< 27)

i n fact, a dire c to r q r c. on tru.Her of U } i&

i'y s i & not a ;BBr •vant . A director• may, howe ver 9

in a ci ± ■ ■rent capacity. Dir•sc tors ar©

as agenl t; s ome t i mes as tr ustees and

par tners» Bi ~c © a izh of these exp cession S X s

of thei r pciwcrs and respone‘ibi 1ities, tout

as indicating useful points of view form which they may for the

moment and for the particular purpose be considered^

The directors often described as managing partners,

servants, trustees and officers, yet such description hardly

represent the true position of the directors of the company. They

combine in themselves many functions and duties. Whatever, is

the status and position of directors, discussed at length in this

chapter.
V

(a) Director as an Agent

The company is not a person, it (can act ij, l 5 '1J. V/ throu g h

directors and the case is as regards t.hose directo rs , (iter e 1 y t he

ordinary case of principal and agent » The> princi.pi e of ss gen cy

C,

govern the relationship between the compsiny and d i rec to r.

Where the directors contract in the name smd on be1 n ci If of t he

company, it is the company which is 1 iab 1 e on i t an d inot t he

directors.6 The company is bound by the acts of J.. L~

di r_c +.n cr.
 C 28)

which can be ratified by the company except for the acts which

are ultra-vires * If the company ratify the acts of the directors,

the same effects will follow as if they had been performed by

the company itself.7

A notice to an agent in the course of business amounts to

notice to the principal!. Similarly in the case of directors a

notice to the director is a. notice to the company.® -But where

one person is- an officer of two companies his- personal knowledge

is not necessarily the knowledge of both companies unless he is

under a duty to receive the notice and to communicate to the

J.. i... .... <rj

LiLiitJr .

The directors are agents of the company and not of its

'shareholders. However., the directors are not the agents in the

true sense of the term for the simple reason that the directors

frame policies of the company and are not getting instructions

f rom t he; princ i pa 1 s. 1 ,a

In the eyes of the law directors are5 agents of the company

tor which they act. As such., the general principles of the law

D P rincipal and agent ap«ply to the reiat lonship of thie compariy

B.TiQ its directors. Thus., as agents of the c:ompany., directors bind

the company by contracts with third parti es. They cannot sue or
 (29)

be sued on such contracts unless they exceed their authority. An

agent has to act within the powers and authority granted to him

by his principal. Directors are agents of the company with powers

and duties for carrying on the whole of its business subject to

such restrictions as may be imposed by its articles and the

tot.

As agents of the company the directors control and manage

its affairs. The executive authority of the company is vested in

them. They lay down the general 1 policy of the company, appoint

the company's officers* ensure that they carry out their duties,

and advise the members on the distribution of profits. The powers

given to the directors are thus wide and must be exercised by

them in good faith and in the interests of the company, i.e,

t h e i r p r i n c i p a 1 .1 s

Directors are agents of the company, In contracts entered

by them, the directors act as agents, as they having no personal

liability,13 But they are not agents for individual members of

the company. They are to act within the scope of their authority

given by the articles and all acts done by them while acting

within the scope of their authority are binding on the company

though done with improper motive or to derive some wrongful

benefit for themselves provided that the outsider acted

 :ompany c an r a t i fy an ac t

don
one by the cess! Of tr"ieir author. j. j..
uy
..

p r o v .i 0 e cj s u c n a c t ?.■ o t t he C Ofn party ^ IS

os it ion i.. s d i f f e■rent f: rofs

■ r me i pa 1 h,aving su pe r■ i o r

A. J.,.
to i..i iB d i r ec t ors. The

not eftec tive

J..
but l. S list L =■

and this power can be exercised only at general meetings.1*

Further., by nature of- their office,, the directors powers are far

y\l 3, U Lr? r a nd fuller thaii a mere a. Cj ©j 3it.1'7

As observ ed by H a 1 sbu r v , ! _.C. in Lennard's Car ry ing Co»

Ltd. V- Pi 5 i Si t 1 C: Petro 1 euffl Co. Ltd.1® A ccr poratic:«n is c*. n

T
abst r ci c ti Ui ! « X L has no mind o f i ts own anyf more than i t ha j~. H

body of i its own r. its act 3. v © a n d d i rentive wi.11 must con so■quen t j. y

be s oug ht in the person of SCjfnebody who for s om e pur po;SG■ may D€?

c a 11 ed an aQ en Jc ti but wbr;« xS rea 13Ly the dir e c 11n g mind a n d w ill

