Y

94 INTRODUCTION.TO COMPANY LAW [Ss. 166, 181-183 S.1

exceeded. The first mentioned restriction does not apply to the case of a not
company whose ordinary business is to sell or lease property. hin
liaL
Company to Contribute to Bona fide Charitable and Other Funds etc
isn
ts. 181I con
The Board of Directors of a company may contribute tobonaJide charitable whi
and other funds. Prior permission of the company in general meeting is (
to be taken for such a contribution in case any amount the aggregate of mul
whictu in any financial year, exceeds five per cent of its average net profits of tl
for the three immediately preceding financial years. exel
Power to make Political Contributions [S. 182] I,D
Before the Companies (Amendment) Act, 1985 (of 1956 Act) companies T
were not permitted to make contributions for political purposes. This ban dire
was lifted, except in the case of Government companies and companies
which have been in existence for less than three years. Rest of the compa- 2. Dr
nies have been permitted to contribute money to any political party or to D
any person for political purposes. The amount should not exceed Tllrper prin
cent of the company's net profits during the three immediately preced- of th
ing financial years. Contribution should be sanctioned by a resolution of for a
the company's Board of Directors and that will be sufficient authorisation coml
and justification for all-round validity. Donation given to enable a party oPp(
to win public support would also be a contribution; so also those for pub- carr)
lication of a souvenir, brochure, tract, pamphlet or the like. The amount their
contributed must appear in annual accounts. Defaulting company will be fits-o
punishable with five times the amount and defaulting officers with fine be1, I
up to five times the amount contributed and imprisonment extending up whic
to six months. Political party should be registered under Section 29-A, Pany
Representation of People Act, 1951. the cr
prete
Contributions to National Defence Fund etc [S. 183] refus
This section sanctions contributions to National Defence Fund or other of the
Funds approved by the Central Government. The section fully empowers Ev,
the Board of Directors for this purpose without any limit. The amount has tuniti
to be disciosed in Profit and Loss Account. profit,
Duties of Directors [S. 166] profitr
the co
Duties of directors have been thus stated in Section 166:
direct
(1) The directors have to act in accordance with the articles of the com-
.in sell
pany. (2) A director of a company has to act in good faith in order to pro-
tially
mote the objects of the company for the benefit of its members as a whole
financ
and in the best interests of the company, its employees, the shareholders,
the community and for protection of environment. (3) A director has to per- 188. Th
form his duties with due and reasonable care, skill and diligence and has chr

to work with independent judgment. (4) A director is not to involve himself hel
18e. (19
in a situation in which he may have direct or indirect interest that conflicts 190. lnd
or possibly may conflict with the interest of the company. (5) A director is 191. (1e,
-183 s. 1661 DIRECTORS 95

r[a not to achieve or attempt to achieve any undue gain oI advantage either to
himself or to his relatives, Partners or associates. If he does so, he will be
liable to pay an amount equal to that gain to the company. (6) A director
TC
is not to'assign his office. Any such assignment is void. (7)If a director
contraven", ih" Provisions of ihe section, he will be punishable with fine
rble which is not to bi less than Rs 1,00,000 but may extend to Rs 5,00000.
Corporate executives are today Possessed of "immense power
which
gis
.) Of must be regulated not only for the public g@dl but also for the protection
regulate the
rfits of those *hor. investments are involu"4'itao The law tries to
exercise of this power by imposing uPon directors certain
duties.

1. Dutyto act according to Articles t5. 166(1)l

Act,
nies The statement in this respect is that, subject to the provision of the
ban ,directors have to act in accordance with the articles of the company'
i:ies
2. Duty of good faith: Liobility for breoch of trust
.',pa-
Directors being fiduciary agents of the company, they are bound
by the
,rr to
principle of gooifaith. "ireatest good faith is expected in the discharge
, P€r
,C€d- ft tf,.ir duties." As fiduciaries they are bound to account to the company
the
in of for any profit made by them while acting as directors or by the use of
rl.ion .o*pir,y', property. 'in"y should not exploit to their own use the business

