key managerial personnel (KMP)
- Matters related to the appointment and removal of internal auditors and secretarial auditor
Additionally, the Board is authorised by passing a resolution to delegate the financial powers including:-
- borrowing monies,
- invest the funds of the company and
- grant loan, guarantee or provide security in respect of loan
- to the following persons:
- any committee constituted by two or more directors
- the managing director
- the manager
- any other officer of the company
- for Branch offices, the principal officer of the branch office, on conditions as may be specified [9] ”
RESTRICTION ON THE POWER OF THE BOARD
In General meetings shareholders
The law provides certain exceptional situations where the shareholder’s intervention is called for even subject to the competency of the general meeting in the matter
- Misconduct by Directors
The directors while making the decisions often conflict. While they are safeguarding the company’s interest often their interest arises.[10] In this case, the director is the person who usually conducts litigation on behalf of the company and here their interest is in conflict thus they might not undertake the steps to redress the wrongdoing in the company. Here comes the role of the shareholders who may restrict the power of the board in such decisions[11]
- Incompetency of the board
When the Board of Directors fails to show their fitness to exercise the duties enshrined to them by the Act, the Act empowers the shareholders by majority to act and perform said duties. The incompetence of the directory and the casual vacancy caused failure to form quorum new instances to allow Stakeholders to exercise the the Bothe ard.[12]
- Deadlock among the Directors
Certain powers of the directors are inherited and essential. When the directors fail to show a willingness to act and exercise the above powers, it creates a deadlock.[13]. The Shareholders in case of such deadlock may exercise the powers of the Board in addition to the appointment of additional directors[14]
- Residuary Powers of the Board
The powers of the director are conferred by the Companies Act, and Charter of the company. When excess powers are required or any action otherwise is taken the same is allotted by passing of an ordinary resolution by the shareholders.[15]
In Board meeting
It is pertinent here to note that Section 179(3) provides that the above financial powers including the borrowing of monies, making of loans etc shall not be deemed under the meaning of Section 179 of the companies act when such deposits of money from the public repayable on demand or otherwise is done by a banking company in ordinary course of business.
Additionally, the borrowings by a banking company from another banking company, RBI, SBI or any other bank established by or under any statute. However, the above powers are unaffected by the right of the company to impose restrictions and conditions on the exercise of power by the board, in general meetings
The above financial power may be exercised by section 8 companies by circulation instead of at a meeting[16]
The second proviso of section 179 (3) provides that the Board of specified IFSC public companies may exercise these financial powers either by board meetings or circulation among the directors”
Section 180 imposes restrictions on the power of the board of directors of a public company and any subsidiary thereof. The following decisions taken by the board during its exercise of power can be undertaken with the consent of the resolution passed in the general meeting.
- Sale, lease or otherwise disposal of whole or substantially the whole of the undertaking where the company owns more than one undertaking. Here the undertaking implies the investment of the company exceeding 20% of its net worth as per the audited balance sheet of the preceding financial year or the undertaking has generated 20% of the total income of the company during the previous financial year by the audited balance sheet.
- To invest otherwise in trust securities where the amount of the compensation received by the company is a result of merger or amalgamation
- Borrowing money where the money borrowed together with the money already borrowed will exceed the aggregate paid-up share capital and free reserves. Here the temporary loans obtained by the company from its bankers in the ordinary course of business are excluded.
- To remit or give time for repayment for any debt from a director.[17]The Board is refrain to perform any act or powers which are exclusively vested in the hands of members and are to be exercised in General Meetings. [18]”
Appointment of the Nomination and Remuneration Committee
The Nomination and Remuneration Committee is constituted under Section 178 by the board of directors of every listed company. The Committee consists of three or more non-executive directors, of which one-half should be independent. The major function of the Nomination and Remuneration Committee is to identify the persons who are qualified to become directors, and who may be appointed to senior management by the criteria set. The committee often engage itself in the formulation of criteria determining the qualification, positive attributes and independence of a director. They also recommend the board regarding the policies related to remuneration for directors, key managerial persons and other employees.[19]
Appointment of the Stakeholders Relationship Committee
Further, the board are also obligated to constitute a Stakeholders Relationship Committee under Section 178.[20]
Power to contribute to Bona fide charitable trust and other Funds
Section 181 the Bona fide charitable trust and other Funds to receive contributions from the company subject to the approval of the Board.