O ,C! A-
U he CO rporati on,, the very ego and centr e o~ the pe rs on a 1 i ty

Of 11ne cIQ Y•poratic:>n „ Picco rding ly, the persons■ through wheJiT» it a c t. s

and doeiS its bu S J.- i ’1 tv:? iHi* wou 1 f-! be its agent s. iiuch peir ;on s are

usua ny c alled d irectors and the term 'dir & c ii d S'"1 a © o _.f jr; ined in

S» 2< 13 s\ \of the Companies Ac t , 195 h includes any person oc c u py ing

- A.
the r*' O X L ion uf directoi Pi v !what. ever name called„17
 (3 i)

In Lit e Insuran ce Cor por a t i on V » rici ri Das Mundhr** A _ sa©

s l
it

was } !& 1 d i:.hat " ft di rec t;Dr is i n st at us Ot an agent o t t h e c: om; p a rs V »

Dw.i ved:i J, in his Jud gement bp ci j. d t !~3 cl t d i r ector i. s i n |302• i ti. on

ot an ag en t ot the c om parry 3 crnarge?d wi t h the obiiqa. “C1 ian of

car ryir as i ts busine 55, Th b n a turs' O T; hi s duty is deJtor minied

is
pa r tly by £> "t. cl tu te and part 3. y bV t h e i ClW ot agency

It the directors enter into contract on be ha it ot the

company, they cannot sue or be sued on such contracts. He is

himself not liable on contract entered into on behalf ot the

company unless he undertakes personal liability. In view ot

Sec. 14 / {4 ) of the (Indian) Companies .Act., 19 bo, if he (the

director) signs or authorised to be signed, on behalf of the

company'., any bill of exchange, hundi, promissory note,

endorsement cheque or order for money or goods, where in the

company's name is not mentioned in legible character, apart from

being punishable with fine which may extend to five hundred

rupees, he (the directors) may beheld liable personally to the

holder thereof tor the at mount in question unless- the same is duly

paid for the com parry held m Oriental industries Ltd. V. Boun

H e r c a n 111 e B a ri k L t ci, •"2

Di rec tor s a rc c orrec 11 y desor i bed - as ageri1e

company, and the ordinary rules of agency apply. She corn parry
being a legal person;, the directors as agents act on its behalf.

l hey are agents for the company with powers ana auta.es ot

carrying on the business subject to restrictions imposed by the

articles and the Act. They make contracts on behalf of the

company and are not personally liable,, unless they contract in

their own name, or fail to exclude personal liability. If they

make contracts ulir a-~v£res the company they will not be liable

on them unless there is an implied breach of warranty of

a u t h o r i t y „3232

Thus where the plaintiff supplied certain goods to a

company through its chairman,, who promised to issue him a

debenture for the price, but never did that anr. the company went,

into liquidation, he was held not liable to the plaintiff.323

Similarly, where the directors allotted certain shares to the

aintitf,
pi a they were held not liable when the company, haviiig

exhausted its shares, failed to give effect to the allotment,32^-

Like Agerr :s, the directors have to disclose their

personal interest if any, in any transaction of the company, It

should, however,, I: e remembered that the directors are the agents

o t a n a. n s 11 x. u r i o n and not of its individual members, except when

that relationship arises due to the special facts of a cass.20

 < )

There-fore,, the aforesaid cases make it clear that a

director of a company is certainly not a mere agent. It is his

duty, among other things, to protect the company and to enforce

its rights even against himself,, If there is the conflict between

his interest and his duty. When he misapplied the company's

money. The statute of limitations does not prevent from applying

to an action brought against him by the company in order to

recover such money.26

Rec en11y , t-Mfc? iiciu! c<is High Cciurt in the crase of M.

Mah a d e v a n P i 11 a r 1Vl l: Vedavull i Pillai he Id that whene t.he iTisnag ing

dir ector taken t he loan on iuehalf of t he company. he himse1f is

lia b .1 e t o p a y t h e loan to t?•ss creditor i n v i e k o f se ction 2S of

t. he negotiable Ii15’trument Acit, and the company not; 1 .i a b i e for

pay the loan to the credito rs unless ■the cuiTipdi ry is a par *c y to

the arrangement„ 32 7’’

