JAMIA MILLIA ISLAMIA

FACULTY OF LAW

Assignment- CORPORATE LAW 1

TOPIC- POWER, DUTIES AND LIABILITIES OF DIRECTOR

SUBMITTED BY:
DAVID LUKE

BA.LLB(H)[REGULAR]- 13th Semester

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 Contents
INTRODUCTION .....................................................................................................3
APPOINTMENT OF DIRECTORS ..........................................................................4
A) Minimum/Maximum Number of Directors in a Company ..............................4
NUMBER OF DIRECTORSHIP ...........................................................................4
Residence of a director in India ...........................................................................5
Woman Director......................................................................................................5
General provisions for the appointment of the director ..........................................5
POWERS OF THE DIRECTORS .............................................................................6
DUTIES OF THE DIRECTORS ...............................................................................7
CASES REFLECTING THE IMPORTANCE OF DUTY .................................8
CONCLUSIONS ......................................................................................................11
BIBLIOGRAPHY ....................................................................................................12

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 INTRODUCTION

The word company comes from two Latin words i.e “com” meaning together and “panis” means
together.1 When a group of people come up together to run a business for the purpose of earning
profit which has a separate legal entity is called a company. The word “separate legal entity”
means that the company is having an existence of its own and it is separate from its workers who
are “natural person” instead of a legal person. Thus, it is seen as a different entity in the eyes of
the law. For a company to be recognized in India, it needs to be registered under Section 32 of
the Companies Act 2013. Section 3 states, the company may be formed for any lawful purpose.3
Further, it states that a minimum of seven or more persons should be present for the formation of
the public company.4 Two or more persons should be present for the formation of the private
company and a minimum of one person when the company is to be formed as a One Person
Company which shall comply to the Companies ACT 2013.5
In section 4 and section 5 of the Act, the provision for the Memorandum of association and
Articles of association is given. Memorandum of association includes the information related to
the constitution of the company. Section 4 states, the memorandum shall include the name of the
company with the last name denoting “limited” and “private limited” to specify whether it is a
public or private company. It further states the objects of the company. Its liabilities, the amount
of assets which shall be calculated at the time of winding up.6The “name clause” according to
which the name of the company shall be allocated is also present in the memorandum. The
memorandum of the company shall be presented in respective forms given in schedule 1 of the
Act.7
Section 5(1) of the Act states that the articles of the company shall contain the regulations for the
management of the company.8 Thus, the memorandum of the company establishes the
constitution of the company and articles denote how the company is run. They are one of the
most important documents which need to be followed accordingly. Further, Section 10 of the
Companies Act states that the memorandum and articles shall have a binding effect on the
members of the company. It is to be noted that chapter XII of the Companies Act states the
provisions for the meeting of the board of directors. According to the act, the company must hold
general meetings and meetings of the boards of directors. Section 173 of the act mandates that
there shall be a meeting of the board of directors within 30 days of its incorporation and further
there shall be a minimum of 4 meetings of the board of director meetings annually according to
the prescribed manner. Directors play a vital role in formation and controlling the management

1
Online Etymology Dictionary, available at: https://www.etymonline.com/word/company ( Last visited on 2 May
2023)
2
The Companies Act 2013, s.3.
3
Ibid.
4
Ibid.
5
ibid.
6
The Companies Act 2013. s.4
7
Ibid.
8
id. s4

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of the company. Section 2(34) of the act defines the term director as “director” means a director
appointed to the board of company. Under the Companies Act 2013 in India, directors are
entrusted with significant responsibilities and are held to high standards of conduct. The
company having no physical existence cannot perform various functions which are necessary for
its promotion. So, directors perform all those functions and act as the face of a company which
has its own separate entity.
This assignment aims to explore the key provisions of the Companies Act 2013 that relate to
directors and to analyze the powers, duties, and liabilities that come with the role. In this
assignment, the appointment and qualification of directors, their duties and responsibilities, and
the liabilities they may face in case of any wrongdoing will be discussed. We will also look at
relevant case laws and discuss the implications for directors in the current corporate landscape.