,artY opportunities of thl company. In Cookv Deekslse the directors of a comPany/

in
'i-rub- .urryl.,g on the businesi of railway constructions, obtained a contract
bene-
t}unt their own name to the exclusion of ihe comPany, it was held that the
remem-
iii be fits of the contract belonged in equity to the comPany' They must
ber, the court said, "thal they aie not at liberty to sacrifice
the interests
, fine
Ll; up
*ni.h they are bound to protict, and, while ostensibly acting for-the com-
belong.to
,:i-4, pany divert in their o*n iurrorr business which should properly
'tt. .o*prny they represent". Where a managing director resigned ulder
Gas Board had
prutu.,.u of itt-t eatth and obtained. a gas-contiact which the
refused to allotto the company, he wis held liable to account
for the profits
',.irer of the contract.leo
of its oppor-
:',rCfS Even where the company is financially unable to make use
and makea
. has tunities, directors should .,ot rr" it for themselves' If they doso,
to retain such
profit, that also belongs to the comPany. If they are permitted
profit, there would 6e temptation to-induce such inability on !!re part.of
(Hastings) Ltdv Gullirter,lel the
ihu .o*puny and to profit Uy it. fnus , inRegal
by them
directori were held iiabie to restore to the comPany the profits made
They ini-
com- in selling the shares acquired by them in the company's subsidiary'
- pro- being
tially winted their company to acquire those shares but the company
r 'l:ole financially unable to do so,ihey had themselves taken up the shares'
:i.lers,
Thus where two of them signed
, 188. The duties of non-executive director are the same.
Fer- the executive directors to act as they pleased, they were
ri has cheques in blank and enabled
held equally liable. Dorchester Finance co Ltd v stebbing,1989 BCLC
498.
,'i:self 18e. (1e16) 1 AC 5s4 (PC).
443: (1972) 2 All ER 162'
,flicts tgO. induitriat Deaelipmints Consultants Ltd v Cooley, (1972\ 1.WLR
r:tor is r91.. (1s67) 2 AC 134n: (1942)1' All ER 378 (HL)'
 96 INTRODUCTION TO COMPANY LAW
[5s.166,191 S,

. A director may, however, make use of a business opportunity where

the-company is insolvent, or the business is outside the A
scope of its objects ul
and the company has shown no interest in the opportunity
or where the in
directors in good faith decide that the opportunity L o.,. thatthe
company o{
ought not to take.
th
Trading in corporate control State tS. 191]._The Act provides
V .directors that if the di
receive any money on the sale of their controlling block
of shares
which is over and above the money received by the othJr selling share- co
holders, the extra money is in essence a price ior the sale pr
of con"trolling
Power and the directors would hold it in trust for the selling sharehold- ne
ers. Sellers of controlling block also become liable when for
tlieir personal co.
gain-they too negligently alow the control of the company to
I pass into the Bu
hands of persons who intend to loot the company. in<
Misuse of corporate information.-rf a director makes any use
of
unpublished and confidential information belonging to the company soI
and
the c-ompany suffers a loss in consequencg it.u. urf the directo, to
to *rt"
good the loss. Any knowledge or information generated wit
by the.o*pur.,y i,
the company's property. Turnover of businesj profit margins, act
list of cus-
tomers, future plans, manufacturing formulae and processes hel
are the com_
pany's trade secrets. Any gain made out of the use oi such
information has dir
to be accounted for to the company. If any inside information WOt
is used for
the purpose of trading in the company's sirares, it would
amount to viora- .1

tion of sEBI (Insider Trading) Regulaiion s, l992.Insiders involved ties

can be
disqualified and also held riable ior the company,s rosses or those ical
of any
other victim. ,,Tb