To contribute to any Bonafide charitable or other funds prior permission of the company in a general meeting is required. Additionally, any amount in the aggregation of five per cent of the annual net profit for three immediately preceding years can not be contributed
Power to contribute to the political parties
The Companies Amendment Act 1985 provided for the provisions for the companies to make contributions to the political parties and for political purposes. Although the Government companies and the companies who have not completed three years of their incorporation are still not allowed to make any political contribution Under section 182. [21]
The companies are eligible to make political contributions provided that the contribution must not exceed 7.5 per cent of the company’s net profit during three immediate preceding Financial Years. Such contribution should also get sanctioned by a resolution of the company’s board and be sufficiently authorized. Such contributions must appear in the annual books and the failure to account for the account. Such political contribution may result in a penalty of up to five per cent of the amount so contributed and an imprisonment of up to six months.[22] ”
Power to contribute to the National Defense Fund
The Board of Directors or any person authorized to exercise the power of the Board are eligible to contribute to the National Defense Fund under Section 183. There is no capping limit on the amount of Contribution made to the National Defense Fund or any other fund approved by the Central Government for national security. Profit and Loss Statements of the Company must show such contributions made in the said Financial year.[23]
DUTIES OF THE DIRECTORS
In their report, the JJ Irani Committee on the lines of English law, suggested that the duties of the director are of a wide spectrum. Thus, the list of duties of the director must be inclusive and not exhaustive. In this regard, section 166 provides that the director has a fiduciary duty, duty of care, duty to comply with Laws and duty to act in the interest of the stakeholders of the company.
To sum up, the director has a duty of care, skill and diligence along with fiduciary duties.
Fiduciary Duty of the Director
The fiduciary duty includes the duty of the director, where he has to act in good faith to promote the company’s objective and for the advantage of its members, as a whole. They are required to act in the best interest of the company, its employees and shareholders.
- Breach of trust
The director’s duty was not initially mentioned in statutes but was developed by case laws. The obligation of greatest good faith and endeavours to benefit the company are pillars of the duties of directors.[24]The case of Aviling Barford Ltda is a landmark in the determination of the duty of utmost trust of the director wherein he knew about the sale at a lower price. The director was treated as a constructive trustee for the illegally gained profits.[25]
- Directors’ profit
Being in a fiduciary position, the directors are often prohibited from making any personal profit during company transactions. The Court, in the case of Albion Steel and Wire Co v Martin, accounted the director for profits earned in the sale of the company’s stock at a lower price, when the director had such knowledge.
- Doctrine of Corporate Opportunity
The Doctrine of Corporate Opportunity
denotes the actions of directors towards the benefit of a company when any business opportunity arises. The director is held accountable for any gain earned due to his fiduciary position.
- Competition by directors,
With time, Courts have observed that merely holding interest or directorship in rival concern doesn’t attract a breach of duty. Howeve,r the use of business assets for the benefit of rival concern makes the director accountable for loss, if any, occurred.
The use of business assets includes the use of business connections, Goodwill, trade assets and a list of customers of the company in question with rivals. The corporate entities to eradicate the problem of competition directors provide restraining use of such skills for the benefit of rival concerns. The Non-Compete Clause and Non-Disclosure Clauses of the contract for directors are a safeguard against the above problem. A full-time director by its very nature of employment is confined from joining any other company.
- Misuse of corporate information
The directors with the very nature of their working in the company are often exposed to confidential information. Any exploitation of unpublished and confidential information belonging to the company is considered a breach of duty and the company is eligible to inquire about the director in question and to make good. any loss, if any, is incurred. It is here noted that the knowledge or the information made by the company is considered as a property of the company. Any loss financial or otherwise, incurred because of leakage of such information is considered as a loss to the Company. The turnovers, profit margin, list of customers, and business plan are considered corporate information and any personal use of such knowledge is equivalent to being dishonest to the company. Information of such kind is restricted by the use of Injunction. The Securities and Exchange Board of India (SEBI) have formulated the regulation for insider trading to prevent and punish the use of price-sensitive, unpublished insider information in dealing with the company securities in the market.[26]
Directors duty of care, diligence and skills
Under Section 166(3), the director while he exercises his duty needs to be due and reasonable, careful in the exercise of skills and diligence as per his independent judgment.