I. APPOINTMENT OF DIRECTORS
In simple terms, directors are the persons who are elected or appointed to manage a company’s
affairs and business. There are various provisions in the Company Act 2013 which mention the
minimum qualifications which need to be fulfilled for the appointment of the director of the
company. They are as following,

A) Minimum/Maximum Number of Directors in a Company-

According to Section 149(1) of the Companies Act, 2013, every public company requires that it
shall have a minimum number of 3 directors. There is a requirement of two directors in the case
of a private company, and one director in the case of a One Person Company. 9 A company can
appoint a maximum of fifteen directors. A company may appoint more than fifteen directors
after passing a special resolution in a general meeting and approval of the Central Government is
not required. A period of one year has been provided to enable the companies to comply with
this requirement.10

B) NUMBER OF DIRECTORSHIP

9
The Companies Act 2013, s. 149(1).
10
Ibid.

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Section 165(1) of the Act states that a person can hold the office of director simultaneously in 20
companies. The number of 20 companies includes the office of alternate directorship. A person
cannot be a director in more than 20 companies at a given time. If a director holds more than 20
offices before the commencement of the act, then he shall have to choose between the companies
in which he wants to act as a director not exceeding the prescribed number. If a director is found
to breach this section, then he shall have to pay Rs.2000 for each day which may extend to Rs.
2,00,000.11

C) Residence of a director in India

According to Section 149 (3) of the Act, every director is necessarily to be a residence of India,
i.e. every company shall have at least one director who has stayed in India for a total period of
not less than 182 days in the previous calendar year.12

D) Woman Director
Section 149 of the Act provides for the necessary appointment of one woman in a listed
company. Further, every other public company having paid up share capital of Rs. 100 crores or
more or turnover of Rs. 300 crore or more as on the last date of latest audited financial
statements, shall also appoint at least one-woman director within 1 years from the
commencement of second proviso to Section 149(1) of the Act. 13

E) General provisions for the appointment of the director

1. Every director shall be appointed by the company in general meeting.14

2. Director Identification Number is compulsory for appointment of director of a
company.15
3. Every person proposed to be appointed as a director shall furnish his Director
Identification Number and a declaration that he is not disqualified to become a director
under the Act.16

11
The Companies Act, 2013, s. 165(1).
12
Ibid. S. 149(3)
13
The Companies Act 2013, s. 149(1).
14
APPOINTMENT AND QUALIFICATION OF DIRECTORS, (Indian Institute of Chartered Accountant),
available at: https://www.icsi.edu/media/portals/0/APPOINTMENT%20AND%20QUALIFICATIONS.pdf (last
visited on 2 May 2023)
15
Ibid.
16
Ibid.

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 4. A person appointed as a director shall on or before the appointment give his consent to
hold the office of director in physical form DIR-2 i.e. Consent to act as a director of a
company.17
5. Articles of the Company may provide provisions relating to the retirement of directors. If
there is no provision in the article, then not less than two-thirds of the total number of
directors of a public company shall be persons whose period of office is liable to
determination by retirement by rotation and eligible to be reappointed at annual general
meeting.18

II. POWERS OF THE DIRECTORS

Section 179 of the act provides that the board of directors is empowered to exercise all the
activities that the company is authorized to do so.19 The effect of this section is that the directors
have almost all the power to perform the activities with respect to the business which is not
barred in the act or articles of the company. Their power can only be restricted by the removal
from the company.20Thus, their powers are limited to the articles of association and other
provisions of the company act. It can be said that these are only absolute to a certain extent.
There is always a chance of clashes between the shareholders and the directors. In the case of
Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame21, the conflict between the
shareholders arose regarding the sale of certain objects of the company. The shareholders
proposed a simple resolution to force the directors to proceed with the sale of the objects of the
company. This resolution was refuted by the directors. Then the shareholders contended that it is
only the question of principal and agent. Shareholders are the principals and directors are the
agents. It was held that "directors are agents not of a majority of the shareholders, but of the
company, of the whole entity made up of all the shareholders. And if the whole entity of
shareholders has entrusted the directors with a particular power a simple majority could not
interfere in exercise of it.".
In the case of ]ohn Shaw & Sons (Salford) Ltd v Shaw22,
If powers of management are vested in the directors, they and they alone can exercise these
powers. The only way in which the general body of the shareholders can control the exercise of

17
Ibid.
18
Ibid.
19
The Companies Act. S.179.
20
Avtar Singh, COMPANY LAW 286, ( EASTERN Book Company, LUCKNOW, 17TH edn.)
21
(1906) 2 Ch 34: 94 LT 651
22
935) 2 KB 113(CA).

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the powers vested by the articles in directors is by altering their articles, or, if opportunity arises
under the articles, by refusing to re-elect the directors of whose action they disapprove. They
cannot themselves usurp the powers which by the articles are vested in the directors any more
than the directors can usurp the powers vested by the articles in the general body of the
shareholders. Therefore, this case demarcated the position of directors and shareholders in case
of dispute.