competition by directors.-A director commits no breach of duty if the

he
competes with his company or holds some interest in me(
a rival company or is
a director in a competing company. But he should lear,
not make ,rr" o? the com_
pany's secrets or assets or any special skill for which he has ma)
been trained
by the company. By dn agreemlnt with a director, he can be restrained i*p
from engaging himself in activities of competing nature. non
j. guil
Duty of care: Liobitity for negligence [S. 166(3)]
Fidelity alone is not enough. A director has to perform his functions 4,D
with reasonable care and skill. "His duties will depend upon the nature co-a
of the company's business and the manner in which the work
of the com_ D
pany is distributed among the directors and other officials of
the com- dele;
discharging these duties, 4, director must exercise some
l:lt,],,
ot skill and diligence. But he does not owe to the company
degree But <
to take all ios_ ised
sible care or to act with best care. Indeed, he need .,ot
u*r,iuit in the per_ tain
formance of his duties a g19at-er degree of skill than
may ,.uro.,ubry b. to so
expgct_e_d from a person of his knowiedge and
experience ... Directors are man
not liable for mere errors of judgment." This is the well-known
observation assul
of Rorr'rrn J in the celebrated case of City Equitable Fire Insurance
Co Ltd, re.1e2 193. L
192. city Equitable Fire lnsurance Co Ltd, re,1925 Ch407:1924
AIIER Rep 4g5 (cA).
L94. C
195.11
,.191
DIRECTORS 97
s. 1661

r'r'inding
iiere A director of an insurance company plunged the company into
by his frauds, misappropriations.and dd investments.
He \vas accord-
ircts ,p
were not guilty
the irisfy convicted. The questior, *u, whether his co-directors
held that
:'',1ftY ofirlgligence in not detecting such extensive frauds. The court
ttruy ir"i., but they escaped li"ability-because under
the company's articles
directors could be-made liable only for gross negligence.
iithe
"This acquittal caused such fermentis to lead to legislation abolishing
rares rendered void anv
contracting out." Accordingly, Section 201, 11956 Act]
.are- liability for
provision In the articles o.1., u^y agreement which excludes
'iiing
-,old- lugfij.".., default, misfeasance, briach of duty or breach of trust' The
such liability'
.oilp"uny is also noiallowed to indemnify its officers against
.3nal the company could
But where an officer sued or prosecuted was acquitted,
r: the
indemnify him for his costs.
standard with
The courts are also trying to infuse Rourn J',s subjective
,e Of some objectivity. Fo, .*u*pie, in a case Buc*rv J
said that a director has
'and ,,in the way in which a man of affairs dealing with his own affairs,
to act
expected. to
)rake with reasonable care and circumspection could reasonably be
nir is ur1.rt1e3 Applying this standard to
the case before him, the learned judge
as compensation to a
CUS- held thaiti. puy*"r,t of f 4000, without legal advice,
compensation'
com- director for retirement when, in fact, he was entitled to no
r has was an act which could not be regarded as reasonable'
d for
Attendance at Board meetings: Liability for non-altendance'-Du-
'i*rla- performed at period-
ties of directors are o{ an intermittent nature to be
in be meetings'
trny .ical Board meetings. A director is not even bound to attend all
,,They do not und-ertake to manage the company.,, Act only says that
J}ie
fails to attend all
the office of a director is automitically vacated if he
with or without
it he meetings of the Board held during u p*i9g of ]2- months
habitual absence
*r is leave of absence of the Board. 1S. fOi1fl1A)l A director's
liability was
it*m- *ry u..o*e evid.ence of negligence. In an early case in whichguilty of gro.ss
jred imposed in this respect, the"court said, "lf"some Persons
are
to others, they may be
,*ed non-attendur-r.., urrd leave the management entiiely
by others'"1e4
guilty by this means if breaches of tiust are committed
4.Dutynottodelegateorossignhisoffice:Liabilityfor
tI _-lt1s
co- di rector's defau lts
r::lre non potest
Directors being agents are bound by the maxim delegatus
,im- to another person'
jm- delegare. A direior"should not delegaie his functions
to which it is author-
But ielegation of functions may be *"ud" to the extent
:.fCe S.e-condly, there are cer-
ised by i'he Act or the constituiion of the company.
may be left
,!0s-
lrer-
tain duties which, k.upi.,g in mind the exigencigi oi business,
two co-directors
to some other officials. In"Dooey v Corylss the defendant's
t

there was loss' but

manipulated the accounts and showed profits when
:"'be
fif€ The defendant
assured the defendant of the correctnesi of the accounts'
iiion
Fe.r92 l93.DuomaticLtd,re,(1969)zCh365:(1969)IWLR114:(1969)1,A118R161,171'.
194. Charitable Corpnv Sufton, (1726)2 Atk 400:
268R642'
195. 1901 AC 477:(189s-99) All ER Rep 724 (HL)'
 98 INTRODUCTION TO COMPANY LAW !s.166(4) S. 18I

