1.

2 Learning Outcome
At the end of this module one shall be able to understand the following:

Who is director?

What is his position in the company?

How a director is appointed in a company?

What are the qualifications of a director?

How a director is removed from his office?

What are the powers of a director?

What are the duties of a director?

What are the liabilities of a director?

1.3 Director: Meaning and Definition

A company is a legal entity and does not have any physical existence. Lord Reid held that, “A
living person has a mind which can have knowledge or intention and he has hands to carry
out his intention. A corporation has none of these it must act through living persons1.” It can
act only through natural persons. The person, acting on its behalf, is called Director. A
Director is any person, occupying the position of Director, by whatever name called2. Now
there is slight change in the definition and it is defined in section 2(34)3 as “director” means a
director appointed to the Board of a company. They are professional men, hired by the
company to direct its affairs. But, they are not the servants of the company. They are rather

1
Tesco Supermarkets Ltd. v. Nattraso, [1977] AC 153 at 170.
2
Section 2(13) of Companies Act, 1956.
3
Companies Act, 2013.
the officers of the company. Only individual can be appointed as directors in company4.
Supreme Court 5 pointed out reason as why it is necessary that a director must be an
individual. It said that office of director is office of trust and in case of failure to carry out this
trust someone should be held responsible. It simply means a firm, company or other legal
persons cannot be directors of company but in earlier days a firm used to direct a company
and it was knows as managing partners or managing trustees. Directors are public institution
while companies are social institutions6.

It is not the name by which a person is called but the position he occupies and the functions
and duties which he discharges that determine whether in fact he is a Director or not. So long
as a person is duly, appointed by the company to control the company's business and,
authorized by the Articles to contract in the company's name and, on its behalf, he functions
as a Director. The Articles of a company may, therefore, designate its Directors as governors,
members of the governing council or, the board of management, or give them any other title,
but so far as the law is concerned, they are simple Directors7.

1.4 Position of Directors

The directors are agents of company. They are trustees of company and they are also officer
of company. They are professional men hired by the company to direct its affairs yet they are
not servant of company8. But by a separate service agreement he can offer his professional
services to company as Lee was doing in his company of which he was sole employee and
sole director 9. The companies Act, 2013 is silent about their position in the company. Bowen
LJ clarifies his position in the company and he says that, “Directors are described sometimes
as agents, sometimes as trustees and sometimes as managing directors. But each of these
expressions is used not as exhaustive of their powers and responsibilities, but as indicating
useful points of view from which they may for the moment and for the particular purpose be
considered10.”

4
Section 149, Companies Act, 2013.
5
Oriental Metal Pressing Works P. Ltd. v. B.K. Thakoor, (1961) 31 Comp Cas 143.
6
Chiranjit Lal v. U.O.I., AIR 1951 SC 41 at 49 quoted in Dr. Avatar Singh, Introduction to Company
Law, (Eastern Book Company, Lucknow, 2006)p. 63
7
Robert R. Penington, Company Law, (Oxford University Press, New Delhi, 2006), p. 646.
8
Moriarty v. Regent’s Garage and Engg. Co., [1921] 1 KB 423.
9
Lee v. Lee’s Air Farming Ltd., (1961) AC 12.
10
Imperial Hydropathic Co. v. Hampson, (1882) 23 Ch.D. 1.
 Position
of Agents Trustees Officers
directors

1.4.1 Directors As Agents of Company

Lord Cairns observed that, “What is the position of the directors of a public company? They
are merely agents of a company. The company itself cannot act in its person for it has no
person; it act only through directors and the case is as regards those directors, merely the
ordinary case of principal and agent11.”

In agency a person is employed to establish, maintain and annul a relationship of principal

with third parties and he has necessary authority for the same and directors also enjoy the
same authority in terms of company and third parties. This authority they get from
memorandum and articles of the company and if their act is beyond it, it is ultra vires.
Directors can bind the company as agents only when they act collectively as a Board of
directors12. However the directors do not fit in the role of agents as they are selected not
employed with authority and powers of directors are wide and independent in comparison to
agents.

