Corporate Law

Lecture 6

Introduction

1. The welfare of a company depends on the shoulders of the directors and the directors are
also responsible for the interests of the company as well as shareholders. Directors are
basically fiduciary agents and they owe duties to the company, directors’ are appointed
by the company’s shareholders to run the company’s affairs for the benefits of the
shareholders.
2. Moreover, no company can get success without having the good and honest directors, so
company success can only be achieved, if the directors of the company fulfil their duties
and complete enforcement of the director’s duties. Therefore directors play very
significant role in any corporate governance system. Director’s general duties are based
on the certain common law rules and equitable principles.
3. Lord Judge Bowen explains director’s duties in these beautiful words that “directors are
described sometimes as agents, sometimes as trustees and sometimes as managing
partners. But each of this expression is to be used not as exhaustive of their powers and
responsibilities, but indicating useful points of view from which they may for the moment
and for the particular purpose be considered.”
4. Where there is a duty there is also a chance of breach of that duty and where ever there
is a breach of a duty it gives rise to the various remedies. So where there is a breach by
the director of a company there are also available certain remedies against him.

Duty to act for Proper Purposes:

5. Directors’ primary Duties are included in section 204 of the COMPANIES ACT 2017.
6. Conflict of interest is included in section 205 of the ACT.
7. Subject to section 207, conflicted directors may not vote on issues which bring them into
conflict.
8. Directors have to use their powers within the company constitution and only for the
reasonable purposes in the best interests of the company.
9. The directors must observe the constitution of the company while they are exercising
director’s powers and they must exercise their powers bonafidely for the best interest of
whole company and under this duty directors are also compelled to act for the best
interest of shareholders.
10. Furthermore, directors are fiduciary agents of company, so they cannot use their powers
beyond the company’s constitution and for their own benefits. Where directors misuse
their powers and their acts are not in accordance with the constitution of the company
shareholders can challenge them in the court of law.
 11. Under section 204 of the Companies Act it is the duty of directors to function in good faith
and to promote the success of the company as well as its members. So, where director
acts slightly beyond while using their powers to promote the success of the company in
the benefit of its members therefore it is not fair in these circumstances to declare those
acts or purposes improper merely on the base that these functions are slightly beyond
their powers and these acts or purposes are also not in the constitution of the company.

Duty to use Independent Judgment:-

12. Section 204(3) of the Companies Act 2017 set out the duty upon director of independent
judgement and this section require from directors that they must exercise independent
judgement rule and must not fetter their discretion under any body influence.
13. They must only work and watch the company’s interests, affairs and always use their
independent opinion in the best interest of the company rather than any other person’s
interests.

The Duty of Care and Skill:

14. The duty to exercise reasonable care, skill and diligence is consider one of the most
important duties of the directors.
15. This duty of reasonable care, skill and diligence has got huge attention in recent years
also. This duty has been codified in section 204(3) of the Companies Act 2017. The duty
of care and skill is based on the contract, trust, tort and equality principals.
16. Section 204(3) states that a director of any company must display the highest level of
care, skill and diligence, while performing a director duty. Furthermore, director duty of
care, skill and diligence which is normally overlap in daily routine, these duties can
distinguished that care to be understand as carefulness, though not caution, skill suggests
ability, whereas diligence might be understood as requiring a director to use his skills
devotedly in the affairs of the company, in the particular matter in hand.
17. The critical question is that what is the reasonable standard to be expected from a
director while a director performing as director in the company. On the other hand, courts
have not been able to describe clearly that point, what is the compulsory level of care and
skill required from a director of a company, although courts explain a general level. In
Lagunas Nitrate Company v. Lagunas Syndicate it was held in this case that if a director
discharged his responsibility with particular care, used his powers properly within
company constitution and he maximum utilizes his experience and knowledge while
acting as director, so it will consider that he has discharged both his duties to company,
equitable duty and his legal duty as well.
18. Because the directors of a company acted within his powers, and with reasonable care,
and honestly in the best interest of his company, are not personally liable for losses which
the company may suffer by their mistakes.
19. In Re Brazilian Rubber Plantations and Estates , Limited it was held in this case that ‘such
reasonable care must I think be measured by the care an ordinary man might be expected
 to take in the same circumstances on his own behalf. He is clearly I think not responsible
for damages occasioned by errors of judgment.’
20. Directors are elected by the shareholders to run the company affairs on their behalf. So
directors should work with reasonably care and use their best knowledge and skill whilst
working as a director and always work like that they are working for their own work or
their on behalf.

Avoid conflicts or No Personal Secret Profit:-

21. The directors must not enter into any agreement in where company’s interest is clashed
with their own interests. Furthermore, directors cannot make a secret personal profit by
unfair using of their position or authority as a director.
22. There should be no conflict of interest and conflict of policies between the companies and
their directors. Moreover, directors should always avoid taking all those steps, where is
possibility of clash with their own and company interests.
23. Section 207 of the Companies Act 2006 is very clear on how and when the director must
disclose his conflicts. Recite the clause here.
24. States directors undisclosed ‘secret profits regulations, which they make by the using of
the director’s powers. According to this section, directors can be accountable for
undisclosed profits which they obtained as a director’s position.
25. Section 207 talks about interested directors not voting in such matters. Recite the clause
here.
26. What happens if a majority of directors are conflicted? Who decides? The General
meeting.
27. This section covers those secret profits also, which a director received during the business
deal negotiation on the company’s behalf as a director. Directors of a company held in
breach of their duty towards company, where they were appointed for a negotiation on
the company behalf, but they had taken the benefit from this particular company project.
28. If a company’s director misused his power and derives a secret profit from any contract
and did not disclose it, subsequently the company can recover this secret profit from him.
29. However, any conflict can be resolved by the due disclosure of in front of company’s
board of directors and directors only can protect their any acts which can become conflict
later by the due authorisation and prior consent of the BoD.

Enforcement of Director’s Duties

30. How can directors’ duties be enforced?