gave his authority to the payment of dividend which was obviously paid mak
out of the capital. But he was held not liable for this loss of capital. He of tl
had the right to trust his co-directors unless there was something to cre- incu
ate a doubt about their integrity and competence. Similarly, where one mafl
of the directors misappropriated the security money of employees, his rum
/ co-directors were held not liable.le6 uPor
On the same principle, directors were held not liable for misappropri- inter
ation of stores by the stores manager,leT or for failure to detect cashier's mee
concealment of overdrafts,les or for payment of dividends on false accounts lutic
declared at a meeting where the director sought to be made liable was asa
absent lee or for allowing by one of the two directors the company's prem- inter
ises to be used for gambling purposes without licencg the other director \
knowing nothing.2oo inter
This does not, however, mean that directors can always throw up their cont
hands and say, "we know nothing and believed that everything was whe
alright". Thus, where in the case of a banking company, dividends were com
paid for as many as 22 years on the basis of manipulated accounts, the firm
directors were not permitted to say that they reiied upon competent staff irrel
and auditors.2ol serv
As for assignment Section 166(6) says that a director is not to assign his closi
office and any assignment shall be void. cien
the I
5. Duty to disclose interest ond to avoid conflict of interests
IS. 166(4)l
6,D
A
Where a director is personally interested in a transaction of the com-
advi
panlr he is required to disclose his interest to the Board. Section 166(4)
doer
requires that a director is not to involve himself in a situation in which he
may have a direct or indirect interest that conflicts or possibly may con- Loar
flict with any interest of the company. If he is a member of a company or A
a firm with which the cpmpany has to deal, he should give a yearly notice any
to the Board of his interest in that concern. Disclosure has to be made at inw
the first meeting of the Board in which he participates as a director. It has SCCL
to be repeated after that at the first meeting of the Board in every finan- The
cial year or whenever there is any change in the disclosures already made, inu
then at the first Board meeting held after such change. Where the.company or t<
is entering into any contract or arrangement with a partnership firm, the any
director is to disclose whether he is a partner, member or owner there. A (3) t
similar disclosure has to be made whqn the other party is a companl4 gnd (a) tr
the director in question is holding by himself or in association with others tors
more than 2 per cent shareholding there. If he becomes interested after

196. D Doss v CP Connell, AIR 1933 Mad724. 202..

197. Oficial Liquidator v Mathura Prasad, AIR 1963 All 55. 203. .

198. Perfontaine v Grenior,1907 AC 101 (PC).

199. K. NagendraPrabhuv Popular BankLtd, AIR 1970 Ker 120: ILR (1969) 1 Ker 340. 204..
200. Huckerby v Elliott, (1970) I All ER 189 (DC).
201. Palai Central Bank Ltd v K loseph Augusti, (1966) l Comp L| 350: AIR 1966 Ker 121. , 205.
 DIRECTORS 99
165(4) s.1851

making of the arrangement, etc, he has to disclose

it at the first meeting
paid guilty director
l" He of the Board subseqlent to his becoming interested. Tht
to vote on the
, CI€- ir,.rrc a penalty. Secondly, an interested iirector is neither
matter of his interest nor his Presence shall
count for the purposes of quo-
r Oft€ are based
his rum. If he does vote, his voie shall be void. These Provisions
' agent_should not allow a conflict between
his
** ihe prlnciptu tt rt anwhJre the directors took Part in and voted at a
irprl- interest and duty. Thus,
to two of them, the reso-
tier's meeting of the goura *i,i.n granted debentures
a director as a chairman or
unts lution was held bad,.zlzBut thi aPPointment of
shares to a director, is not such an
was as a managing director, or allotment of
interest ur"*orta exclude the director from
voting'2o3
rgm-
where the whole body of directors is already u*,.e
of a director's
)ctor
interest, a formal disclosure is not necessary.
His vote will not vitiate the
iheir contrac!providedthatwithouthisvotetherewasenoughq"gt*jEY:"
by the
is only voidable
llras where the interest is not disclosed the transaction
,ttfe comPanyandnotvoid.Ifthecompanywa-iveltheirregularity.andcon-
, the firmsthetransaction,hebecom"'uo,',abyit;hecannotinsistonthe
staff irregularity.,onAdirectorwasnotallowedtorecoverremunerationforhisdis-
takeover rendered without
services in connection with the company's
comPany and it was not suffi-
(

i rhis closing that he was interested in thl otirer

of directors dealing with
( cient that the matter was known to the committel
the takeover. It had to be discl0sed to the
Board of Directors'205