1.4.2 Directors as Trustees of Company

In trust an author creates a trust for the beneficiary which is managed by a trustee. Lindley LJ
on the basis of analogy observed that, “Although directors are not properly speaking trustees,
yet they have always been considered and treated as trustees of company which comes to
their hand or which is actually under their control and ever since joint stock companies were

11
Ferguson v. Wilson, [1886] LR 2 Ch 77.
12
K.S. Anantharaman, Lectures on Company Law and Competition Act,(LexisNexis, Nagpur, 2009) p.
205
invented, directors have been held liable to make good moneys whey have misapplied upon
the same footing as if they were trustees13.”

Being trustee of the company, they are custodian of the assets of the company and they
should apply the funds in best interest of company. If they misapply, misappropriate or divert
the use of fund for their own vested interests they must be held liable. In Percival v. Wright 14
the directors were not held liable for buying shares from shareholders who were not disclosed
about a pending transaction of sale of an asset of the company. But if they would have
induced the shareholders to sell their shares to them concealing the fact that they were going
to merge the company to another company at a profit, they would have become trustees of
this profit to the individual shareholders. Supreme Court held that, “The directors of
companies have been variously described as agents, trustees or representatives but one thing
is certain that the director’s action on behalf of a company is in a fiduciary capacity and their
acts and deeds have to be exercised for the benefit of the company. They are agents of the
company to the extent they have been authorized to perform certain acts on behalf of
company. In a limited sense they are also trustees for the shareholders of company15.”

The directors must exercise all his powers in utmost good faith of the company as they stand
in fiduciary capacity to the company. However the directors are not trustees as strictu senso
as there is no author of a trust all agreements are singed on behalf of company by the
directors.

1.4.3 Directors as organ or Officer of Company

Directors are limbs and organs of the company as Calcutta High Court observed that, “We
should treat certain officials as organs of the company, for whose action the company is to be
held liable just as a natural person is for the action of his limbs16.” The director is a vital
organ of company absence of which may paralyze the company.

The companies Act 2013 in section 2(59) treats them as officer of company. It says that,
“officer” includes any director, manager or key managerial personnel or any person in
accordance with whose directions or instructions the Board of Directors or any one or more of

13
Re Land Allotment Co., [1894] 1 Ch 616.
14
(1902) 2 Ch 421.
15
Dale and Carrington Investment P.Ltd. and Anr. v. P.K. Prathapan and Ors., (2004) 122 Comp Cas
161 SC.
16
Gopal Khaitan v. State, AIR 1969 Cal 132.
the directors is or are accustomed to act”. Section 2 (60) keeps the directors in category of
‘officer in default’ and the Companies Act, 2013 at several places punishes him as ‘officer in
default’ for non-compliance of its provisions. Apart from being officer, they can serve to any
post in official capacity so they can also be employee of company17. They are also taken as
managing partners when they are having personal liabilities and golden shares i.e.
qualification share. In such cases all the good decisions made by them shall fetch them more
money in form of dividends. The directors also can be employees of company. It was held
that, “Directors are elected representatives of the shareholders engaged in directing the affairs
of the company in its behalf. As such directors are agents of the company but they are not
employees or servants of company. However there is nothing in law to prevent a director
from accepting employment under the company under a special contract which he may enter
in to with the company18.”
1.5 Number of Directors and Inter-company Directorship
A public company shall have minimum three and private company shall have minimum two
directors and every company may have maximum 15 directors which can be raised by passing
special resolution and one of such directors shall be a woman19. Every company has to have at
least one Indian resident director 20 and 1/3rd directors must be independent directors who
essentially are not connected with company and officers of company like promoters and
directors.
Section 165 provides that no person, after the commencement of this Act, shall hold office as
a director, including any alternate directorship, in more than twenty companies at the same
time. The maximum number of public companies in which a person can be appointed as a
director shall not exceed ten. If a person is appointed as director he may resign from one
company or chose his option and intimate the concerned company. It also explains that for
reckoning the limits of public companies in which a person can be appointed as director,
directorship in private companies that are either holding or subsidiary company of a public
company shall be included. Earlier there was no limit for private companies and this
limitation did not apply to subsidiary companies and alternate directorship but now even
those are included. Charitable companies and unlimited companies may exceed this limit.