(b) Director as an Employee

The- Direc L U r s a r e n o't, as such. 0 rn p j. q y & 0 s c:* f the comp any

dr members o f i i;• CJ. s t a t ■*!*' u Therefore, they are no't entitled to

any privileges, E? g , ,
a pensi i or bonus which may be granted or

... 1 "i owed by the cc sany to- it;s employees « A director

cA J. 1 C Bin, howev er ,

hoi d a salaried em■ jo 1 oymen t or an officn e .1 ri a d d 11 i. on to that DT

d x r ectorship in wf*lieh case he would enjoy any ri gfrvl S5- Q X V 0! "C D

 34:

smp 1 qyees 5uch«2S

It was held in Normandy V„ Ind. Coops and Co. Ltd.5®** that

whsre the director holds- a salaried optics? or employment in

addition' to being a director., he certainly is to be treated as

an employee and entitled to claim the rights given to the

employees as such. A director who per-forms no more than the tasks

of director i.e. attending board meeting and the like., will not

be considered an employee of the company. Whereas, if he is

appointed to some executive post, such as managing director., or

if works full---time or part-time -for the company so as to be part

of its labour fore- e? these activities may make him an employee

even though he is a 3.so a di rector. :'

ss>

Though the Directors may be employees •_.<f the company in

the ordinary sense. They may be em ployees for the purposes of

some statutes but not for others suc h as t hi e e m p.!. o y e e s for

pension or insurance scheme. A d'i rector simpiiciter only

attending board meetings does not make him an employee, I-or

eamp.1.e a masriaging dirsetor or a director who works full-time or

part-time for the company as part of the company's labour force?

wi1i be treated as an employee.

 •i *! 4.
But under

the category of "employee" in as much as there is nobody who

exercises control over the manner m which he does his work. For

instance, under section 2(e) ot the Employees' Provident Funds

Act j 1952;, a m(an aging director may be sin employer. Where he is

an employer., he cannot naturally be an employee within the

meaning of section 2(f) of the Act, A managing director or a

director is treated as an "owner" and as such at "Principal

employer" within the meaning of section 2(1/) ot the Employees'

Starts Insurance Act* 1948, But in a small concern where a

director actively takes part in the working of the 'factory, he

may be am "employee" within the meaning of section 2(9) of the

Act provided from the term; ■act e s i a b 11 :=■ h e ci t i s a t

in relation to him there is !P rin cipa1 emp1oyer

(c) Directors as Trustees of Company

Directors are not me?‘eiy agents taut they are m some sense

and to some extent trustees or in the position pf trustees. They

are trustees ot the company''5 money and property which have come

into their hands or which are under their control. If they

misapply the funds of the company, they would, be liable for

committing breach of trust « Further, where directors make any

corrupt profits on account of their position or office, such as

 (36) .

receiving a secret commission -from a third party in its

transaction Keith the company the directors have to account to

t h e c o m p a n y f o r s u c h p r o f i t s ,3 1

The two -fold character of directors., as agents and as

trustees,, is important to understand in order to appreciate their

rights, powers, duties and liabilities, This two -fold character

may be stated to impart a fiduciary position to the directors in

relation to the company, gu director being in a fiduciary

relationship to the company is always expected to guard the

company's interests and not to utilise the position and knowledge

possessed by him by virtue of his office either to the deteriment

of the company's interest or for his personal advantage, It is

on account of his fiduciary position in relation to the company

that a director is prohibited from entering into contracts with

the company m which he is personally interested unless his

interests in the contracts have been disclosed at a meeting of

the Board of directors. However, this fiduciary relationship of

a director exists with the company and not with individual

shareholders. He do fas not act as an ,5 gent for or trustees of

individual shareholders,3s

It was held in York and North Nil lend Rly. V, Hudson31

regards assets of the company which are- in their control, e.g. ,

power of approving transfers., issuing and allotting shares,,

making calls and forfeiting shares etc. I he 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 in its entirely.

In Ramaswami lyer v» Brahmayya & Co.'*4 it was held that5

the directors of a company are trustees for the company and with

reference to their powers 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. They stand in a fiduciary position

towards the company in regard to the powers .conferred on them by

the articles and also capital under their control.355

Directors are trustees of the company and not of

individual shareholders,3* The facts of the case in Pen:iva1 v.

Wright"5^ are "Negotiations tor the sake of company’s undertaking

were going on, the directors did not disclose the facts to the

shareholders and purchased their shareholdings. The negotiation

failed and the shareholders wanted to repudiate the sale on the

grounds that non disclosure was breach of the fiduciary duty. It

 (38)

was held that there? was no -fiduciary duty towards individual

shareholders and directors need not disclose negotiations which

w e r e u 1 i i m a t e 1 y p r o v e d a b o r 11 v e = ! 1

RomillyP M.R. said in York and North Midland Rly« V.

