DUTIES AND LIABILITIES OF DIRECTORS

Duties of directors are numerous. Any omission or commission of an act in

contravention of lawful duty of a director gives rise to liability which he has to
suffer. A director is required to be reasonably careful in performing his duties,
otherwise, it creates liability not only for the director himself, but also for the
company and other defaulting officers. The duties of directors are discussed in
the first place and then the liabilities of directors

The duties of directors have been incorporated in Section 166 of the Companies
Act 2013. Section 166 reads as

Duties of directors
(1) Subject to the provisions of this Act, a director of a company shall act in
accordance with the articles of the company.
(2) A director of a company shall 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.
(3) A director of a company shall exercise his duties with due and reasonable
care, skill
and diligence and shall exercise independent judgment.
(4) A director of a company shall not involve 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.
(5) A director of a company shall not 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.
(6) A director of a company shall not assign his office and any assignment
so made shall be void.
(7) If a director of the company contravenes the provisions of this section
such director shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to five lakh rupees.
The Act of 1956 did not specifically lay down the duties of the directors. The field
was occupied by common law. It is important to remember that codification of
duties in Section 166 of the Companies Act cannot be said to be an exhaustive
enumeration of the duties of the directors. Common law principles laid down by
the courts from time to time are still relevant.

The duties of directors can be discussed under the following heads :

1.Duty to act bona fide in the best interests of the company
This duty is the most basic of all duties. What is meant by bona fide and in the best
interests of the company is that a director must at all times ensure that his actions
are consistent with the well being of the company’s.
In Cook v. Deeks, a contract offered to the company was rejected by the directors
who subsequently accepted it in their personal capacity and made some profit. It
was held that the directors were liable to account for such profits. The court
observed: “Men who assume complete control of company’s business must
remember that they are not at liberty to sacrifice the interests, which they are
bound to protect and while ostensibly acting for the company, divert in their own
favour business which should properly belong to the company they represent.”

A director who acquires property only by reason of the fact that he was a director
and in the course of the exercise of the power of director, shall be liable to the
company if he makes any profit on the resale of such property.

Regal (hastings) ltd v Gulliver [1967] 2 A.C.134; [1942] 1 ALL E.R. 378

is an authority for this principle. The company (“Regal”) operated a London

cinema. The defendant was one of its directors, who proposed to the members of
the company that it purchase two other cinemas. This opportunity was declined.
Accordingly, the directors resigned from their position and set up another
company (“Amalgamated”). Amalgamated purchased the cinemas with a view to
selling them back to Regal, and operated them successfully over the next few
years. As a consequence, the value of the directors’ shares in Amalgamated
increased.

The new directors of Regal then brought a claim on behalf of the company against
Gulliver and the other former directors to require them to account to Regal for this
profit, arguing that this was an opportunity they had obtained as a result of their
position as directors of Regal. Gulliver replied that the profit had been made as a
result of his own effort and acumen, there had been no impropriety on his part, and
Regal should not benefit from an opportunity which they had declined to take up in
the first place.

While accepting these arguments, the House of Lords (by a bare majority of 3 to 2)
found that as the opportunity to purchase the cinemas had arisen as a result of his
directorship of Regal, Gulliver had a duty to account for the profit he had made,
regardless of the fact that Regal had declined this opportunity. The case therefore
demonstrates the strictness of the prohibition on conflicts of interest irrespective of
the intentions of the directors.

In Industrial Development Consultants Ltd v Cooley , Mr Cooley was the

managing director of the claimant company. His duties included procuring
business in the field of developing gas depots. The company had unsuccessful
negotiations with the Eastern Gas Board for the development of four depots.
However, the Gas Board were not prepared to let the contracts to the company.
The Gas Board subsequently approached Mr Cooley in his private capacity; and
indicated that they would be prepared to contract with him personally. Mr Cooley
therefore resigned his office (on the basis of a false excuse) and entered into the
contracts with the Gas Board.
The Court held that he was accountable for the profit. Where a fiduciary obtains a
benefit in breach of his fiduciary duty, he is liable to account even if the
beneficiary could not itself have obtained that benefit or opportunity.

