Directors of a Company

Meaning of Director as per the Companies Act, 1956

A company is a legal entity and does not have any physicalexistence. It can act only through natural persons to run itsaffairs. The person, acting on its behalf, is called Director.A Director is any person, occupying the position of Director,by whatever name called. They are professional men, hired bythe company to direct its affairs. But, they are not theservants of the company. They are rather the officers of thecompany.

The definition of Director given in this clause is aninclusive definition. It includes any person who occupies theposition of a director is known as Director whether or notdesignated as Director. It is not the name by which a personis called but the position he occupies and the functions andduties which he discharges that determine whether in fact heis a Director or not. So long as a person is duly, appointedby the company to control the company's business and,authorized by the Articles to contract in the company's nameand, on its behalf, he functions as a Director.

The Articles of a company may, therefore, designate itsDirectors as governors, members of the governing council or,the board of management, or give them any other title, but sofar as the law is concerned, they are simple Directors.

Duties of a Director

There is no exhaustive list defining the duties of the Boardof Directors towards the company and shareholders. But basedon the analysis of the provisions of the Companies Act, 1956with regards to a director, some general duties of a Directorare mentioned herein: To file return of allotments: a companymust file with the Registrar, within a period of 30 days, areturn of the allotments, stating the specified particulars.Failure to file such return shall make the Directors liable as

'officer in default'. A fine, up to Rs.500 per day, till thedefault continues may be levied. Not to issue irredeemablepreference shares or shares, redeemable after 20 years: Acompany cannot issue irredeemable preference shares orpreference shares, redeemable beyond 20 years. Directors,making any such issue, may be held liable as 'officer indefault' and, may be subject to a fine, upto Rs. 1,000. Todisclose interest: A Director, who is interested in atransaction of the company, must disclose his interest to theBoard. The disclosure must be made at the first meeting of theBoard, held after he has become interested. This is because aDirector stands in a fiduciary capacity with the company and,therefore, he must not place himself in a position in whichhis personal interest conflicts with his duty.

A company is not debarred from entering into a contract inwhich a Director is interested. It only requires that suchinterest be disclosed. An interested Director should not takepart in the discussion on the matter of his interest. Hispresence shall not be counted for the purpose of quorum forthat item. He shall not vote on that matter. If he does vote,his vote shall be void. Non-disclosure of interest makes thecontract avoidable and not void. However, the concernedDirector may be subjected to fine, up to Rs. 5,000.

Duty to attend Board meetings - A number of powers of thecompany are exercised by the Board of Directors in theirmeetings, held from time to time. Although, a Director may notbe able to attend all the meetings, but, if he fails to attendthree consecutive meetings or, all meetings for a period ofthree months, whichever is longer, without permission of theBoard, his office shall, automatically, fall vacant.

A Director's duties also include the following:• To convene Statutory, Annual General Meeting (AGM) and also Extraordinary General Meetings; • To prepare and place at the AGM, along with the balance sheet and, profit and loss account, a report on the company's

affairs, including the report of the Board of Directors; • To authenticate and approve annual financial statement; • To appoint first auditor of the company; • To appoint cost auditor of the company; • To make a declaration of solvency in the case of a Members' voluntary winding up;

It is difficult to describe the duty of directors in generalterms, whether by way of analogy or otherwise. The nature ofduties of director would depend not only on the nature of thecompany's business but also on the manner in which the work ofthe company is distributed between directors and otherofficials. A director need not exhibit in the performance ofhis duties a greater degree of skill than may reasonably beexpected from a person of his knowledge and experience.

In case of a Non Executive Director: A director is not boundto give continuous attention to the affairs of his company.His duties are of an intermittent nature to be performed atperiodical board meetings, and at meetings of any committee ofthe board upon which he happens to be placed. He is not,however, bound to attend all such meetings, though he ought toattend whenever, in the circumstances, he is reasonably ableto do so. However an Executive Director needs to give constantattention and take active interest in the affairs of theCompany.