17
Lee v. Lee’s Air Farming Ltd., (1961) AC 12.
18
In Re Lee Brehens & Co., (1932) 2 Comp Cas 588.
19
Supranote 13.
20
Who resides in India for 182 days.
1.6. Qualification & Disqualification of Directors

1.6.1 Qualification of Directors

As we know that a director is highly important person in corporate affairs so he must be very
qualified but Companies Act does not lay down any academic qualification for directorship
which seems logical being right to trade as a fundamental right it must be available to
everyone. The companies Act in order to weed out dishonest persons from running companies
lays down many requirements. These requirements or qualifications are following:
1. The people may take help of director database21 to get the name of people who can
work as independent directors.

21
Section 150 as maintained by Bombay Stock Exchange
 2. The person who intends to work as a director shall apply to central government for
Director Identification Number (DIN) which shall be allotted to him once only22.
3. Now the requirement of qualification shares is not there in the new Act under section
270 of the old Act which provided that a director shall have to acquire the
qualification share within two months otherwise he shall be punished. One must be
mindful that this was earlier also not a provision of companies Act but if company
wanted to have this they could have by a provision in the Articles of Company. But
now new Act does not provide anything about qualification shares. One must be
mindful that qualification shares bring sense of responsibility and develops
belongingness to the company of the director. A company even now may have it
provided this does not contravene the provisions of Companies Act, 201323.

1.6.2 Disqualifications

Besides aforementioned qualifications a director needs following things in negative. These

are disqualifications. Section 164 provides for disqualifications of directors. According to it,
“A person shall not be eligible for appointment as a director of a company, if :
(a) He is of unsound mind and stands so declared by a competent court;
(b) He is an undischarged insolvent;
(c) He has applied to be adjudicated as an insolvent and his application is pending;
(d) He has been convicted by a court of any offence, whether involving moral turpitude or
otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a
period of five years has not elapsed from the date of expiry of the sentence:
Provided that if a person has been convicted of any offence and sentenced in respect thereof
to imprisonment for a period of seven years or more, he shall not be eligible to be appointed
as a director in any company;
(e) An order disqualifying him for appointment as a director has been passed by a court or
Tribunal and the order is in force;
(f) He has not paid any calls in respect of any shares of the company held by him, whether
alone or jointly with others, and six months have elapsed from the last day fixed for the
payment of the call;
(g) He has been convicted of the offence dealing with related party transactions under section
188 at any time during the last preceding five years; or

22
Section 153 to 159 of the Companies Act, 2013.
23
Section 6 of the Companies Act, 2013.
(h) He has not complied with sub-section (3) of section 152 and has not obtained DIN.
Apart from these requirements a person must not be director, including the company in
which he intends to be appointed as director, in more than 20 companies24. Section 164(2)
provides for an additional disqualification which says that no person shall be re-appointed in a
company or appointed in another company as a director if a company of which he has been
director has failed to file financial statement or annual returns for three consecutive financial
years or has failed to return the interest on public deposit etc for one year or more.
All these qualification needs a little bit explanation. Unsoundness of mind is related with
contractual capacity which is related with cause-effect theory. If a person is capable to form a
rationale judgment about what is he doing and what is the effect of his doing he is of sound
mind. Insolvency again is related with contractual capacity. Moral turpitude offences are
essentially white collar crimes i.e socio-economic offences. Punjab High Court held that
conviction on a criminal charge is also a moral turpitude offence. It said that moral turpitude
is, “Anything done contrary to justice, honesty, principle or good morals, an act of baseness,
vileness or depravity in the private and social duties which a man owes to his fellow men or
society in general contrary to accepted and customary rule of right and duty between man
and man25.”
In such cases appointment is possible after cooling off period (5 years). But in conviction for
serious offences no appointment is possible and this proviso has been added for first time to
keep perpetrators out of corporate governance. Related party transaction means siphoning off
the money of corporation by related party transaction.
If a person has been a director in company which defaults in filing annual return or does not
repay public deposits, he cannot be appointed as director in another company. It was
challenged earlier in Supreme Court26 which upheld the constitutionality of provision. It held
that, “The judgment while dismissing the petition held that bringing in of section 274(1) (g)
of the Act was to serve a larger public interest and did not violate the fundamental rights or
any other rights of the petitioner. The provision is no punishment on the company, it only
renders directors of the defaulting company incapable of acting as directors of the defaulting
company incapable of acting as directors for a certain period.