2.Duties of Care, Skill and Diligence

The directors of a company are expected to perform their functions with reasonable
care and attention. They must discharge their duties with skill and diligence as
expected from a reasonable person of his knowledge and experience. They are,
however, not liable for bonafide error of judgment as observed by Romer J in Re
City Equitable Fire Insurance Company. In this case, in the course of winding up
an insurance company, the liquidator found a shortage of funds, this loss being
largely attributable to the fraud of the managing director. While it was found that
hthe other directors were not implicated in the fraud, the liquidator sought to make
them liable for negligence in authorising or making poor and unwise investments
and loans and for payment of dividends out of capital. He did not succeed, mainly
because the company’s articles exempted the directors from liability for any non-
wilful loss or damage they might cause.
Romer J’s judgment, which was affirmed by the English Court of Appeal,
summarised the duties of skill, diligence and care into four propositions:
1. A director must exercise that degree of skill and diligence as would amount to
the reasonable care that an ordinary man might be expected to take, in the
circumstances, on his own behalf.
2. A director need show no greater degree of skill than may reasonably be expected
from a person of his knowledge and experience. Thus the director’s care and
diligence must be judged on subjective criteria. Regard must be had to the
director’s personal qualifications and experience, not to some objective minimum
standard. He need bring no special qualifications to the office. Only if he has
knowledge and experience appropriate to his tasks will he be expected to
demonstrate a commensurate degree of skill.

3. A director is not bound to give "’continuous attention to the affairs of his

company".The duties, Romer J added, are of an intermittent nature, to be
performed in the boardroom and on subcommittees. But there is no duty to attend
all board meetings or shoulder responsibility for decisions made in his or her
absence.

4.A director can rely on other officers or experts. Modern, large businesses rely on
effective delegation by the boards of directors of subordinate and administrative
tasks to subordinates or experts. Boards delegate to accountants, auditors, lawyers,
executive committees, managers and other company employees and trust in and
rely on their advice. The question that arises is : Can the directors rely on officials
and experts to perform these functions? Romer J in Re City Equitable Fire
Insurance Co Ltd qualified his affirmative answer:
“In respect of all duties that, having regard to the exigencies of business, and the
articles of association, may properly be left to some other official, a director is, in
the absence of grounds for suspicion, justified in trusting that official to perform
such duties honestly”.
The standards laid down in Re City Equitable Fire Insurance Co Ltd are considered
lax in the present times. The focus now is on the level of responsibility taken on by
the directors rather than the directors actual level of expertise of experience. It is
likely that the courts will continue the line of applying a higher standard of care
and attention to the business by all directors. The standard required is that to be
reasonably expected of someone occupying the office in question.(S.M.Watson,
“Directors Duties in New Zealand”)
In Dorchester Finance Co Ltd. v. Stebbing, it was held that the duty of care extends
uniformly to all the directors whether they are executive or non executive directors.
Thus the two non-executive directors of a company were liable for the loss caused
to the company due to their negligence in signing blank cheques which enabled the
executive to enter the amount as they pleased in those cheques. As regards the
standard

Exclusion of liability : Section 201of Companies Act 1956 did not allow liability
for negligence to be excluded. It rendered void any provision in the company’s
Articles in any agreement which excluded liability for negligence.
However there is no analogous provision in the Companies Act 2013.But now the
duties of the directors have been incorporated in Section 166 of the Act. No
modification of the duties is permissible. Therefore, liability for negligence cannot
be excluded. However, Section 463extends special protection against a liability
that may have been incurred in good faith. Where in a proceeding for negligence,
default, misfeasance, breach of duty or breach of trust, it appears to the court that
the director sued “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, ether wholly or partly from his liability on such terms as it may think fit.”