In respect of all duties that, having regard to the exigenciesof business, and the articles of association, may properly beleft to some other official, a director, is in the absence ifgrounds for suspicion justified in trusting that officer toperform such duties honestly. A director must of necessitytrust the officials of the company to perform properly andhonestly the duties allocated to those officials.

When presenting their annual reports and balance sheet totheir shareholders and when recommending the declaration of adividend, directors ought not to be satisfied as to the valueof their company's assets merely by the assurances neither of

their chairman, nor with the experience or the belief of theauditor howsoever competent and trust worthy he is. All inall, there is no difference between legal and equitable dutiesof directors. If the directors act within their power withsuch care as is reasonably to be expected from them, havingregard to their knowledge and experience, and if they acthonestly for the benefit of the company. They discharge boththeir legal as well as equitable duty to the company. Thedirectors are not liable for all mistakes they make, althoughif they had taken more care they might have avoided them.

Appointment, Disqualification And Liabilities Of Directors OfA Company: A Legal Perspective

On incorporation, a company becomes a legal artificial personbut it cannot act by itself and consequently it has to dependupon some human agency to act in its name. The members have noinherent right to participate in the management of thecompany. A large sized company may have its members runninginto lakhs, who are dispersed all over the country and theyeven lack the expertise to manage the affairs of the company,which makes it impossible to give the management of thecompany in their hands. Therefore a specialized body ofpersons called as directors are appointed by the members tomanage the affairs of the company. The directors must act as abody without improper exclusion of any of the directors. Thedirectors collectively referred to as BOARD. The board is themanagerial body constituted by the members to whom isentrusted the whole management of the company. Board owes aduty to the members to exercise care, skill and diligence indischarge of their functions.

Legal Position Of Directors:

It is difficult to define the exact legal position of thedirector of the company. The Companies Act makes no effort todefine their position. At various times they have beendescribed by judges as agents, trustees or managing partners.

Directors as agents:

The relationship between the company and the directors is thatof principal and agent and the general principles of agencywill govern their relations. Consequently, where the directorsenter into contracts on behalf of the company, it is thecompany and not the directors who are liable there under. Butthe directors will be personally liable only in the followingcases:

· Where a director acts in his own name.

· Where a director contract on behalf of the company withoutusing the words ‘Limited’ or ‘Private limited’ as a part ofthe name of a company.

· Where a director enters into any agreement or contract inwhich it is not made clear as to whether the director issigning in his personal capacity or as an agent of company.

Directors as trustees:

The office of a director is an office of trust. The directorsstand in a fiduciary position towards the company. They arethe trustees of:

· Company’s money and property: The property of the companymust be applied for the genuine purposes. If the property ismisappropriated it would amount to breach of trust.

· The powers entrusted to them: The directors must exercisetheir powers bonafide and for the benefit of the company. As awhole, not to promote their own personal or private interests.They should not put themselves in a position where theirduties and personal interests may conflict. Where a directoruses confidential information of the company for his personalpurposes, misappropriates or misuses the assets of thecompany, he becomes accountable to the company if a directormisuses his fiduciary position and makes a secret profit, heis liable to pay it to the company.

Directors as officers of the company:

Amongst other persons, a director is also included in thedefinition of an ‘officer’ of the company Whether or not adirector is in the employment of the company, he shall alwaysbe treated as an officer of the company.

Directors as ‘officers in default’ (section-5):

a) A Whole time director or managing director is alwayscovered in the definition of officer in default.

b) Where a company has no whole time director or managingdirector, or manager-A director shall be treated as an officerin default if

i. he has been so specified by the board in this behalf.

ii. no director is so specified by the board.

Kinds Of Directors:

Under the Companies Act, 1956, the following kinds ofdirectors are recognized:

Ordinary Directors

Ordinary directors are also referred to as simple directorswho attends Board meeting of a company and participate in thematters put before the Board. These directors are neitherwhole time directors nor managing directors.

Whole-time/Executive Directors

Whole-time Director or Executive Director includes a directorin the whole-time employment of the company.

Additional Directors

Additional Directors are appointed by the Board between thetwo annual general meetings subject to the provisions of theArticles of Association of a company. Additional directorsshall hold office only up to the date of the next annual

general meeting of the company. Number of the directors andadditional directors together shall not exceed the maximumstrength fixed for the Board by the Articles.