1.7 Appointment of Directors

24
Section 165.
25
Durga Singh v. State of Punjab, AIR 1957 Punj 97.
26
Snowcem India Ltd. v. U.O.I., (2005) 60 SCL 50.
There are various methods to appoint various types of directors in various types of
companies. Some of such methods are following:

1.7.1 First Directors/Deemed Directors/Shadow Directors/Promoters as Directors

Generally Articles of the company provides for such directors27. But if the Articles are silent
about it then subscribers of Memorandum are deemed to be first directors of company. They
shall hold office till first AGM when the directors are finally appointed. As the section 149
requires the directors to be appointed within one year of incorporation so the same must be
done as soon as possible. No person shall be appointed as a director of a company unless he
has been allotted the Director Identification Number under section 154 and a declaration that
he is not disqualified to become a director under this Act. A person appointed as a director
shall not act as a director unless he gives his consent to hold the office as director and such
consent has been filed with the Registrar within thirty days of his appointment.

27
Section 152.
1.7.2 By Shareholders in General Meeting
Shareholders in Annual General Meeting appoint minority director, rotational directors,
independent directors. Section 151 provides that a listed company may have one director
elected by such small shareholders. Section 152 provides that every director shall be
appointed by the company in general meeting. In a public company 2/3rd of such directors
shall be persons whose period of office is liable to determination by retirement of directors by
rotation. Others 1/3rd shall be whole time directors. Section 149(4) provides that every listed
public company shall have at least one-third of the total number of directors as independent
directors.
At the subsequent AGM the directors to retire by rotation at every annual general meeting
shall be those
who have been longest in office since their last appointment, but as between persons who
became directors on the same day, those who are to retire shall, in default of and subject to
any agreement among themselves, be determined by lot. The maximum size of board is
fifteen and in counting the total number of directors independent directors are not counted. In
public company every director is appointed by a single resolution while in a private company
all directors may be appointed by a single resolution.
If the vacancy of the retiring director is not so filled-up and the meeting has not expressly
resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next
week, at the same time and place, or if that day is a national holiday, till the next succeeding
day which is not a holiday, at the same time and place. 28 If at the adjourned meeting also, the
vacancy of the retiring director is not filled up and that meeting also has not expressly
resolved not to fill the vacancy, the retiring director shall be deemed to have been re-
appointed at the adjourned meeting.
1.7.3 By Board of Directors
According to section 161the articles of a company may confer on its Board of Directors the
power to appoint any person, other than a person who fails to get appointed as a director in a
general meeting, as an ‘Additional Director’ at any time who shall hold office up to the date
of the next annual general meeting or the last date on which the annual general meeting
should have been held, whichever is earlier. Likewise for temporary absent of three months of
a director from India can be filled by ‘Alternate Director’. If the office of any director
appointed by the company in general meeting is vacated before his term of office expires in
the normal course, the resulting casual vacancy may, in default of and subject to any

28
Section 152(7)
regulations in the articles of the company, be filled by the Board of Directors at a meeting of
the Board. Such directors are termed as ‘Casual Director’. The provision of additional and
alternate director is a periodic arrangement and cannot bypass the general process of
appointment by shareholders in general meetings by remaining on board for years29.

1.7.4 By Central Government/National Company Law Tribunal

Section 161(3) provides that subject to the articles of a company, the Board may appoint any
person as a director nominated by any institution 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. The power under
section 408 of old Act has now been deleted where Central Government in case of oppression
and mismanagement could appoint its nominee directors on the board now such power has
been conferred upon National Company Law Tribunal under section 242.
1.7.5 By Third Parties
The Articles of the company may authorize the third parties to appoint persons on the Board
of Directors as their nominee to protect their interests. They can be directors nominated by
debenture holders, creditors and bankers etc. the idea behind such directors is to ensure
meticulous application of money lent by creditors so the repayment could be secured.

1.8 Vacancy & Removal

1.8.1 Vacancy
Section 167 provides that the office of a director shall become vacant in following cases:
(a) He incurs any of the disqualifications specified in section 164 for example unsoundness of
mind, insolvency, conviction for moral turpitude offences etc.
(b) He absents himself from all the meetings of the Board of Directors held during a period of
twelve months with or without seeking leave of absence of the Board;
(c) He acts in contravention of the provisions of section 184 relating to entering into contracts
or arrangements in which he is directly or indirectly interested;
(d) He fails to disclose his interest in any contract or arrangement in which he is directly or
indirectly interested, in contravention of the provisions of section 184;
(e) He becomes disqualified by an order of a court or the Tribunal;
(f) He is convicted by a court of any offence, whether involving moral turpitude or otherwise
and sentenced in respect thereof to imprisonment for not less than six months:

29
P. Natrajan v. Central Government, (2004) 51 SCL 76.
Provided that the office shall be vacated by the director even if he has filed an appeal against
the order of such court;
(g) He is removed in pursuance of the provisions of this Act;
(h) He, having been appointed a director by virtue of his holding any office or other
employment in the holding, subsidiary or associate company, ceases to hold such office or
other employment in that company.
A private company may, by its articles, provide any other ground for the vacation of the
office of a director in addition to those specified in section 167(1).
If a person, functions as a director even when he knows that the office of director held by him
has become vacant on account of any of the disqualifications specified in 167(1), he shall be
punishable with imprisonment for a term which may extend to one year or with fine which
shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.
All such vacancies on account of disqualifications shall be filled by promoter or central
Government.
1.8.2 Retirement & Resignation
The usual tenure of a rotation director is five years. As we know that 2/3rd of directors shall
retire in each AGM by rotation after completion of their tenure. Section 168 provides that a
director may resign from his office by giving a notice in writing to the company and the
Board. His vacancy shall also be filled by promoter or central Government
1.8.3 Removal
According to section 169 National Company Law Tribunal under section 242 and
shareholders under section 169 can remove a director before expiry of his term by giving him
opportunity of hearing. It can be done by ordinary resolution passed in AGM. This section
provides for detailed protection to such person affirming the principles of natural justice and
principle of Audi Altrem Partem which means hear the other side. Such vacancy shall be
filled in the same manner as the casual vacancies are filled. Though no grounds of removal
are mentioned in the section however where the shareholders feel the policies pursued by
directors or any of them are not to their liking, they have the option to remove the directors by
passing an ordinary resolution. Directors can be removed on grounds of fraud, misfeasance,
persistent negligence in carrying out the duties, avoidance of sound principles of prudent
commercial practices, serious injury to interest of trade, industry or business, defrauding
creditors etc. Sound business principles include proper business accounts, clear balance sheet,
integrity, fair dealings, and efficient services.
Shareholders cannot remove a director who has been appointed by NCLT.
Apart from statutory provision of section 169 the Articles of a company may also provide for
removal of directors. Delhi High Court held that, “Where Articles confer power on Board to
remove a director such power is not affected by provision of section 284(now sec. 169). The
Articles are in nature of an agreement between the shareholders who are the joint owners of
the company. If some specific methodology is devised by consent nothing precludes the
members from doing so30.”
1.9 Powers of Directors
The directors steer the company for maximization of profit. The Board of directors gets its
powers from Articles, Memorandum and provisions of Companies Act, 2013. Certain powers
of Board can be exercised by individual directors to further the routine affairs as per
allocation but certain powers shall be exercised by the board collectively.

1.9.1 General Powers of Directors (Routine)

Section 179 says that 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 authorised to exercise and
do. But in exercising such power or doing such act or thing, the Board shall be subject to the
provisions contained in that behalf in this Act, or in the memorandum or articles, or in any
regulations not inconsistent therewith and duly made there under, including regulations made
by the company in general meeting.
The Board shall not exercise any power or do any act or thing which is directed or required,
whether under this Act or by the memorandum or articles of the company or otherwise, to be
exercised or done by the company in general meeting as mentioned in section 180.
1.9.2 Collective Powers of Board (Substantial)

30
Ravi Prakash Singh v. Venus Sugar Ltd., (2008) 84 SCL 75 (Delhi).
The Board of Directors of a company shall exercise the following powers collectively 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:
Out of these powers the powers mentioned under clauses (a) to (c) can be delegated to a
committee of directors but other powers related with borrowing, merger, amalgamation,
diversification which are substantial in nature cannot be delegated.
The aforementioned powers of board shall not be deemed to affect the right of the company
in general meeting to impose restrictions and conditions on the exercise by the Board of any
of the powers specified in this section. Within the limits laid down by the Act, the powers of
board of directors are supreme and the shareholders cannot alter or restrict their powers by
passing a unanimous resolution. They can remove unscrupulous directors.
In following cases shareholders of company can restrict or interfere with powers of board:
i. Where directors are acting mala fide or against the interests of company;
ii. Where the board is interested in a transaction so they shall be incompetent to work;
iii. Where there is complete deadlock in management.
Supreme Court held that, “A company is a juristic person and it acts through its directors who
are collectively referred as Board of directors. An individual director has no power to act on
behalf of company of which he is director unless by some resolution of Board of the
company, specific powers are given to him. Whatever decisions are taken regarding running
the affairs of the company, they are taken by the board of directors31.”
1.9.3 Powers of Board to be Exercised In General Meetings
Certain powers can be exercised by board with sanction in meetings of shareholders only.
Section 180 discusses about such powers. It provides that the Board of Directors of a