6. DutY notto moke undue gain

any undue guT:'
A director has not to achieve or attempt to achieve
partners or associates' If he
advantage either to himself or to his relatives,
]f}ITI-

t {*$) the comPany'

do.r ro,"hu is liable to refund such gain amount to
, i:i he
i_., ;i_]n-
Loans to Directors [S. 185]
any loary including
i ,1'Or A company cannot, directly or indirectly advance
: of its directors or to any Person
l*;iae any loan ,"prlr".,t"d by a book debt, to any
guarantee or to providq any
i.: dt in whom the director is int"rested or give any
by him or such other person'
has security in connlction with any loan taken
i'; tr1- The Explanation tothe section says that
the expression "to any other person
directors of the company/
1' lCe, in whom director is interested" means (1) to the
t' ;ny ortothedirectorsofitsholdingcompanyortoany.partnerorrelativeof
is a partner;
any director; (2) to any firm in *ni.ni director
: the or his relative
:: :'- A (3) to uny p.irrut. ;;;P'"y in which a director
is a member or director;
;,, Afld (4) to any body .orpo.it" ut *hor. general
meeting any_director or direc-
or
.: 1:]fS i*, .or,i.o125 per cent of voting; (5) to any company whose managers
,lr: iief
(7979) 1 Ch 198'
-t
202. North Eastern Insurance Co Ltd, re' v TP Khaitan'
1to\o-tilAll ER Rep 856; Public
Prosecutor
.4i 203. Foster v Foster,tigr6) cLi sti:
:rt
AIR 1957 Mad 4.
Cas 596:2 Comp LJ 99: AIR
ru 204. Narayandas shreeram somaniv sangliBankLtd, (1965)35 Comp
19665C770.
ptc v Saunders, ('t990) Z AC 663: (1990) IWLR 324: (1990) 1 A1l ER 652 (HL)'
205. Guinness
 1OO INTRODUCTION TO COMPANY LAW ls. 1BB S.:

Board are accustorned to act in accordance with instructions of the Board ler
of Directors, or any director or directors of the lending company. COI

The company can neither guarantee nor provide any security for the
loan taken or given by any of the above persons. It has been held that pay- shi
ment to a director of his salary in advance,2o5 or providing a house on half AS

cash payment and half on instalments, does not amount to a direct or indi- oP
rect loan. The section does not prohibit giving of any loan to a managing to
or whole-time director as a part of the conditions of service or extended by
the company to all its employees pursuant to any scheme approved by the pu
members by a special resolution or by a company which in the ordinary ext
course of its business provides loans or gives guarantees or securities for tol
due repayment of any loan with interest at a rate not less than bank rate uP
declared by RBI.
tor
Related Party Transactions [S. 188]
inr
Any contract or arrangement with a related party in respect of the fol- par
lowing matters can be entered into only with the consent of the Board of lic
Directors given by a resolution at a meeting of the Board and subject to wit
such conditions as may be prescribed. The matters covered are: (a) sale, boc
purchase or supply of any goods or materials; (b) selling or otherwise isa
disposing ol or buying property of any kind; (c) leasing of property of tior
any kind; (d) rendering or availing of any services; (e) appointment o{ any ori
agent for purchase or sale of goods, materials, services or propert/; (fl such notl
related party's appointment to any office or place of profit in the company, or i,
its-subsidiary compan)a or associate company; and (g) underwriting the is,
subscription of any securities or derivatives thereof, of the company. or (l
Any such transaction with a company having the paid up share cap- sucl
ital of prescribed amount or the value of the transactiron in excess of the
prescribed sum is to be entered into with the prior approval of the com- Reg
pany by a special resolution. No member of the company can vote on such lnte
special resolution to approve any contract or arrangement which may be E
entered into by the company if such member is a related party. The section part
is not to apply to any transactions entered into by the company in its ordi- aPpl
nary course of business other than transactions which are not on arm's Afte
length basis. befo
The Explanation to Sub-section (1) says that the expression "officeor place ent r
of profit" means any office or place held by a director if he receives }.om days
the company anythingby way of remuneration over and above to what he com
is entitled as a director by way ef, sal ary, for commission, perquisites, any or ir
rent-free accommodatiory or'otf,"i*ise. Where any such om." or place is regir
held by an individual, other than a director, or by a hrm, private co*pany regir
or other body corporate, it would be a place of profit if the individual or meel
entity receives from the company the abovementioned benefits. An arm's insp,
mer
man
206. MR Electronics Components Ltd v Registrar of Companies, (1987) 61 Comp Cas g: (19g6) 3
Comp L] 28 (Mad).
7'

