Directors:

Introduction:

It is widely recognized in company law, that a corporation is an artificial being, which is neither
having a mind nor a body of its own. Thus, it must act through living persons. Hence, the
necessity of directors. Section 2(34) defines a director as “director appointed to the Board of a
company.”

Position of director:

The position that the directors occupy in a corporate enterprise is not easy to explain. They are
professional men hired by the company to direct its affairs. Yet they are not the servants of the
company. They are rather the officers of the company. A director may, however, work as an
employee in a different capacity. For example, in Lee v Lee’s Air Farming Ltd, The principal
controller and a director of a company was also working as its pilot. Following his death while
acting as a pilot, his widow recovered compensation under the Workmen’s Compensation Act.9
The Companies Act makes no effort to define their position. Section 2(34) only states that
director includes any person occupying the position of a director, by whatever name called. We
can find a better definition in The Nigerian that the directors of a company are persons duly
appointed by the company to direct and manage the business of the company.

Directors are described sometimes as agents, sometimes as trustees and sometimes as managing
partners. But each of these expressions is used not as exhaustive of their powers and
responsibilities, but indicative of their varied functions.

Directors as agents:

Directors as agents was recognised in Ferguson v Wilson, that directors, in the eyes of law are
the agents of the company. Since, the company has no person, it can only act only through
directors, and thus the general principles of agency govern the relations of directors with the
company and of persons dealing with the company through its directors. Where the directors
contract in the name, and on behalf of the company, it is the company which is liable on it and
not the directors. However, the directors incur a personal liability in the circumstances where
they they contract in their own names; or use the company’s name incorrectly, e.g., by omitting
the word ‘Limited’; or where the contract is signed in such a way that it is not clear whether it is
the principal (the company) or the agent who is signing; and lastly, where they exceed their
authority, e.g., where they borrow in excess of the limits imposed upon them.

Directors as trustees:

Directors are trustees of the company’s money, properties and their powers and as such must
account for all the moneys over which they exercise control and shall refund any money
improperly paid away, and shall exercise their powers honestly in the interest of the company
and all the shareholders, and not their own sectional interests. Although directors are not
properly speaking trustees, yet they have always been considered and treated as trustees of
money which comes to their hands or which is actually under their control. In Ramaswamy Iyer
v Brahamayya & Co, it was observed that the directors of a company are trustees for the
company, and with reference to their power of applying funds of the company and for misuse of
the power they could be rendered liable as trustees and on their death, the cause of action
survives against their legal representatives. In Percival v Wright, it was held that Directors are
trustees of the company and not of individual shareholders.

Another reason why directors have been described as trustees is the peculiar nature of their
office. The directors are persons selected to manage the affairs of the company for the benefit of
the shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully
and entirely. Some of their duties to the company are of the same nature as those of a trustee. For
example, they, like trustees, occupy a fiduciary position. The power to make calls, to forfeit
shares, to issue further capital, etc. are all powers in trust which have to be exercised in good
faith for the benefit of the company as a whole. Yet directors are not trustees in the real sense of
the word. A trustee is the legal owner of the trust property and contracts in his own name. A
director, on the other hand, is a paid agent   or officer of the company and contracts for the
company.

Directors as organs of corporate body:

There was a time when corporations played a very minor part in our business affairs, but now
they play the chief part, and most men are the servants of corporations. Every position of power
implies responsibility. But it often became difficult to hold a company to its responsibilities in
view of the artificial nature of its personality. There was a time when a company could not be
held responsible for any wrong involving mental element. But today the range of corporate
responsibility almost corresponds with that of an individual, thus, now the directors are
something more than mere agents or trustees. The Board is also correctly recognised to be a
primary organ of the company. It was noted in Bath v Standard Land Co Ltd, the Board of
directors are the brain of the company, which is the body and the company can and does act only
through them. The success of a company depends, to a very large extent, upon the competence
and integrity of its directors.

Directors as managing partner:

The persons holding this view consider a company as large partnership, directors being charged
with the responsibility of managing the affairs. The other shareholders are virtually dormant
partners. By virtue of the various provisions in the Memorandum and Articles, they enjoy vast
powers of management and act as the supreme policy and decision making body.
Duties of directors:

The duties of directors are of two types:

1) Statutory duties: Statutory duties are the duties and obligations imposed by the Companies
Act.

(a) To file return of allotments - Section 39(4) of the Companies Act, 2013 requires a company
to file with the Registrar, a return of the allotments stating the specified particulars within a
period of 30 days. Failure to file such return shall make the company and its officer who is in
default liable to a penalty, for each default, of Rs. 1,000 per day till the default continues or on
lakh rupees, whichever is less.