III. DUTIES OF THE DIRECTORS

Directors are key decision-makers of a company and as such, they are entrusted with various
responsibilities and duties under the company law. These duties are of utmost importance for the
proper functioning of a company and to ensure that the interests of all stakeholders are protected.
The following are the key duties of directors under the company law:

1. Duty to act in good faith and in the best interests of the company : Section 166
of the Companies Act, 201323, states that a director of a company shall act in good faith to
promote the objects of the company for the benefit of its members as a whole and in the best
interests of the company. This duty requires directors to exercise their powers and duties in the
best interests of the company and not for their own personal gain or interests.24

2. Duty to exercise due care, skill, and diligence: Section 16625 also mandates that a
director of a company shall exercise due care, skill, and diligence while discharging his duties.
This duty requires directors to apply their knowledge, expertise, and experience to make
informed decisions that are in the best interests of the company.26

3. Duty to avoid conflicts of interest: Section 18427 of the Companies Act, 2013, lays
down the duty of directors to avoid situations that may result in a conflict of interest between
their personal interests and the interests of the company. Directors must disclose their interests in

23
THE COMPANIES ACT, 2013 s.166
24
J.P Sharma, Corporate Laws, p.89 (Ane Books Pvt. Ltd., New Delhi)
25
Ibid.
26
Id. At. 90.
27
THE Companies Act 2013, s.184

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any contract, arrangement, or transaction entered or proposed to be entered into by the company
to avoid any conflict of interest.28

4. Duty to maintain confidentiality: Directors have access to sensitive information

regarding the company, its operations, and its stakeholders. As such, they have a duty to
maintain confidentiality and not disclose any information that may harm the company’s
interests.29

5. Duty to prevent insider trading: Directors have a duty to prevent insider trading in the
company’s securities. They must ensure that no insider, including themselves, trades in the
securities of the company on the basis of any unpublished price-sensitive information.30

IV. CASES REFLECTING THE IMPORTANCE OF DUTY

1) Satyam Computer Services Ltd. v. Seshadri,31: This case involved the Satyam Computer
Services scandal, where the directors of the company were found to have engaged in fraudulent
activities. The case highlighted the importance of directors' duties of loyalty, care, and good
faith.

2) Hindustan Lever Ltd. v. Bhatia,32 : This case dealt with the duty of directors to act in the best
interests of the company. The court held that directors must act with a view to promote the
success of the company and to act for the benefit of its members.

3) R. Sitaraman v. Sun TV Network Ltd.33, This case dealt with the liability of directors for
insider trading. The court held that directors have a duty to prevent insider trading and can be
held liable for any violations of securities laws.

28
Brenda Hanningan, Company Law, p.54 (Oxford University Press, U.K)
29
Ibid.
30
Ibid.
31
(2010) 156 CompCas 241 (AP)
32
(2004) 121 CompCas 529 (Bom)
33
(2016) 133 SCL 18 (Mad)

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 V. LIABILITIES OF THE DIRECTORS
The liability of the Director to the company may arise from:

(a) Breach of Fiduciary duty- whenever a director works dishonestly instead of the interest of
company, he will be held liable for breach of fiduciary duty. Most of the powers of Directors are
‘powers in trust’ as explained above and therefore, should be exercised for the benefit of the
company and not for their own benefit or for the benefit of other members.34

(b) Ultra vires acts- everybody in the company is supposed to work within the prescribed limits
or the provisions of Companies Act, Memorandum and Articles of association since these lay
down the limits to the activities of the company and consequently to the power of board of
Directors. If the Directors do anything which is beyond these prescribed limits it would be
considered as ultra vires and so he shall be made personally liable for this.35
(c) Negligence- as long as the Directors Act within their powers and exercise their duty with
reasonable care and skill as every prudent businessman is expected to take care of, they will not
be made liable. But where they fail to exercise reasonable care, skill and diligence, they shall be
deemed to have acted negligently in discharge of their duties and consequently shall be liable for
any loss or damage resulting therefrom. Although there are no objective standards of skill and
care with the help of which we can decide whether a director has been negligent, instead, there
are only general principles which may be applied depending on the facts of each case. The
directors are not bound to bring any special qualification into their office. The mere omission to
take every possible care will not amount to negligence.36

(d) Mala fide Acts- directors are the trustees of the assets of the company including money,
property and also exercise power over them. And If they exercise such power dishonestly or
perform their duties in a malafide manner, they will be held liable for the breach of trust and
would be asked to reimburse the company of whatever the loss company has suffered of such
malafide act. It is the foremost duty of the director to disclose all the facts to the company which
is known to him and so he could be made accountable to the company for any secret profits he
might have earned in the course of performing duties on behalf of the company. Directors can
also be made liable for the acts of Misconduct or willful misuse of powers.37

34
Directors and liabilites, India, available at: https://www.legalservicesindia.com/article/577/Directors-&-Their-
Liabilities.html (last visited on 3 May 2023)
35
Ibid.
36
Supra Note. 20. At. 67
37
Ibid.