3.Duty to Attend Board Meetings Section 167 (1) (b) provides that the office of
the director will be vacated if he absents himself from all meetings of the board for
a consecutive period of 12 months with or without obtaining leave from the
board. Moreover a director’s habitual absence from the board meetings may, taken
in the light of other circumstances, become evidence of negligence in his part.

4. Duty not to Delegate A Director as an agent is governed by the maxim

delegatus non protest delegare. This means that a delegate cannot further delegate.
There are, however, two exceptions to this rule. Firstly, a director can delegate
such functions which the Act or the Articles of the company permit him to
delegate. Secondly, delegation is permissible where due to exigencies of business
certain duties are left to be discharged by some other officials of the company. It is
important to remember that delegating responsibility in a proper manner and to a
proper extent by the board is permissible but total abrogation of responsibility by
the directors is prohibited.

Pertinently,Section 166(6 ) provides that a director of a company shall not assign

his office and any assignment so made shall be void
In Dovey v. Cory, a banking company suffered heavy losses due to huge advances
given to certain untrustworthy persons without taking proper security. Also, the
payment of dividends was made out of capital. All this, was attributable to the
machinations of the Chairman and the manager who manipulated the accounts and
showed a profit. The defendant director was ensured of the correctness of the
accounts presented to him and he authorized the payment of dividends which were
actually paid out of capital. Holding the director not liable, the court observed that
a director is entitled to rely upon the judgment, information and advice of a fellow
director whose integrity skill and competence he has no reason to suspect.
Lord Halsbury observed ‘The business of life could not go on if people could not
trust those who are put in a position of trust for the express purpose of attending to
details of management. He could have been held liable only if he had some
reasonable grounds to suspect the honesty of the other officials”

This principle was again followed by Madras High Court in Doss v. C. P. Connel,
where a person who was discharged insolvent was appointed as an advisory
director of a banking company. He misappropriated part of the security money
received from the employees of the company which was at his disposal. The
liquidator did not succeed in his effort to charge his co-directors with the liability.
The court observed that the respondents had no reason whatsoever to suspect the
integrity of the chairman. Insolvency does not necessarily mean that a man is
dishonest.

However, directors cannot always shrug off their responsibility and escape liability
by saying that they knew nothing and believed everything was alright.

For example, in Palai Central Bank Ltd v.Joseph Augustii, a banking company
paid taxes and dividends for 22 years out of profits which had not been really
earned. The directors pleaded that they had made the payments on the basis of
accounts prepared and certified by competent staff and auditors. The court,
however, rejected their contention and held them liable for the deliberate
falsification of accounts. Referring to the magnitude of the loss involved, which
could not be easily explained, the court observed: “Not one of them cared to
disclose who were the persons in actual charge of these matters, what exactly were
the duties imposed on them and what scrutiny there was over their work in order to
assure that it was properly done. At the best plea of the respondents can only
amount to a plea of complete ignorance born of a complete inadvertence to their
duties, as directors, reckless indifferences or otherwise put a willful shutting of
their eyes. The deliberate falsification of the books year after year could not have
been handiwork of the staff of the company; it could only have been at the specific
instructions of those at the helm of affairs. In a company, the directors are at the
helm of affairs, and although the rudder might be in the hands of managing
director, it is their duty to keep an eye on him and see that he steers a proper
course.”

5.Duty to disclose interest

The director stands in a fiduciary relation to the company. It is his duty to avoid
conflict between his personal interest and his duty to the company. Consequently,
for the proper discharge of his functions, it is imperative that he is free from any
conflicting interest. If he has any interest, he is duty bound to disclose it.

In Aberdeen Railways v. Blaikie Bros , Blaikie had a conflict of interest as a

director, Chairman and managing partner of a firm which supplied office furniture
to the company. Despite the fact that the price the company paid was fair, the
company was entitled to set aside the contract.

In Ramaswami Iyer v. Madras Times Printing and Publishing Co, under a

company’s articles two directors constituted a quorum for a meeting of the board.
Two were present and they appointed one of themselves as managing director and
co-director ofthe paper run by the company. The appointments were held to be
invalid as when the vote of the interested director was excluded there was no
quorum to make the appointment in each case.