31
Dale and Carrington Investment P.Ltd. and Anr. v. P.K. Prathapan and Ors., (2004) 122 Comp Cas
161 SC.
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.
(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.
Restriction in such classes shall not affect the rights of bonafide transferee or such companies
where the ordinary business of the company consists of, or comprises, such selling or leasing.
1.9.4 Managerial Powers of Directors
The directors as are limbs of company so they have all power for better and effective
management of company including the following:

Power to enter in to contractual relationship for

mobilization of stock in trade;

Power to declare dividend;

Power to allot, forfeit and transfer of shares;

Power to appoint director to fill up casual

vacancies;

Power to issue debentures or hybrid instruments;

Power to appoint managing director, manager or

secretary of company;

Power to formulate and execute policies related

with corporate affairs of the company;

Power of control and supervisions of other

personnel in the company.

1.9.5 Other Restrictions on Directors

1.9.5.1 Restrictions on Political Contributions
Section 182 provides that a company, other than a Government company and a company
which has been in existence for less than three financial years, may contribute any amount
directly or indirectly to any political party. The aggregate of the amount which may be so
contributed by the company in any financial year shall not exceed seven and a half per cent of
its average net profits during the three immediately preceding financial year.
Every company shall disclose in its profit and loss account any amount or amounts
contributed by it to any political party. If a company makes any contribution in contravention
of the provisions of this section, the company shall be punishable with fine which may extend
to five times the amount so contributed and every officer of the company who is in default
shall be punishable with imprisonment for a term which may extend to six months and with
fine which may extend to five times the amount so contributed.
1.9.5.2 Interested Directors
Section 184 provides that an interested director shall disclose his interest to in the first
meeting of Board. If a director of the company contravenes the provisions of 184, such
director shall be punishable with imprisonment for a term which may extend to one year or
with fine which shall not be less than fifty thousand rupees but which may extend to one lakh
rupees, or with both.
1.9.5.3 Restrictions Related with Loan
Section 185 provides that no company shall, directly or indirectly, advance any loan,
including any loan represented by a book debt, to any of its directors or to any other person in
whom the director is interested or give any guarantee or provide any security in connection
with any loan taken by him or such other person. But this restriction does not apply to
managing and whole time directors who is being extended such loan being resolved by
special resolution in AGM for recognition of his services or to a company the business of
which is financing. If any loan is advanced or a guarantee or security is given or provided in
contravention of the provisions of section 185(1), the company shall be punishable with fine
which shall not be less than five lakh rupees but which may extend to twenty-five lakh
rupees, and the director or the other person to whom any loan is advanced or guarantee or
security is given or provided in connection with any loan taken by him or the other person,
shall be punishable with imprisonment which may extend to six months or with fine which
shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or
with both.

1.10 Duties of Directors

Duties
of General statutory
Director duties duties
s
1.10.1 General Duties of a Director

The directors are very important persons in the corporate affairs. They derive their duties
wowing to the position and role that they have in the company. Their duties also ooze out
from their fiduciary capacity. Generally a director is expected to show great amount of skill
and care in the all transaction where he is representing the company to the world. A director
has to conduct the affairs of company in such a manner that all the decisions taken by them
may serve the interests of company and all its stakeholders. He should not run the company in
autocratic way. Generally powers of substantial nature are not exercised by the directors alone
and they are subject to final confirmation of general body of company. Substantial powers
are exercised by board in board’s meetings.