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A company having a separate legal entity can sue and be sued as a separate individual. In the
land mark case of Salomom V. Salomon38, the issue before the court was to check the personal
liabilities of the director. In this case, Solomon, made himself and his family members the other
members of the company. He issued the shares and debentures for raising the capital of the
company. After some time, his company went to a loss and the liability to the creditors arrived.
Solomon contended that he is not liable to pay the creditors as the company is having separate
legal entity. The house of lords held that the company was duly incorporated, it is an independent
person with its rights and liabilities appropriate to itself, and that “the motives of those who took
part in the promotion of the company are absolutely irrelevant in discussing what those rights
and liabilities are”.39 Thus, upholding the protection of separate legal entity. Many times, cases
have arisen in which directors try to take arbitrary advantage of the separate legal entity of the
company. To remove such lacunae the doctrine of lifting of the corporate veil was incorporated
to set it aside. It is worthwhile here to refer to the case of Adams v Cape Industries40, which
examined the common law grounds, primarily evolved through case law as an equitable
remedy,41 namely-
(a) agency,
(b) fraud,
(c) façade or sham,
(d) group enterprise, and
(e) injustice or unfairness.
The exception of separate legal entity has been invoked widely by English courts, including in
the recent cases of , Mr Karavias, Egerton Corp.42, Beckett Investment Management Group v
Hall,43 Stone & Rolls v Moore Stephens,44and Akzo Nobel v The Competition Commission.45

38
[1897] AC 22
39
Ibid. at. 30-31 (Lord Halsbury LC)
40
991 4 All ER 769, 779
41
Peter B.Oh, ‘Veil-Piercing Unbound’ (2013) 93 B.U. L. Rev. 89
42
2007 I.C.R. 1539 (A.C.).
43
2009 1 A.C. 1391
44
2009 UKHL 39
45
2013 CAT 13 (21 June 2013)

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 CONCLUSIONS
It can be concluded that the directors of the company have wide discretionary powers subject to
the limitations to the Companies Act, 2013 and articles of association. But the directors also have
certain duties and responsibilities which they need to abide in order to work in the promotion and
growth of the company. The case laws presented clarify the importance of the role they play to
the company. Directors sometimes indulge in activities which are beyond their powers for the
purpose of acquiring some dishonest gain. It can be seen from the case of Satyam computers46
,that the earlier companies act was inefficient to deal with the cases in which directors were
involved in fraudulent activities, but the new amendment of 2013 addressed most of the prior
lacunae and rectified them to the extent which can be fruitful to the companies and shareholders
at large. But there is a need to create a proper mechanism through which the complex procedures
can be simplified to save time and resources of the company. Moreover, there should be a
separate committee to which the acts of the directors in case of breach of duty can hold them
accountable for their actions.

46
Supra Note. 31.

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 BIBLIOGRAPHY
PRIMARY SOURCES

LEGISLATION-
1. THE COMPANIES ACT, 2013.

INTERNATIONAL CASE LAWS-

1. 1906) 2 Ch 34: 94 LT 651
2. 935) 2 KB 113(CA).
3. [1897] AC 22
4. 2007 I.C.R. 1539 (A.C.).
5. 2009 1 A.C. 1391
6. 2013 CAT 13 (21 June 2013)

INDIAN CASE LAWS

1. (2010) 156 CompCas 241 (AP)
2. (2004) 121 CompCas 529 (Bom)
3. (2016) 133 SCL 18 (Mad)

SECONDARY SOURCES

BOOKS-

1. Singh, COMPANY LAW 286, ( EASTERN Book Company, LUCKNOW, 17TH edn.)
2. J.P Sharma, Corporate Laws, p.89 (Ane Books Pvt. Ltd., New Delhi)
3. Peter B.Oh, ‘Veil-Piercing Unbound’ (2013) 93 B.U. L. Rev. 89

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 4. Brenda Hanningan, Company Law, p.54 (Oxford University Press, U.K)

INTERNET SOURCES
1. Online Etymology Dictionary, available at: https://www.etymonline.com/word/company (
Last visited on 2 May 2023)
2. APPOINTMENT AND QUALIFICATION OF DIRECTORS, (Indian Institute of
Chartered Accountant), available at:
https://www.icsi.edu/media/portals/0/APPOINTMENT%20AND%20QUALIFICATIONS.
pdf (last visited on 2 May 2023)
3. Directors and liabilites, India, available at:
https://www.legalservicesindia.com/article/577/Directors-&-Their-Liabilities.html (last
visited on 3 May 2023)

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