[s. 1SS s. 1B9l DiRECTORS 101

],t_u11i""r of the Board length transaction means a transaction between two related parties that is
rg company.
conducted as if they were unrelated so that there is no conflict of interest.
se5urity for
,..1I
rs.been rhe ]ustification for such transaction must be put in the knowiedge of
held ihat,., shareholders through Board's report. If such transaction is not approved
as required nor ratified within three months, it becomes voidable at the
iiiH;ff::ffi#l option of the company and if a director or employee is involved in it, he has
;::tj:&H;:5't, to indemnify the company for any loss incurred by it.
Any such violation on the part of an employee or director makes him
upp.ouua;;Tl
"l the ordinary
punishable in the case of a listed company with imprisonment for a term
::::l: securiries extending up to one year or fine of not less than Rs 25,000 but may go up
rt,ss:l
;:: for to Rs 5,00000. In the case of any other company fine of Rs 25,000 extending
thdrl bank rate up to Rs 5,00000.
The expression related party includes the following: [s. 2(76)] (i) a direc-
tor or his relative; (ii) akey managerial personnel or his relative; (iii) a firm,
respect of in which a director, manager or.his relative is a partner; (ia) aprivate com-
the
ir.of the Boardfo.l_ pany in which a director or manager is a member or director; (a) a pub-
ro of lic company in which a director or manager is a director or holds along
1nd subject to
ered are: (a) with his relatives, more than 2 per cent of its paid-up share capital; (ai) any
sale. body corporate whose Board of Directors, managing director or manager
nB
9. otherwise is accustomed to act in accordance with the advice, directions or instruc-
t.of property of
r-untment tions of a director or managey (aii) any person on whose advice, directions
of anv
or instructions a director or manager is accustomed to act: Provided that
foRgrty, 1l such nothing in sub-clauses (oi) and (aii) shall apply to the advice, directions
rl the company.
oerwriting the or instructions given in a professional capacity; (aiii) any company which
]ompany. is (A) a holding, subsidiary br an associate company of such company;
rup or (B) a subsidiary of a holding company to which it is also a subsidiary; (ix)
share cao_
r excess such other person as may be prescribed.
or tfi"
al of the Register of Contracts or Arrangements in which Directors are
com_
i r.ote on
such lnterested tS. 1891
,-hjch may
be Every corhpany has to keep one or more registers giving separately the
. The section
particulars of all contracts or arrangements to which Sections 184 and 188
:.r'in its ordi_
';i)'t apply. The registers have to contain such particulars as may be prescribed.
on arm,s After entering the requisite particulars such registers have to be placed
before the next meeting of the Board and signed by all the directors pres-
;;ce orplace
ent at the meeting. Every director or key managerial personnel, within 30
:r,ryes from days of his appointment or relinquishment of office, has to disclose to the
i',i what
he company the particulars specified in Section 184(1) relating to his concern
r:,cites, any
or interest in other transactions which are required to be included in the
place is
register or such other information about himself as may be prescribed. The
lmpany
register has also to be produced at the commencement of every general
i' ldual or
meeting of the company at its registered office. It should remain open to
An armt
inspection during business hours. Extracts may be taken from it. If any
member ask for copies they have to be furnished by the company in the
8: (1986) manner prescribed and on prescribed fee. The register has also to be
3