Alternate Director

An Alternate Director is a person appointed by the Board if soauthorised by the Articles or by a resolution passed by thecompany in the general meeting to act for a director called"the original director" during his absence for a period of notless than three months from the State in which meetings of theBoard are ordinarily held. Generally, the alternate directorsare appointed for a person who is Non-resident Indian or forforeign collaborators of a company.

Professional Directors

Any director possessing professional qualifications and do nothave any pecuniary interest in the company are called as"Professional Directors". In big size companies, sometimes theBoard appoints professionals of different fields as directorsto utilise their expertise in the management of the company.

Nominee Directors

The banks and financial institutions which grant financialassistance to a company generally impose a condition as toappointment of their representative on the Board of theconcerned company. These nominated persons are called asnominee directors.

Disqualifications of a director:

Section 274(1) reads as under:

A person shall not be capable of being appointed director of acompany, if the director is

(a) Of unsound mind by a court of competent jurisdiction andthe finding is in force;

(b) An un discharged insolvent;

(c) Has applied to be adjudicated as an insolvent and hisapplication is pending;

(d) Has been convicted by a court of any offence involvingmoral turpitude and sentenced in respect thereof toimprisonment for not less than six months and a period of fiveyears has not elapsed from the date of expiry of the sentence;

(e) Has not paid any call in respect of shares of the companyheld by him, whether alone or jointly with others, and sixmonths have elapsed from the last day fixed for the payment ofthe call; or

(f) An order disqualifying him for appointment as director hasbeen passed by a court in pursuance of section 203 and is inforce, unless the leave of the court has been obtained for hisappointment in pursuance of that section;

(g) Such person is already a director of a public companywhich-

(A) Has not filed the annual accounts and annual returns forany continuous three financial years commencing on and afterthe first day of April, 1999; or

(B) Has failed to repay its deposits or interest thereon ondue date or redeem its debentures on due date or pay dividendand such failure continues for one year or more:

Provided that such person shall not be eligible to beappointed as a director of any other public company for aperiod of five years from the date on which such publiccompany, in which he is a director, failed to file annualaccounts and annual returns under sub-clause (A) or has failedto repay its deposit or interest or redeem its debentures ondue date or paid dividend referred to in clause (B).

Appointment of directors:

A. Appointment of First Directors of the Company

Procedure for appointment of first directors

a) Consent of each of the persons proposed to be named asdirector in the articles of association, seeking his consentto act as director, shall be obtained in the form of a letter.

b) Consent of the first directors (unless they are named inthe articles of association) in Form No.29 prescribed underthe Companies (Central Government’s) General Rules &Forms,1956 shall be filed with the Registrar of Companies [section264(2)].

c) Form No.32 prescribed under the Companies (CentralGovernment’s) General Rules & Forms, 1956 in duplicate inrespect of the first directors shall be filed with theRegistrar, in the case of every company. [section 303].

d) The agreement, if any, which the company proposes to enterinto with any individual for appointment as its managingdirector or whole-time director or manager shall be filed withthe Registrar. [section 33(1)(c)]

e) Form Nos.29 and 32 may be filed within 30 days afterincorporation. However, it is advisable to file them at thetime of incorporation. The Registrar also insists on it to befiled at the time of incorporation.

f) Where a director undertakes to take up qualificationshares, if any, Form No.29 should bear requisite stamp duty asapplicable under the Stamp Act of the State in which the formis executed.

g) The particulars required to be entered in the Register ofDirectors under section 303 will be entered with respect toeach director immediately after the incorporation of thecompany.

h) The particulars of the director’s shareholding will beentered in the Register of Directors’ Shareholdings.

i) Information relating to the director’s interests in othercompanies, firms and also names of his relatives for thepurposes of sections 297 and 299 of the Act will be obtained.A general notice of the interests under section 299 will alsobe given in Form No.24 AA prescribed under the Companies(Central Government’s) General Rules & Forms, 1956.