Generally for better internal management of the corporate affairs, the Articles of the company
details out the role, responsibilities and duties of directors in routine and extraordinary
business of company. He must be meticulous especially in financial transaction, account
keeping and auditing of books of account. Though doctrine of indoor management is a relic of
past but on the basis of it the third party may bind the company for reckless transactions done
by reckless directors, therefore in performance of duties, great amount of care and skill is
expected from directors. He in general sense has following duties:

Duty of good faith;

Duty of reasonable care;

Duty not to delegate his powers;

Now these duties have been given statutory recognition categorically under section 166 which
provides that a director of a company shall act in accordance with the articles of the company.
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 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 and if 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. A director of a company shall not assign
his office and any assignment so made shall be void. If a director of the company contravenes
the provisions of this section such director shall be punishable with fine which shall not be
less than one lakh rupees but which may extend to five lakh rupees.

1.10.2 Statutory Duties of Directors

The companies Act, 2013 at various places describes about so many duties of directors out of
which few may be seen as following:

i. Duty not to mislead by offer document; (sec. 34& 35)

ii. Duty not to induce investors for share subscription; (Sec. 36)
iii. Duty not to issue irredeemable preference shares; (sec. 55)
iv. Duty to file annual return to Registrar; (sec. 92)
v. Duty to hold statutory meetings of company; (sec 96)
vi. Duty to maintain books and auditing of the books, appoint auditors; (sec. 128)
vii. Duty to ensure planning and execution of Corporate Social Responsibility initiatives;
(sec. 135)
viii. Duty to get DIN (sec. 156 & 159)
ix. Duty to perform certain things as enumerated in section 166.
x. Duty to attend board’s meetings; (sec. 173)
xi. Duty not to make political contribution in contravention of provision; (sec. 182)
xii. Duty to disclose his interest in transaction; (184)
xiii. Duty not to receive loan from company;(sec. 185)
xiv. Duty to receive remuneration in confirmation of provisions; (sec. 197)
xv. Duty to make declaration of solvency in winding up of the company; (sec. 305).

1.11 Liability of Director

The liability of a Director to the company may arise from his breach of fiduciary duty. He
can be made liable to shareholders, outsiders, company and co-directors. Where a Director
acts dishonestly to the interest of the company, he will be held liable for breach of fiduciary
duty. Most of the powers of Directors are powers in trust and, therefore, should be exercised
in the interest of the company and, not in the interest of the Directors or, any section of
members.

1.11.1 Ultra vires Acts

The object clause of memorandum defines as well as confines the powers of company. Any
act done beyond such objects shall be ultra vires32. Though doctrine of ultra vires has now
become diluted however it is still relevant to save the company from unwarranted reckless
transactions done by the directors for personal and vested interests in the garb of contracts
done on account of company by the directors. For ultra vires acts directors shall be held
personally liable. This doctrine aims at protecting the interests of shareholders of company.

1.11.2 Negligence

The directors as we know various statutory and non-statutory duties to various stakeholders.
If they breach such duty then resultantly they would be held negligent in performance of the
duties. For negligence of such duties directors may be held liable under tortuous liability and
they cannot be exonerated from their liabilities by Articles and general body of the company.

1.11.3 Mala Fide Acts

As we have discussed that directors are agents, trustees and officers of the company and they
stand in fiduciary position in relation to the company, therefore they should utilize the
resources, money and property of the company in the best interests of company with due care
and diligence. If the want of care is shown then the acts shall be mala fide acts for which the
32
Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875) LR 7 HL 653, A.L. Mudaliar v. LIC, AIR
1963 SC 1185.
directors shall be liable for breach of trust and, may be required to make good the loss or
damage, suffered by the company by reason of such mala fide acts and in such situations
shareholders can intervene 33 . Since the directors are holding a confidential and powerful
position so they have access to information about the assets of the company and if they apply
the corporate funds for vested interests they can be held liable for torts like malfeasance and
misfeasance and conversion of property. They are equally liable for diversion of money for
personal use in criminal laws as a case of criminal breach of trust, criminal misappropriation
of property etc. In such cases the court may requisition him to return and restore such money
personally.

1.11.4 Liability for Co-Directors?

The directors do not act in isolation. They are jointly and severally liable for the acts of
company. All the directors are agents of each other. They sink and swim together. A director
owes vicarious liability for other directors. If a particular act is to be done by the board of
directors and the same is done by single directors on behalf of all such directors, then in case
of liabilities he can seek contribution from all his co-directors.

