DIRECTORS

Meaning of a Director : A director is an individual appointed to manage, control, and direct a

Definition (Section 2(34) of the Companies Act, 2013) "Director means a person appointed to
the Board of a company."
Board of Directors (BOD)
A company is managed by a Board of Directors, which consists of individual directors.
The BOD makes strategic decisions and ensures compliance with corporate laws.
As per Section 149 of the Companies Act, 2013, a company must have Minimum 3 directors
(public company), 2 directors (private company), and 1 director (one-person company).

DUTIES OF DIRECTORS
Directors appointed in a company have various duties to perform. The foremost duty of the
directors is to act honestly and diligently and in the best interest of the company so that the
objective of wealth maximization is achieved for the stakeholders. In no case any business
opportunity which falls within the ambit of the company be exploited by the directors for their
own benefits.
A. Duties as per Section 166: Duties of directors, more particularly statutory duties, have been
prescribed for the first time in the Statute. Section 166 specifies the following duties which are
required to be accomplished by a director:
(i) He shall act in accordance with the articles of the company, subject to the provisions of the
the Companies Act, 2013.
(ii) He shall act in good faith in order to promote the objects of the company for the benefit of
its members as a whole. Further, he shall act in the best interests of the company, its
employees, the shareholders, the community and for the protection of environment.
(iii) He shall exercise his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment.
(iv) He shall not involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.
(v) He shall not achieve any undue gain or advantage either to himself or to his relatives,
partners, or associates. In case 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.
(vi) The original director is required to carry out their duties of directorship on their own
without assigning them to another person. If an office is assigned to another person, it is void
as the shareholders may not have faith in the other person, making it impossible for a person
who does not command the faith of the shareholders to manage the company. Delegation of
duties to other staff members is not equivalent to the assignment of office.
Punishment for not accomplishing statutory duties: If any director of the company contravenes
the provisions of Section 166, such director shall be punishable with fine which shall not be less
than `1,00,000 but which may extend to `5,00,000.
B. Some Other Duties:
(i) To file various documents: It is the duty of the directors to file various documents required
to be filed with the Registrar within the specified time limits. Similarly, wherever required, the
requisite documents must also be filed with other statutory bodies. (ii) To convene General
Meetings: As and when required, Annual General Meeting (AGM) and extraordinary general
meetings (EGMs) need to be convened by the directors. (iii) To attend Board Meetings: Board
meetings are essential for a company's profitability, with a 120-day gap between meetings.
Directors are required to attend, but may not attend all. Absence from all meetings within a 12-
month period results in a director vacating their office, but they can attend more as needed.
(iv) To disclose interest: A director must ensure their interests do not conflict with the
company's interests, avoiding profit-sharing transactions. If they become interested, they must
disclose it at the first board meeting and every financial year. If they change their disclosure,
they must inform other directors. The board meeting discusses detailed disclosure of interest
and punishment for non-disclosure. (v) To approve the annual financial statements :Before
seeking auditor’s report, the annual financial statements i.e. balance sheet, statement of profit
and loss, cash flow statement, etc. including consolidated financial statements, if any, are
required to be approved by the directors. (vi) To approve and attach Board Report :A report
by the Board of Directors containing requisite particulars on the affairs of the company
including Directors’ Responsibility Statement (vii) To appoint first Auditors : It is the duty of
directors to appoint first auditors of the company.

LEGAL POSITION OF DIRECTORS

Describing the precise legal role of directors in a company can be quite challenging. Judges
have used various terms to define directors, such as agents, trustees, and managing partners.
Directors are individuals who have been duly appointed by the company to direct and manage
its affairs. However, these terms, like agents and trustees, do not cover all of their powers and
responsibilities comprehensively. In the case of Ram Chand & Sons Sugar Mills Pvt. Ltd. v.
Kanhayalal Bhargava (1966), it was acknowledged that it’s indeed difficult to provide an exact
legal position of a director in a company. Judges have described it as a multi-dimensional role,
which can be viewed as that of an agent, trustee, or manager, even though these terms may
not have the same legal implications in a strict legal sense.

Directors as Agents : A company cannot independently take action in its own capacity and
requires a representative. This representative role is fulfilled by the directors, establishing a
principal-agent relationship. In this relationship, directors possess the authority to act and
make decisions on the company’s behalf. Any contracts or transactions made on behalf of the
company render the company responsible, while the directors remain free from personal
liability. Directors merely sign and execute contracts on behalf of the company.

In the case of Ray Cylinders & Containers v. Hindustan General Industries Limited (1998), it
was clarified that directors act as agents of the company, not of its individual members unless
special circumstances dictate otherwise. A company is legally distinct from its shareholders.
However, in the case of H.P. State Electricity Board v. Shivalik Casting (P.) Ltd. (2003), it was
established that if a director provides surety in their personal capacity, and not on behalf of the
company, the company cannot be held responsible for the surety amount.

Certain circumstances were outlined in the case of Vineet Kumar Mathur v. Union of India
(1996) in which directors can become personally liable:

 When directors enter into contracts in their own names, rather than on behalf of the
company.
 When directors omit or incorrectly use the company’s name in agreements.
 When directors sign contracts or agreements in a manner that is unclear whether the
company (as the principal) or the director (as the agent) is signing and who will be liable
for future obligations.
 When directors exceed the approved limits and borrow in excess of authorized funds.