Section 184 of the Companies Act lays down the procedure to be followed in
the event of the director being interested in a transaction with the company.
Section 184 reads as
Disclosure of interest by director
(1) Every director shall disclose his concern or interest in any company or
companies or bodies corporate, firms, or other association of individuals which
shall include the shareholding, in such manner as may be prescribed.
(2) Every director of a company, who is in any way, whether directly or indirectly,
concerned or interested in a contract or arrangement or proposed contract or
arrangement entered into or to be entered into—
(a) with a body corporate in which such director or such director in association
with any other director, holds more than two per cent shareholding of that body
corporate, or is a promoter, manager, Chief Executive Officer of that body
corporate; or
(b) with a firm or other entity in which, such director is a partner, owner or
member, as the case may be,
shall disclose the nature of his concern or interest at the meeting of the Board in
which the contract or arrangement is discussed and shall not participate in such
meeting:
A contract or arrangement entered into by the company without disclosure
or with participation by a director who is concerned or interested in any way,
directly or indirectly, in the contract or arrangement, shall be voidable at the option
of the company.

Liabilities of directors

Liabilities of directors are generally speaking three-fold, such as. (1) liabilities to
outsiders or third parties, (2) liabilities to the company or the shareholders in general, and
(3) liability to the State or criminal liability.

(1) Liability to Outsiders: The directors are not personally liable to outsiders or third
parties if they act within the scope of the powers vested in them. The directors shall be
personally liable to third parties for certain contracts in the following cases:

(a) They contract with outsiders in their personal capacity.

(b) They contract as agents of an undisclosed principal.
In such cases, they simply describe them as directors without disclosing the
name of the company. It seems that the directors cannot bind the company
where they sign the contract on behalf of the company without affixing the seal of
the company. The proper test for determination of personal liability of directors
in these cases will be: Do they contract in form and substance on behalf of the
company to give a clear impression to the outsiders that they are acting simply
 as agents of a specific company? If the answer to this test is yes, they are
protected from personal liability.

(c) The directors are personally liable for contract with third parties when it is
made for a prospective company (i.e., before the incorporation of the
company
(d) The personal liability of directors will also arise when they enter into a contract
which is ultra vires the company.
(e) In default of statutory duties, the directors shall be personally liable.
Such liability generally arises when (i) there is a mis-statement in the prospectus:
(ii) there is an irregular allotment,' (iii) there is a failure to repay application
money for shares if the minimum subscription has not been subscribed,' (iv) there
is a failure to repay application money forthwith if allotment of shares and
debentures is not dealt in on stock exchange as provided in the prospectus.8

(f) Where directors are a party to a fraud or tort, they are liable to the aggrieved party.
(2) Liability to the Company: The liability of directors to the company arises
under the following circumstances:

(a) The directors have acted ultra vires the company. It is immaterial in such
case to prove fraud of the directors or that they acted "bonafide with the
approval of the majority of the shareholders

(b The directors are liable in respect of (i) any negligence, (ii) default
misfeasance, (iii) breach of duty, or (iv) breach of trust' of which they may
be guilty in relation to the company.4But they are not liable for errors of
judgment. If they make proper investigation into the affairs of the
company and arrive at a bona fide conclusion, they are not liable even if
that conclusion suffers from error of judgment. In order to make a director
liable for default, misfeasance it is necessary to prove that his misconduct
is wilful or amounts to culpable negligence. In the course of winding up of
a company, the court may on the application of the liquidator or any
creditor or contributory, examine the conduct of a director for any
misfeasance or breach of trust in relation to the company.