Hu Ison3*3 that "The o-f-fice of director is an office o-f trust

which5 if- they undertake? it is their duty to perform -fully and

entirely, A resolution by share.holders,; therefore, that the

snares or any other species of property shall be at the disposal

of directorsP is resolution that it shall be at the disposal of

trustees,. In other wordsj that the persons entrusted with the

property shall dispose of it5 within the scope o-f tne functions

d e 1 e g a t e d t o P x n t ri e m a n n e r b e s t s u 11 e d t o b e ri e f i1 t heir c a s t. u i s

aue trust."

in Re Lands Ptl lotment. uo. 3,!j’^ Lmdlsy ,, L.J, said "Hi though

directors are not properly speaking trustees3 yet they have

always been considered and treated as trListees of money which

comes to their hands or which i— i* s > ~i I "! j

and ever since joint stock companies were invented directors have

been held liable to make good money which thE’V have misapplied

upon the same footing as if they were trustees.

 In Allen V. Hayat^*0., the Court held that "The directors

of a company represented to the shareholders that their consent

was necessary in order to effect amalgamation and induced the

shareholders to give them option to purchase their shares,, The

directors made protit out oh the transaction, It was held that

directors are trustees oh the profit made out of the transaction

for the benefit of shareholders,"

The directors are not trustees in the full sense. There-

being significant points of difference between two offices. Some

examples are as below in this regard s'11

(i) A trustee has title to property., whereas a director is

not vested with title to the property of the company of

ii) The trustee cannot take risk with property under his

control whereas director is expected to'take reasonable

business risks in his conduct of the daily affairs of the

company ?,

\ iii) Pi trustee is a man who is the owiit?r of the property and

deals with it as principal while the office of a director

is that of a paid servant of the company.

 (4©)

The directors are the trustees of the company,

particularly in the matter of •financial atfsirs« i hey

a i. s o oc c u py f i ci u c j. ary relationship vis-a-vis the

shareholders of the company, e.g., in the matter of the

issue or transfer of shares, or making calls, the

d i r ec t o r s s hou 1 d protect the interests of the

s h a r e ho 1 d e r s , and should not abuse their fiduciary

position

1 n re 1 a 11 on to b s'!e c ompany, i t. has been already noted 11 i a t

the position of the directors is thiat of trustees. They Cell*’! %

thus, be made liable for any crimina 1 breach of trust by i

under section 409, I = P.C.4,i:

(d) Director as Organs

As Neville, J. put it in Bath V. Standard Land Co

Boa r d of .0 ire c t o r s a re t h £■ bra in an d t he on 1 y brain

company, which is the body and the c ompany can and does get on 1 y

through them," There was a time when a company could not oe h e i d

responsible for any wrong involving mental element.

F o d a y, t he ran g e of c o r po ra te r es pon s i b i 1 i ty a 1 mos t

corresponds with that of an individual'*1’*, as "the attending

 (41 )

company cannot escape -from the consequences which would follow

in the case of an individual! by saying that it is a corporate

body,"4*

This organic, theory of corporate life as was pointed out

by Taluk da fit J „ in Go pail Khaitan V« the State**'’’* a s follows"

"A t heor y which treat:s certain o f f icial.5 as the organ of

the company for whose c tion the compa ny i.s to h e 1iable j u s t as

ci n a tu r a 1 d 0 r son is for •full act ion of his limbs.” Per

H i d a yattul1 ct! i ? J - n in S.T C * V» C . T. Cd•? a "When the brain

•f Line tions t he c o r po rati.on j.Sciicl no f unc: tion, Jl

Lord De nm ng J Hieautif ul 1 f 0 y, p 1 a i.ned the organic

chair acter o t t h e c o m p a n y in his words as ssuch "A company in many

W cl v ~. to be 1 i k iened wit h the? human bo■dy. 11 1las a brain and a

nerv■e cent!--'s wh ich cents•- o 1 s V<<hat it doesi> It ha;s also hands which

ho 1 dIs the t ool and act in a<:ccordance wit!h the direction of the

r f=n t,re. •::>Oill 0 O ’f t he p«h*cj■ pie i n the company are mere servants and