Director as a Trustee

Within a company, the legal position of director is also as a trustee. This trustee role implies
that directors manage the company’s assets and work in the best interests of the company. A
trustee is someone who can be entrusted with the company’s resources and acts to achieve
the company’s objectives rather than for personal gain. Furthermore, a trustee is granted
certain powers, such as share allocation, issuing calls, accepting or declining transfers, etc.,
which are referred to as powers in trust.

The Dale & Carrington Investment v. P.K. Prathapan case established that directors must act
in a fiduciary capacity, representing the company's best interests. The Madras High Court's V.S.
Ramaswami Iyer v. Brahmayya and Co. case highlighted the potential liability of directors as
trustees for managing company funds. However, Percival v. Wright (1902) and Peskin v.
Anderson (2001) affirmed that directors owe their duty to the company as a whole and are not
trustees for individual shareholders. They can purchase company shares without disclosing
ongoing business negotiations.

Director as a Managing Partner

Directors of a company act as representatives of the shareholders, carrying out their will and
objectives. They work on behalf of the shareholders and their interests, which grants them
significant powers and the ability to perform functions that are essentially proprietary in
nature. The company’s Memorandum of Association (MOA) and Articles of Association (AOA)
establish the board of directors as the highest authority for policy-making and decision-making.

Director as an Employee/Officer
Shareholders elect directors in a company's general meeting, who have legal rights and powers
that cannot be revoked by shareholders. Directors cannot interfere in their decision-making
processes, making them unclassified as employees. Employees typically have limited authority
and work under employer direction without interference in decision-making. Therefore, a
director's legal position can be considered an employee.
The case of Lee Behrens & Co., Re (1932) established that shareholders elect representatives to
direct a company's affairs, similar to acting as agents. Directors are not employees or servants
of the company, but can enter into special contracts to be considered employees without
specific legal constraints. Directors are also officers in certain company aspects and can be held
accountable for non-compliance with the law.
2. POWERS OF DIRECTORS
Nature and Extent of the power of directors.
The powers of directors of a company are co-extensive with the powers of the company. As per
section 179 of the Companies Act, the Board of Directors of a company shall be entitled to
exercise all such powers and to do all such acts and things as the company is authorized to
exercise and do. There are however, two limitations upon the powers of the Board:
1. The Board cannot exercise those powers which the Act, or Memorandum or Articles require
to be exercised by the shareholders in the general meeting.
2. In the exercise of their powers, the directors are subject to the provisions of the Act,
Memorandum and Articles and other regulations, not inconsistent therewith, made by the
company in the general meeting.
The Board of Directors and shareholders distribute a company's powers in a general meeting,
with the Board exercising its powers alone and the general meeting not interfering with
directors' decisions unless they act contrary to the Act or Articles. However, the shareholders
have inherent residuary and ultimate powers.
1. Where the directors’ actions are found to be mala fide. Where the actions of directors are
mala fide and against the interests of the company, e.g. clash of directors’ personal interest
with the duties towards the company.
2. Where the Board becomes incompetent to act. Where the Board of Directors has for some
valid reasons become incompetent to act, e.g. all the directors are interested in a particular
transaction.
3. Deadlock in the Board. Where directors are unable to act because of a deadlock in the
meeting of the Board of Directors. They are equally divided and, therefore, cannot come to any
decision.
Statutory Powers of the directors
As per Section 179(3), The Board of Directors of a company shall exercise the following powers
on behalf of the company by means of resolutions passed at meetings of the Board, namely:-
a) to make calls on shareholders in respect of money unpaid on their shares;
b) to authorise buy-back of securities under section 68;
c) to issue securities, including debentures, whether in or outside India;
d) to borrow monies;
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 statement 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:

As per Section 180(1), The Board of Directors of a company shall exercise the following powers
only with the consent of the company by a special resolution, namely:-
a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking
of the company or where the company owns more than one undertaking, of the whole or
substantially the whole of any of such undertakings. (“Undertaking” shall mean an undertaking
in which the investment of the company exceeds twenty per cent.)
b) to invest otherwise in trust securities the amount of compensation received by it as a result
of any merger or amalgamation;
c) to borrow money, where the money to be borrowed, together with the money already
borrowed by the company will exceed aggregate of its paid-up share capital and free reserves,
apart from temporary loans obtained from the company’s bankers in the ordinary course of
business.
d) to remit, or give time for the repayment of, any debt due from a director. As per Section
181, The Board of Directors of a company may contribute to bona fide charitable and other
funds, Provided that prior permission of the company in general meeting shall be required for
such contribution in case any amount the aggregate of which, in any financial year, exceed five
per cent. of its average net profits for the three immediately preceding financial years.
In addition to the powers specified under sub-section (3) of section 179 of the Act, the
following powers shall also be exercised by the Board of Directors only by means of resolutions
passed at meetings of the Board:-
a) to make political contributions;
b) to appoint or remove key managerial personnel (KMP);
c) to take note of appointment(s) or removal(s) of one level below the Key Management
Personnel;
d) to appoint internal auditors and secretarial auditor;
e) to take note of the disclosure of director’s interest and shareholding;
f) to buy, sell investments held by the company (other than trade investments), constituting
five percent or more of the paid up share capital and free reserves of the investee company;
g) to invite or accept or renew public deposits and related matters;
h) to review or change the terms and conditions of public deposit;
i) to approve quarterly, half yearly and annual financial statements or financial results as the
case may be