(3) Liability to the State: The Companies Act, 2013 imposes criminal liability
either in the form of fine or imprisonment or both on the directors for
contravention of certain statutory duties. The penal sections dealing with offence
imposing punishment are mainly Sections 147,159,339,403,447

Appointment of Directors

Number of directors:
Every company is required to have a board of directors consisting of individual
directors. Under the companies Act, 2013, no company or firm or association can
be the director of a company. Section 149 (1) provides that every public limited
company shall have a minimum number of 3 directors while a private limited
company shall have a minimum number of 2 directors. The maximum number of
directors permitted is now is 15 and the same can be increased by passing a special
resolution. Approval of Central government is not required. In the old Act, a
maximum number of 12 directors were permitted and permission of Central
Government was required for increasing it beyond this number.
A public company having a paid up share capital of Rs. Five crore or more and one
thousand or more small shareholders, should have a director elected by the small
shareholders. A small shareholder for this purpose means a shareholder having
shares of the nominal value of twenty thousand or less in a public company.

Mandatory requirements for Appointment: Director shall give to the company

his consent and Director Identification Number (DIN) and also a declaration to the
effect that he is not disqualified before his appointment. (Section 152).The Board
must ensure that director to be appointed is not hit by any disqualification specified
in Section 164 and meets the requirements of the company.
Modes for appointment of Directors
The Articles of association generally contains provisions with regards to
appointment, retirement rights duties and remuneration of directors. Directors are
appointed

I.. by naming first directors in the articles of association (If no mention is made by
default, individual subscribers (other than body corporate) to the memorandum will
be first directors. In case of one person company, individual being a subscriber
to the Memorandum of association, he shall be deemed to be its first director until
the director or directors are duly appointed. { Section 152(1)}
II.by the shareholders in General meeting {Section 152(2)}
III. by the board of directors in the following categories
a. Additional directors: If the articles confer power on the directors, they can
appoint additional directors.(persons who fail to get elected at General meeting
can not be appointed as additional director)
b. Nominee Directors :Directors can also be appointed by nomination provided
there is power to that effect in the articles. Section 161(3) provides that subject to
the articles of the company, the board may appoint any person as a director
nominated by any institution in pursuance of any provision of law or any
agreement or by the Central Government by virtue of its shareholding in a
government company. An agreement among the shareholders may be incorporated
in the articles to the effect that every holder of 10 percent shares shall have a right
to nominate a director on the board.
c. Alternate Directors: If authorized by the articles or by a resolution of the
company, the board of directors may appoint an officiating director if any director
is absent for a period of three months or more from India. Such a director is called
alternate director .He holds office only for the period for which the original
director would have been in office.
c. Causal vacancies caused by resignation of a duly appointed director before
expiry of his term can also be filled by the board of directors.

Composition of Board:
The Board of directors consists of whole time director/Managing director and other
directors including independent directors. Whole time directors as the name itself
implies devote whole time and are treated as employees. Similar is the position of
Managing director and this category of directors are entrusted with substantial
powers of management to look after the day to day affairs of the company.
Unless the articles provide for retirement of all directors not less than 2/3rds of the
total number of directors shall be liable to retire by rotation at every Annual
General meeting of a public Limited company {Section 152 (6)} and are eligible to
be reappointed. The remaining 1/3 directors shall be permanent directors. Directors
to retire shall be those who have been longest in the office
New Categories of Directors
Independent Director:
In the case of a listed company, at least one third of the directors have to be
independent directors.
Resident Director:
This is one of the most important changes made in the new regime, particularly in
respect of the appointment of Directors under section 149 of the Companies Act,
2013. It states that every Company should have at least one resident Director i.e. a
person who has stayed in India for not less than 182 days in the previous calendar
year.
Woman Director
Now the legislature has made mandatory for certain class of the company to
appoint women as director. Every listed company and every other public company
having paid up capital of Rs. 100 cr. or more, or turnover of Rs. 300 cr. or more,
must have at least one woman director on its board.

Restrictions on the number of Directorships

The Companies Act prevents a Director from being a Director, at the same time, in
more than 20 companies.

Directors’ common-law fiduciary

duties require them to exercise their powers bona fide and for the benefit of
the company. In addition, they have the duty to display reasonable care and