The failure to exercise due diligence and care is often equated with failure of corporate governance.
It is believed that a director during his course of business must act in the best interest of the company, with utmost faith, diligence, care and skill in all circumstances. While acting on behalf of the company, he must undertake actions to preserve assets for the business and promote the objectives behind the formation of said company. The law provides for penalties for default, misfeasance, breach of duty and breach of trust.[27]
While we discuss the care and diligence exercised by the director in the conduct of his business, it is necessary to point out that the standard and the degree of care and skill are paramount. The Courts define the word skill and the degree of care as reasonably expected from a person by his knowledge and expertise. The standard of care demanded from a director is reasonably the business knowledge from such managers[28]
Duty to attend board meetings.
The directors are bound to attend the board meetings and other general meetings, where the matters of the company are discussed. The nature of the work of directors is intermittent and can be performed periodically. Although the directors are not bound to attend all meetings but are under obligations to attend the meetings, whenever the circumstances reasonably need them. Section 167(1)(b) considers that if a director reasonably absentees himself from all meetings within the last 12 months, without obtaining a leave of non-appearance, the position is considered vacant.[29]
Duty to not delegate the office
Section 166(6) says that the nature of the director’s job is skills and the business shall not be assigned to anyone. Such assignment of office, powers and duties of a director may be considered void.[30]
CONCLUSION & COMMENTS
The directors are considered the brains of the company and are responsible for all actions taken by the company. The directors control and manage the affairs of the company. The powers and duties of directors are multifaceted for governance in the company. Their decisions pave the path for the success of the company. They formulate plans and policies to fulfil organizational objectives. The directors share a fiduciary relationship with the company and are responsible for overseeing of company’s management and detecting potential market risks along with an attempt to neutralize it. They are legally bound to safeguard the interest of the company and related stakeholders and comply with ethics and codes governing the conduct of business.
Ultimately, the directors make decisions related to the company’s finances and day-to-day activities. They review the financial statements, and transactions and ensure proper allocation of resources in the company.
They are the face of the company who foster relationships and maintain the goodwill of the company. They deal with outsiders including shareholders, regulators and other stakeholders. They play a crucial role in incorporating good corporate culture and standards of governance.
The failure to comply with the duties and misuse of powers entrusted to directors shall attract penalties as prescribed by the law in force.
REFERENCES
Books / Commentaries / Journals Referred
- Avtar Singh, Company Law (2009).
- QC, V., Drake, D., Richardson, G., QC, D., & Collingwood, T., 2018. Directors’ Duties. Minority Shareholders. https://doi.org/10.5040/9781784514396.chapter-014.
- Quinn, J., 2019. The Sustainable Corporate Objective: Rethinking Directors’ Duties. Sustainability. https://doi.org/10.3390/su11236734.
Online Articles / Sources Referred
- DIVISION OF POWERS BETWEEN SHAREHOLDERS AND DIRECTORS, The Lawyers & Jurists (2020), https://www.lawyersnjurists.com/article/division-of-powers-between-shareholders-and-directors/ (last visited Aug 5, 2024).
- Bharti, R. (2020, August 4). Company: Introduction, evolution, features, classification, advantages. Essays, Research Papers and Articles on Business Management. https://www.businessmanagementideas.com/company-2/company-introduction/21328
- Rachit Garg, A company is an artificial person created by law, iPleaders (2022), https://blog.ipleaders.in/a-company-is-an-artificial-person-created-by-law/ (last visited Aug 5, 2024).
- Bharti, R. (2020, August 4). Company: Introduction, evolution, features, classification, advantages. Essays, Research Papers and Articles on Business Management. https://www.businessmanagementideas.com/company-2/company-introduction/21328
Cases Referred
- Sunil Bharti Mittal v. Central Bureau of Investigation and Ors., (2015) 4 SCC 609.