a genits who are nothing more than hand S ti0 d O i-mO wos k s ci! id can

not be said to represen t min c! o r w ill., Ot hers a r e d i r e c t o r s a n d

managers wh o r e present the d .treeting m ind or w;ill of the company

and c on tr o 1 wha 1. i. L UOfcf' s.. This s t at t e o t mir'! d O t these managers is

the state o-■f mir'id of the comp any and is tre ated by law as such. "4'5'
 I he ref c*re 3 in o r d b r to hold a company 1iable for crimes

involving proof of mens™ rea the courts have had to develop a new

principle of corporate liability which xs referred to as the

alterego doctrine„ This allows the law to attribute the mental

state of those who in fa ct control and determine the management

to the company itself as being directing the mind and will. this

transformation has been brought about under the influence of the

o r g an i c t h eo ry o f c o r po r a t e a theory which treats certain

officials as organs of th : comp-any fc whose actions the company

is to be held liable just a s n a t u r a 1 srson is for action of his

1 imbs.53153

11 S here was a time when corporations played a very miner

part in our business affairs * hut now they play the chief part,

and most men are the servants, of corporations. "S1 It is not too

much to say that the wealth and bus-in ess of the country are to

great extent controlled by the corporation.*2 This give the

company and its executive an enormous power to affect the lives

of labourers, consumers and shareholders.®5-2.

L.
,! here was a time when a company could not be Id

responsible for any wrong involving mental element. But today

the range of corpor ate responsibility almost corresponds with

 4*3 3

that of an individua!^ as "the o f f en d 1 n g cor p o r a t i o n c an n ot

escape -From the consequences which would -follow in the case o-f

an individual by saying that t h e y a re a c o r p o r a t i o n . " *®

Thus the modern directors are something more than mere

agents or trustees. The board is also correctly recognised to be

a primary organ o-f the company. 6541

Lord Haldane 5 m his well-known passage said®'’’ "A

corporation is an abstraction. It has no mind o-f its own any more

that it has a body of its own. Its acting and directing will

must;, consequently, be sought in the person of somebody who for

some purpose may be called an agent, but who is really the

directing mind and the will of the corporation. That person may­

be under the direction of shareholders in general -meeting. That

person may be the board of directors itself. <His) fault is the

fault of somebody who is not merely at servant or agent tor whose

action the company is liable upon the footing respondent superior

but somebody tor whom the company is liable because his action

is the very action of the company itself."

Lord Pa r k e r f ur t he r e p 1 a i n ed t he o r g an i i_! i a r a c t e r of

company in these Words, "a company may in many ways be likened

•! human body. It. has a brain and a nerve centre which control
 < 44)

what it does. It, has also hands which hold the tools and act ,in

accordance with directions •from the centre. Some cf the people

in the company are mere servants and agents who are nothing more

than hands to do the work.,- and cannot be said to represent the

mind or will. Others are directors and managers who represent

t he d irecti ng m ind or

doe £> a The s ta te o-f m i n *T JIIXMU

of the comp any and is '

"But the courts

J.
w ho se acts or ..i l f L :ent j

i r11 sn tions of t h0 comp

tha A. it wou 1 d i 1DC l!ude

gen er ai. man.ager or o t he­

of di rector s to corld uc

(e) Directors as Managing Partners

It was held in Automatic tie If Cleaning Co. Ltd. V.

Cunningham*1 that the Directors are a position o+ managing

partners when they appointed to -fill that post by a mutual

arrangement between them and all the shareholders. When they hold

shares5 as in most cases they do, they aref in a sense partner,62

.But they do not have all the powers and liabilities which

the managing partner o-f a fir mi have. Their powers are limited by
restrictions contained 3. n the memorandum and articles 'of

association. Their liability tor the debts of the company is

restricted to the amount unpaid upon their shares.*3

Jessei3 M»R„ explained the position 0+ the directors in

re Forest of Dean Cool Minina Co.64 as follows?

"Directors are described as trustees, agents or managing

partners not as exhausting their powers but as indicating useful

points of view,, it does not matter much what you call them so

long as you understand what their true position is which is that

they are commercial men managing. a trading concern for the

benefit of it and all other shareholders involving in it,,"

Conclusion

'i i t c an he «said that

the comp‘any and they'

ave the powe rs vested

everyone d & a ling with

is of these d(dcoments»

s t e e s 0 f the t- 0 ffs p* a n y ,

However, their position differ trustee of marriage

standing in f i d u c 3. a r y

relationship with the company and they are the .trustees