(b) Duties under Section 166 - Section 166 provide a very comprehensive list of the duties of
the directors. As per this provisions, a director of a company shall act in accordance with the
articles of the company. He is also expected to 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.
He is also required exercise his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment. He is expected to not be involved 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, as has been seen in Rajeev Saumitra v. Neetu Singh. He is also expected not to 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. Lastly, A director of a company shall not
assign his office and any assignment so made shall be void.

(c) To disclose interest (Section 184) - A director who is interested in a transaction of the
company must disclose his interest to the Board. The disclosure must be made at the first
meeting of the Board held after he has become interested. If a director fails to disclose his
interest, as aforesaid, he 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.

(d) To disclose receipt from transfer of property (Section 191) - Any money received by the
directors from the transferee in connection with the transfer of the company’s property or
undertaking must be disclosed to the members of the company and approved by the company in
general meeting.

(e) To disclose receipt of compensation from transferee of shares (Section 191) - If the loss
of office results from the transfer (under certain conditions) of all or any of the shares of the
company, its directors would not receive any compensation from the transferee unless the same
has been approved by the company in general meeting before the transfer takes place. If the
approval is not sought or the proposal is not approved, any money received by the directors shall
be held in trust for the shareholders who have sold their shares.

(f) Duty to attend Board meetings - A number of powers of the company are exercised by the
Board of directors in their meetings held from time to time. Although a director may not be able
to attend all the meetings but if 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, his office shall automatically fall vacant as per Section 167(1)(b).

(g) Other duties include: To convene Annual General Meeting (AGM) and also extraordinary
general meetings under Sections 96 & 100; To prepare and place at the AGM along with the
financial statements including consolidated financial statement, if any, and auditors’ report, a
report by the Board of Directors covering the specified particulars as per Sections 134; To
appoint first auditor of the company (Section 139); To appoint cost auditor of the company
(Section 148).

2) General duties:

a) Duty of good faith - The directors must act in the best interest of the company. Interest of the
company implies the interest of present and future members of the company on the footing that
the company would be continued as a going concern. Thus a director should not make any secret
profits. He should also not exploit to his own use the corporate opportunity. In Cook v. Veeks, it
was noted that people who assume complete control of a company’s business must remember
that they are not at liberty to sacrifice the interest which they are bound to protect and while
ostensibly acting for the company, direct in their own favour business which should properly
belong to the company they represent.

b) Duty of care - A director must display care in performance in work assigned to him. He is,
however, not expected to display an extraordinary care but that much care only which a man of
ordinary prudence would take in his own case. Section 463 further states that where a director
may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust
but if he has acted honestly and reasonably and having regard to all the circumstances of the
case, he ought fairly to be excused, the court may relieve him either wholly or partly from his
liability on such terms as it may think fit.

c) Duty not to delegate - Director being an agent is bound by the maxim ‘delegatus non potest
delegare’ which means a delegatee cannot further delegate. Thus, a director must perform his
functions personally. A director may, however, delegate in the following cases: Where permitted
by the Companies Act or Articles of the company; Having regard to the exigencies of business
certain functions may be delegated to other officials of the company.

Powers of directors:
Section 179 of the Companies Act, 2013 provides for General Powers of the Board of Directors.
As per this provision, 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.

Section 179(3) of the Companies Act, 2013 provides that 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:

(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.

Besides the powers specified in section 179 there are certain other powers also which can be
exercised only at the meeting of the Board. These include:

1. The power of filling casual vacancies in the Board (Section 161).

2. Sanctioning of a contract in which a director is interested (Section 188).

3. The power to recommend the rate of dividend to be declared by the company at the Annual
General Meeting, subject to the approval by the shareholders.

4. The power to make political contributions (Section 182).

5. The power to appoint a person as managing director or manager who is holding either office in
another company (Section 203).

6. The power to give loan to or invest in any shares of any other body corporate (Section 186).

7. The power to enter into any contract or arrangement with a related party (Section 188).
8. The power to appoint or remove key managerial personnel.

9. To appoint internal Auditors and secretarial auditor.

The powers of the directors are also subject to certain restrictions as provided in Section 180 of
the act. The board of directors can not exercise certain powers without the consent of the
shareholders by way of special resolution. These powers include selling, leasing or disposing
whole, or substantially whole of the undertaking of the company; Invest, otherwise than in trust
securities, the amount of compensation received by it as a result of any merger or amalgamation;
Borrow monies exceeding the aggregate of the paid-up capital of the company, its free reserves
and securities premium.