Appointment of first directors at a general meeting

A public company and a private company which is a subsidiaryof a public company must hold an extra ordinary generalmeeting before the first annual general meeting and appointthe first directors by passing ordinary resolutions. For eachdirector, a separate resolution should be passed, unless ithas first been agreed by a unanimous resolution that two ormore directors shall be appointed by a single resolution(section 263).Procedure for appointment of first directors atgeneral meeting

a. Consent of the directors named in the articles ofassociation in Form No.29 prescribed under the Companies(Central Government’s) General Rules & Forms, 1956 shall befiled with the Registrar of Companies [section 264]. This isnot required in the case of a private company unless it is asubsidiary of a public company.

b. Form No.32 prescribed under the Companies (CentralGovernment’s) General Rules & Forms, 1956 in duplicate inrespect of the first directors shall be filed with theRegistrar, in the case of every company. [Section 303].

c. The date of appointment of the directors will be entered inthe Register of Directors kept under section 303 with respectto each director immediately after the incorporation of thecompany. [Section 303].

B. Appointment of additional director

The Provisions applicable to additional directors are asfollows

1. Conditions for appointment:

a. Articles of the company must authorize the board to appointadditional director.

b. Additional directors together with the other directorsshall not exceed the maximum strength fixed for the board bythe article.

2. Relaxations in the appointment:

a. Section 260 overrides the section 259. Therefore in nocase, the approval of GG is required for appointment of an AD.

b. AD can also be appointed by passing a resolution bycirculation.

c. The power of the board to appoint an AD is not affected bythe fact that:

i. The strength of the board fallen below the statutoryminimum.

ii. The strength of the board fallen below the quorumprescribed by the articles.

d. For the purpose of section 255 the AD shall not be includedin the total no of directors.

3. Term of office of the directors:

a. He holds office upto the date of next AGM

b. Here the important point is that use of the upto the dateof next AGM not upto the conclusion of next AGM.

c. It means whether the AGM is held or not the AD will retireon the date on which AGM should have been held.

Remuneration of directors:

The remuneration payable to the directors of a company,including any managing or whole-time director, shall bedetermined, in accordance the provisions given below either by

the articles of the company, or by a resolution (specialresolution if the articles so require ), passed by the companyin general meeting and the remuneration payable to any suchdirector determined as per the said provisions shall beinclusive of the remuneration payable to such director forservices rendered by him in any other capacity. However, anyremuneration for services will not be so included if theservices are of a professional nature and in the opinion ofthe Central Government, the director possesses the requisitequalifications.

A director may receive remuneration by way of fees forattending each meeting of the Board or of any committeethereof (Sitting Fees ).

A director who is in whole time employment of the company or amanaging director may be paid remuneration either by way of amonthly payment or at a specified percentage of net profits ofthe company or partly by one and partly by the other. Suchremuneration cannot exceed 5 % of the net profits of thecompany, except with the approval of the Central Government incase of one director and 10 % for all such directors.

The total managerial remuneration payable by a public companyor a private company which is a subsidiary of a public companyto its directors and its manager in any financial year mustnot exceed 11 % of the net profits of the company calculatedin accordance with the provisions of section 349, 350 and 351.

In the case of neither a director who is neither in the whole-time employment of the company nor a managing director may bepaid remuneration either by way of a monthly, quarterly orannual payment with the approval of the Central Government orby way of commission if the company by special resolutionauthorises such payment. Such special resolution to in sub-section (4) shall not remain in force for a period of morethan five years; but may be renewed, from time to time, byspecial resolution for further periods of not more than five

years at a time. Remuneration payable to such directors cannotexceed :-

if the company has a managing or whole-time director or amanager, one per cent, of the net profits of the company;

in any other case, three percent of the net profits of thecompany.

If any director earns remuneration from a company in excess ofthe above limits without prior approval of the CentralGovernment, he shall refund the excess to the company anduntil such re payment; hold the money in trust with him. TheCompany cannot waive recovery of such sum due from thedirector unless approved by the Central Government. Noapproval of the Central Government is required in case theremuneration is within the limits mentioned in Schedule XIIIto the Companies Act, 1956.No director of a company who is inreceipt of any commission from the company and who is eitherin the whole-time employment of the company or a managingdirector shall be entitled to receive any commission or otherremuneration from any subsidiary of such company. The aboveprovisions pertaining to remuneration do not apply to aprivate company unless it is a subsidiary of a public company.

