The Directors draw their powers pursuant to Indian Companies Act, 2013 & Memorandum and Article of Association of Company (“Charter Documents”). However, at any stage Shareholders may restrict the power of the Board by putting restrictive provisions in the Article of Company.
Directors are appointed by the majority of Shareholders of Company at the time of Incorporation of Company and at later stage, if shareholder feels there is need to change Director then can do so by calling Extra Ordinary General Meeting or through the Annual General Meeting.
The duties and responsibilities of directors stipulated by the Indian Companies Act of 2013, can be primarily classified into the following two categories: –
- The duties and liabilities which encourage and promote the sincerest investment of the best efforts of directors in the efficient and prudent corporate management, in providing elegant and swift resolutions of various business-related issues and in taking fully mature and wise decisions to avert unnecessary risks to the company.
- Fiduciary duties which ensure and secure that the directors of companies always keep the interests of the company and its stakeholders, ahead and above their own personal interests.
Types of Director being appointed:
- Nominee Director: If articles of a company have the provisions related to appointment of Nominee Director, the Board may appoint any person as a director nominated by any Financial institution or Bank in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company.
- Additional Director: means the director appointed by the Board during the year to accommodate the emergency resignation or removal of any Director and such Directors need to be regularised by the Shareholders of Company at EGM/AGM, otherwise such director need to be remove at the conclusion of next AGM and new person to be appointed as Director.
- Alternate Director: The Board of Directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint a person, not being a person holding any alternate directorship for any other director in the company, to act as an alternate director for a director during his absence for a period of not less than 3 months.
Roles of Director:
- A Company is an artificial person and need few persons in the Board of Company to run the business of Company on behalf and welfare of Shareholders of Company. The Director acts as agent of shareholders and promotes the objects of Company so that Company can earn good profit and increase the intrinsic value of share and Earning of the Company.
- Any Whole time director appointed by the Board of Directors and approved by the shareholders of the company acts as an employee of the Company by managing day to day affairs of the Company. All the Directors operate the Company in the contours of employment Letter issued by the Board of Company.
- Directors is treated as main officer of Company who shall be liable for penal consequences under various statues, if affairs of Company are not in compliances as per Companies Act, Income Tax Act, FEMA provisions and other applicable Legal statues defined for various industries.
- Director is treated as trustees of the company, money and property of the powers entrusted to and vested in them only as trustee.
Responsibilities of Director:
- A director of the company must act in accordance with AOA & MOA.
- A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members/ shareholders as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
- A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
- A director of a company 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.
- A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates.
- A director of a company shall not assign his office and any assignment so made shall be void.
- A Director must ensure that all the affairs of Company are being done in best possible way and without compromising on legal Compliance of the Company and at same time which are not prejudicial for the interest of Company.
Liabilities of a director of a company can be defined in two categories:
- Liability to Stakeholders: The directors are not personally liable to stakeholders 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 Director shall also be liable in case of negligence & fraud by the Company, knowingly making any mis-statement or sharing false-information with the stakeholder, Failure to repay deposits on time, payment of dividend out of capital and entering into contract with related parties.
- Liability to Company: The directors shall be liable to the company for the following:
- Where they have acted ultra-vires the company: Directors have powers subject to Companies Act, Memorandum and Articles of association. Whenever they exceed these limits they are personally liable for the act being ultra vires. But if acts are intra-vires the company such acts can be subsequently ratified by the shareholders in the general meeting, otherwise, if a company suffers a loss on ultra-vires acts of its directors, the company can claim such loss from the directors.
- 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. However, the error of judgement will not be deemed as negligence.
- Where there is a breach of trust: Directors are the trustees for the money and property of the company. They hold an office of trust and if they misuse their powers they will be liable for breach of trust and may be required indemnify the losses incurred to Company. They also need to make regular disclosures on their profits, if any, earned in course of the performance of duties. Director can also be held liable for misconduct, provided it is not willful.
- Misfeasance: 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 the conduct of a director for any misfeasance or breach of trust in relation to the company.
International practice recognises a very wide spectrum of duties to be discharged by directors of a company. There is an obligation of obedience to the constitution and decisions of the company lawfully taken under it, or under rules of law permitting such decisions to be taken, the duty of loyalty towards the company and, in good faith, to promote its success to the benefit of members as a whole, to exercise independence of judgment along with care, skill and diligence in exercise of duties, to disclose transactions involving conflict of interest and seek shareholders approval as relevant, not to exploit company assets or benefits from third parties for personal purposes, the duty of special care if a company is unable to pay its debts or is facing a likely prospect of an insolvent situation. The question is whether all such duties, and more, can be recognised in law.