1.11.5 Criminal Liability of Directors

Directors in so many cases incur criminal liability for their acts and omissions; some of them
are following:

i. Non-compliance of incorporation formalities (sec. 8);

ii. Misstatement in prospectus (sec. 35);
iii. Fraudulent Inducement for share-subscription (sec. 36);
iv. Failure to return application money;
v. Criminal liability regarding issuance of bonus shares, discounted shares, irredeemable
preference share and calling and falsification of share certificates;
vi. Failure to file annual return; (sec. 92)
vii. Failure to hold AGM;

33
Satya Charan Lal v. Rameshwar Prasad Bajoria, AIR 1950 FC 133.
viii. Grant of loan in contravention of Companies Act (sec. 185);
ix. Failure to maintain proper books of accounts;
x. Failure to distribute dividends (sec. 127);
xi. Failure to file annual financial statement (sec. 129)
xii. Failure to get DIN (sec. 159);
xiii. Failure to exceed maxim limit of inter-corporate directorship (sec. 165);
xiv. Failure to comply with statutory duties (sec. 166);
xv. Accepting deposit in contravention of provisions of companies Act;
xvi. Failure to disclose interest (sec. 184);
xvii. Criminal liability for fraud, false evidence etc. (sec. 339, 447, 449 & 450)

1.12. Meetings of Board of Directors

The board often is found to be either an amalgam where people do not meet and if they meet
they do not conduct the affairs of company. Therefore the companies Act is very much
particular of meeting of directors so the business of the company may be negotiated and
furthered. Section 173 provides that every company shall hold the first meeting of the Board
of Directors within thirty days of the date of its incorporation and thereafter hold a minimum
number of four meetings of its Board of Directors every year in such a manner that not more
than one hundred and twenty days shall intervene between two consecutive meetings of the
Board. Central Government may exempt smaller companies from such requirements. The
participation of directors in a meeting of the Board may be either in person or through video
conferencing or other audio visual means, as may be prescribed, which are capable of
recording and recognising the participation of the directors and of recording and storing the
proceedings of such meetings along with date and time. A seven days notice is must for such
notice by post or electronic mails.
Section174 provides that the quorum for a meeting of the Board of Directors of a company
shall be one third of its total strength or two directors, whichever is higher. Where a meeting
of the Board could not be held for want of quorum, then, unless the articles of the company
otherwise provide, the meeting shall automatically stand adjourned to the same day at the
same time and place in the next week or if that day is a national holiday, till the next
succeeding day, which is not a national holiday, at the same time and place. It is essential that
all business of such board’s meetings should be recorded in a book called minute book.
Minutes of every meeting must be signed as passed in the next meeting.
1.13 Summary
Company is contemplation in the eye of law and gets its locomotion and function through its
directors. Collective compendium of directors is known as ‘Board of Directors’. Board is
responsible for directing the affairs of company in such a manner which may prove beneficial
to all stakeholders. The legal position of directors is very interesting. He stands in fiduciary
capacity to company. He is trustee, agents and officer of company.
A public company must have three and a private company must have two directors. The
maximum strength of the board can be fifteen. A person may be directors of maximum twenty
companies. Only an Individual can be appointed as director. The directors need to have
contractual capacity, unscrupulous conduct and fair dealer in financial matters. He must have
director identification number. Articles of company may provide for golden or qualification
shares. A person of unsound mind, insolvent, convicted for moral turpitude and serious
offences involving punishment up to seven years are disqualified to work as a director.
Directors may be appointed by memorandum, articles, shareholders, National Company Law
Tribunal in general meeting. They may resign and retire. They may also be removed by
shareholders. There can be vacancy on account of incurring disqualifications as mentioned in
the Act after appointment as director. All such vacancies shall be filled by Board and
shareholders.
The powers of board are of two categories i.e. general powers and collective powers. The
board can exercise the less important powers without shareholders but substantial powers can
only be exercised by shareholders in general meetings only. The directors owe general and
statutory duties pertaining to wide aspects of corporate affairs.
The directors are liable for misconduct, ultra vires acts, malfeasance, misfeasance,
negligence, breach of trust, siphoning off money etc. In several matters they owe criminal
liability for acts and omissions cause substantial loss to corporate affairs of the company.
Group decisions are always welcomed in corporate governance process and now board has to
meet at least four times in one financial year. They can use electronic mail and video
conferencing now for meeting so as to further the cause of maximization of profit by
company.