Liabilities of Directors under the Companies Act:

(A) Prospectus: Failure to state any particulars as per therequirement of the section 56 and Schedule II of the act ormis-statement of facts in prospectus renders a directorpersonally liable for damages to the third party. Section 62provides that a director shall be liable to pay compensationto every person who subscribes for any shares or debentures onthe faith of the prospectus for any loss or damage he may havesustained by reason of any untrue or misleading statementincluded therein.

(B) Allotment: Directors may also incur personal liabilityfor:

a) Irregular allotment, i.e., allotment before minimumsubscription is received received (Section 69), or withoutfiling a copy of the statement in lieu of prospectus.

b) For failure to repay application monies in case of minimumsubscription having not been received within 120 days of theopening of the issue.

c) Failure to repay application monies when application forlisting of securities are not made or is refused Under section73(2).

(C) Unlimited liability: Directors will also be heldpersonally liable to the third parties where their liabilityis made unlimited in pursuance of section 322 or section 323.

1. Fraudulent trading: Directors may also be made personallyliable for the debts or liabilities of a company by an orderof the court under section 542.Section 542(1), in this regard,provides that if in the course of the winding up of a company,it appears that any business of the company has been carriedon, with intent to defraud creditors of the company or anyother person, or for any fraudulent purpose, the court, on theapplication of the Official Liquidator, or the liquidator orany creditor or contributory of the company may if it thinksit proper so to do, declare that any persons who wereknowingly parties to the carrying on business in the manneraforesaid shall be personally responsible without anylimitation of liability, for all or any of the debts or otherliabilities of the company as the court may direct.

2. Breach of statutory duties: The Companies Act, 1956 imposesnumerous statutory duties on the directors under varioussections of the Act. Default in compliance of these dutiesattracts penal consequences.

3. Criminal liability: Apart from the civil liability underthat Act or under the common law, directors of a company mayalso incur imprisonment as criminal liability when there isdefault in filing of prospectus or statement in lieu of

prospectus containing untrue statement failure to repaydeposits within the prescribed time limit as specified,inducing persons to invest money, Failure to repay excessapplication money Etc.

Position of Directors In A Company

The law relating to companies in India is contained in theCompanies Act, 1956. The Companies Act, 1956 is aconsolidation of existing laws, statutory rules and certainprinciples laid down in decisions of the Courts in India andEngland. The Act of 1956 substantially incorporates provisionsof the English Companies Act, 1948. A company means, a companyformed and registered under the Companies Act, 1956 or underany of the preceding Acts1. The word company is used to denotean association of persons who have associated together to theconduct or to carry on a business for gain. The personsassociating together will contribute some money for theconduct of the business and the amount is known as the sharecapital of the company. The association will be registeredunder the Companies Act and thereafter it will be a legalperson having an artificial personality.

A company is a legal person who is leaving only in the eyes oflaw. It’s a creation of law which lacks both body and mind. Itcannot act, just like a human being. It can act only throughsome human agency. Directors are those persons through whomcompany acts and does business. They are collectively known asBoard of Directors.

Section 252 – 323 of the Companies Act, 1956 deal with theappointment of directors, remuneration of directors,disqualification of directors, vacation of office bydirectors, Meeting of Board of Directors.

Board of Directors is the brain and the only brain of thecompany which is the body, and the company can does act onlythrough the board of directors. A director is a person who hascontrol over the direction, conduct, management, or

superintendence of the affairs of the company. Only anindividual can be appointed as a director. An association or afirm cannot be appointed as director of a company.

What are the Liabilities of the Directors of a company towardsthe company?