- Prasanna Chandra Sen v. Union of India (1990) 67 Comp Cas 87(CAL)
- Pull Brook v. Richmond Consolidated Mining Company (1878) LR 9 Ch D 610
- Escort Limited v. Union of India (1984) 3 COMP LJ 387
- Satyacharan law v. Rameshwar Prasad Major (1950) 20 COMP CAS 39
- BL Vishwakarma v. Tiffins Baryt asbestos (P) Limited AIR 1953 Mad520
- Barron v. Potter (1914) 1 Ch 895
- Bamford v. Bamford 1970 Ch 212
- Joint Receivers and Managers of Niltan Carson Ltd v Hawthorne [1988] BCLC 298
Statutes Referred
- The Companies Amendment Act 1985
- Companies (Meeting of Board and its Power) Rules 2014
- Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015
- Companies Act, 2013
ENDNOTES
[1] “Section 2(34) of Companies Act 2013”
[2] Concept of corporate personality. (n.d.). Finology. Retrieved August 24, 2024, from https://blog.finology.in/Legal-news/What-is-a-Concept-of-Corporate-Personality
[3] “Section 2(60) of Companies Act 2013”
[4] Sunil Bharti Mittal v. Central Bureau of Investigation and Ors., (2015) 4 SCC 609.
[5] Prasanna Chandra Sen v. Union of India (1990) 67 Comp Cas 87(CAL)
[6] Pull Brook v. Richmond Consolidated Mining Company (1878) LR 9 Ch D 610
[7] legal Service India. (n.d.). Corporate personality. Retrieved August 24, 2024, from https://www.legalservicesindia.com/article/173/Corporate-Personality.html
[8] “Section 179 of Companies Act 2013”
[9] “Section 179 (3) of Companies Act 2013”
[10] Escort Limited v. Union of India (1984) 3 COMP LJ 387
[11] Satyacharan law v. Rameshwar Prasad Manjoria (1950) 20 COMP CAS 39
[12] BL Vishwakarma v. Tiffins Baryt Asbestos (P) Limited AIR 1953 Mad520
[13] Barron v. Potter (1914) 1 Ch 895
[14] DIVISION OF POWERS BETWEEN SHAREHOLDERS AND DIRECTORS, The Lawyers & Jurists (2020), https://www.lawyersnjurists.com/article/division-of-powers-between-shareholders-and-directors/ (last visited Aug 5, 2024).
[15] Bamford v. Bamford 1970 Ch 212
[16] Exemption notification dated 05.06.2015
[17] Joint Receivers and Managers of Niltan Carson Ltd v Hawthorne [1988] BCLC 298
[18] “Section 180 of Companies Act 2013”
[19] “Section 178 of Companies Act 2013”
[20] Ibid
[21] Bharti, R. (2020, August 4). Company: Introduction, evolution, features, classification, advantages. Essays, Research Papers and Articles on Business Management. https://www.businessmanagementideas.com/company-2/company-introduction/21328
[22] “Section 182 of Companies Act 2013”
[23] “Section 183 of Companies Act 2013”
[24] Garg, R. (2023, June 21). Breach of a company director’s duties. iPleaders. https://blog.ipleaders.in/breach-of-a-company-directors-duties/
[25]Aveling Barford Ltd v Perion Ltd, 1989 BCLC 626
[26] Avtar Singh, Company Law (2009).
[27] Rachit Garg, A company is an artificial person created by law, iPleaders (2022), https://blog.ipleaders.in/a-company-is-an-artificial-person-created-by-law/ (last visited Aug 5, 2024).
[28] Kaushika U, Features of a Joint Stock Company, Economics Discussion (2019), https://www.economicsdiscussion.net/joint-stock-company/features-of-a-joint-stock-company/31491 (last visited Aug 5, 2024).
[29] QC, V., Drake, D., Richardson, G., QC, D., & Collingwood, T., 2018. Directors’ Duties. Minority Shareholders. https://doi.org/10.5040/9781784514396.chapter-014.
[30] Quinn, J., 2019. The Sustainable Corporate Objective: Rethinking Directors’ Duties. Sustainability. https://doi.org/10.3390/su11236734.