The liability of a Director to the company may arise from:

Breach of fiduciary duty: Where a Director acts dishonestly tothe interest of the company, he will be held liable for breachof fiduciary duty. Most of the powers of Directors are powersin trust and, therefore, should be exercised in the interestof the company and, not in the interest of the Directors or,any section of members. Thus, in a case where the Directors,in order to forestall a take-over bid, transferred theunissued shares of the company to trustees, to be held for thebenefit of the employees, and an interest-free loan from thecompany was advanced to the trustees to enable them to pay forthe shares, it was held to be a wrongful exercise of thefiduciary powers of the Directors.

Ultra vires acts: Directors are supposed to act within theparameters of the provisions of the Companies Act, Memorandumand Articles of Association, since these lay down the limitsto the activities of the company and, consequently, to thepowers of the Board of Directors. Further, the powers of theDirectors may be limited in terms of specific restrictions,contained in the Articles of Association. The Directors shallbe held, personally, liable for acts beyond the aforesaidlimits, being ultra vires the company or the Directors. Thus,where the Directors pay dividends or interest out of capital,they will be liable to indemnify the company for any loss ordamage, suffered due to such act.

Negligence: As long as the Directors act within their powerswith reasonable skill and care, as expected of them as prudentbusinessmen, they discharge their duties to the company. But,where they fail to exercise reasonable care, skill and

diligence, they shall be deemed to have acted, negligently, indischarge of their duties and, consequently, shall be liablefor any loss or damage, resulting there from. However, errorof judgment will not be deemed as negligence. The Directorscannot be absolved of their liability for negligence by anyprovisions in the Articles of Association.

Mala fide acts: Directors are the trustees for the money andproperty of the company, handled by them, as well as forexercise of the powers, vested in them. If they dishonestly orin a mala fide manner, exercise their powers and perform theirduties, they will be liable for breach of trust and, may berequired to make good the loss or damage, suffered by thecompany by reason of such mala fide acts. They are alsoaccountable to the company for any secret profits they mighthave made in course of their performance of duties on behalfof the company. Directors can also be held liable for theiracts of 'misfeasance', i.e., misconduct or willful misuse ofpowers. However, misconduct, which is not willful, shall notamount to 'misfeasance'.

Where a Director misapplies or misappropriates the money orproperties of the company or, has been guilty of breach oftrust or misfeasance, the Court may order him to repay themoney or, restore the property or, to pay compensation.

Can a Director be made liable for the acts of his Co-Directors?

A Director is the agent of the company, except for matters tobe dealt with by the company in General Meeting and, not ofthe other members of the Board. Accordingly, except in oneinstance, nothing done by the Board can impose liability on aDirector, who did not participate in the Board's action or,did not know about it. To incur liability, he must either be aparty to the wrongful act or, later acquiesce (consent) to it.Thus, the absence of a Director from a meeting of the Boarddoes not make him liable for the fraudulent act of a co-Director, on the ground that he ought to have discovered the

fraud, except where he had the knowledge or, he was a party toconfirm that action.

Where a Director is made liable for the acts of a co-Director,he is entitled to contribution from the other Directors or co-Directors, who were a party to the wrongful act. However,where the Director, seeking contribution alone, benefited fromthe wrongful act, he is not entitled to contribution.

Contractual Liability: - Directors are bound to use fair andreasonable diligence in discharging the duties and to acthonestly, and act with such care as is reasonably expectedfrom him, having regard to his knowledge and experience. InR.K. Dalmia and others v. The Delhi Administration it was heldthat "A director will be personally liable on a companycontract when he has accepted personal liability eitherexpressly or impliedly. Directors are the agents or thetrustees of a Company."

Pre- Incorporation Liability- A Company cannot make a contractbefore it is incorporated because, before incorporation, ithas no legal existence. Therefore, a Company afterincorporation cannot ratify a contract previously made. Itmust make a fresh contract. But, those who act on behalf ofthe unincorporated company may find themselves personallyliable. In Kelner v. Baxter the Court of Common Pleas heldthat where a person purports to sign a contract as agent, buthas no principle in existence at the time, he is personallyresponsible.

Liability of Directors for Torts of the company: - Directorsas such are not liable for the torts or civil wrongs of theircompany. To make a person liable for a tort, e.g. fornegligence, trespass, nuisance or defamation it must be shownthat he was himself the wrongdoer or that he was the employeror principal of the wrongdoer in relation to the actcomplained of, or that the tort was committed on hisinstructions.

Civil Liability to the Company- director’s liability to theCompany may arise where

(1) the directors are guilty of negligence,

(2) the directors committed breach of trust,

(3) there has been misfeasance and (4) the director has actedultra vires and the funds of the company have been applied forsuch an act.

Tax Liability:- Under Section 179 of the Income Tax Act 1961,when any private company is wound up and the tax assessedcannot be recovered, then every person who was a director ofthe private company shall be jointly and severely be liablefor the payment of such tax. Where the bank account of aDirector was frozen for recovering income tax dues of theCompany, it was held in Gurudas Hazra v. P.K.Chowdhury that itwas for the Director to show that the default on the part ofthe company was not attributable to any breach of duty on hispart. The case of Peter J R Prabhu v. Asstt Commissioner ofCommercial Taxes stated that apart from any provisions of thetaxing statute, arrears of the tax amount are not to berecovered from the directors personally.

Directors with unlimited liability:- The liability of thedirectors like the shareholders is limited to the extent ofthe shares held by them remaining unpaid. A limited liabilitycan make the liability of any or all of its directorsunlimited. A provision to this effect has to be contained inthe Memorandum. that a person who becomes director afterincorporation of such a clause will have unlimited liability.

Position Of Directors It is not easy to explain the positionthat a director holds in a corporate enterprise. A director isnot a servant of any master. He is the controller of thecompany’s affairs. Director of a company is neither an

employee nor a servant to the company. They are professionalpeople who were hired by the company to direct its affairs.

However there is no restriction under the Act, that a directorcannot be an employee to the company. In Lee v. Lee’s AirFarming Ltd2, it was held that, a director may, however, workas an employee in different capacity. There is no definitedefinition for director under the Companies Act, 1956.Director includes any person who is occupying the position ofa director, whatever name called3. So in order to understandthe position of a director in a company we have to look in tovarious decided cases.

In Judhah v. Rampada Gupta4, it was held that, director of acompany registered under this Act5 are persons duly appointedby the company to direct and manage the business of thecompany. A director is sometimes described as agents,trustees, managing partners etc. But each of these expressionsis used not as exhaustive of their powers andresponsibilities, but as indicating useful points of view fromwhich they may for the moment and for the particular purposebe considered.

Director As Agents: In Ferguson v. Wilson6, the court clearlyrecognised that directors are in the eyes of law, agents ofthe company. It was held that, the company has no person; itcan act only through directors and the case is, as regardsthose directors, merely the ordinary case of a principal andagent. When the directors contract in the name, and on behalfof the company, it is the company which is liable on it andnot the directors.

In Elkington & Co. v. Hurter7, where the plaintiff suppliedcertain goods to a company through its chairman, who promisedto issue him a debenture for the price, but never did so andcompany went into liquidation, he was held not liable to theplaintiff. Similarly, a director was held to be personally notliable in a suit against a private chit fund company.

Attachment of the property of the director was held to be notpermissible8.

Like agents, directors have to disclose their personalinterest, if any, in any transaction of the company. In RayCylinders & Containers v. Hindustan General Industries Ltd9,held that, the directors are the agents of the institution andnot of its individual members, except when that relationshiparises due to the special facts of the case. Also grantedpermission to file a suit against a company was not allowed tobe treated as permission against directors as well.

In Sarathi Leasing Finance Ltd v. B Narayana Shetty10, thearticles of association empowered the managing director torepresent the company in legal proceedings. It was held that afurther authorization was not necessary to enable him to filea complaint for dishonour of cheque under Sec. 138 ofNegotiable Instrument Act. Directors are the agents of acompany. They are acting on behalf of the company. So thedirectors cannot be held personally liable for any default ofthe company. It was held that, for a loan taken by a company,the directors, who had not given any personal guarantee to thecreditor, could not be made liable merely because they weredirectors.

Director As Trustees: Directors are the trusties of thecompany’s money, property and their powers and such mustaccount for all the moneys over which they exercise controland shall refund any moneys improperly paid away, and shallexercise their powers honestly in the interest of the companyand all the shareholders, and not their own sectionalinterest.

The directors of a company are trustees for the company, andfor reference to their power of applying funds of the companyand for misuse of the power they could be rendered liable astrustees and on their death, cause of action survives againsttheir legal representatives11. Directors are those personsselected to manage the affairs of the company for the benefit

of shareholders. It is an office of trust, which if theyundertake, it is their duty to perform fully and entirely.This peculiar nature of their office is one of the reason whythe directors been described as trusties.

In the real sense the directors are not trustees. A trustee isthe legal owner of the trust property and contracts in his ownname. On the other hand, director is a paid agent or officerof the company and contracts for the company12. In fact, thedirectors are commercial men managing a trading concern forthe benefit of themselves and of all the shareholders in it.

To whom the directors are trustee? Whether to the company orto the individual shareholders. This principle was laid downin 1902 in Percival v. Wright13, and still holds ground as abasic proposition. In this case the court held that, directorshave no duty towards individual shareholders. From this it isvery clear that, the directors are trustees to the company andnot of individual shareholders. The principle of the case wasreiterated in Peskin v. Anderson14. Ordinarily the directorsare not agents or trustees of members or shareholders and oweno fiduciary duties to them.

However we have to take the decision of Allen v. Hyatt15. Itwas held that, the directors are trustees of the profit forthe benefit of the shareholders. They cannot always act underthe impression that they owe no duty to the individualshareholders. But it is of no doubt that the primary duty ofthe director is to the company. But in such circumstanceswhere the directors act as agents for the share holders, thelater would be liable to the purchasers of their shares forany fraudulent misrepresentation made by the directors in thecourse of negotiations16.

Director As Organs Of Corporate Body

The organic theory of corporate life “treats certain officialsas organs of the company, for whose action the company is heldliable just as a natural person is for the action of his

limbs17. Thus the modern directors are more than mere agentsor trustees. The Board is also correctly recognised to be aprimary organ of the company. Directors and managers representthe directing mind or will of the company and control what itdoes.

The state of mind of these managers is the state of mind ofthe company and is treated by law as such. The practicaleffects of these rules are that the directors’ personal faultin the business of the company becomes the “fault of thecompany”; their reason to believe is attributed to the companyand the intention to occupy a premises as expressed by theirconduct is the intention of the company.

Minimum number of directors

Every public company ( other than a deemed public company )must have at least three directors. Every other company musthave at least two directors.

The directors of a company collectively are referred to as the"Board of directors" or "Board". Only individuals can beappointed as directors. Nobody corporate, association or firmcan be appointed director of a Company.

In case the first directors are not appointed by the promotersof a company, subscribers of the memorandum who areindividuals, shall be deemed to be the directors of thecompany, until the directors are duly appointed.

Number of companies of which one person may be appointedmanaging director

No public company or private company which is a subsidiary ofa public company can, appoint or employ any person as managingdirector, of he is either the managing director or the managerof any other company, except as provided below.

A public company or a private company which is the subsidiaryof a public company may appoint or employ a person as its

managing director, if he is the managing director or managerof one, and of not more than one, other company provided thatsuch appointment or employment is made or approved by aunanimous resolution passed at a meeting of the Board and ofwhich meeting, and of the resolution to be moved thereat,specific notice has been given to all the directors then inIndia.

In addition to the above provision, the Central Governmentmay, by order, permit any person to be appointed as a managingdirect of more than two companies if the Central Government issatisfied that it is necessary that the companies should, fortheir proper working, function as a single unit and have acommon managing director.

Managing director not to be appointed for more than five yearsat a time

No company can, appoint or employ any individual as itsmanaging director for a term exceeding five years at a time.

However, a person may be re-appointed, re-employed, or histerm of office extended by further periods not exceeding fiveyears on each occasion. Such re-appointment, re-employment orextension cannot be sanctioned earlier than two years from thedate on which it is to come into force.

This provision does not apply to a private company unless itis a subsidiary of a public company.

Disqualifications of directors

A person shall not be capable of being appointed director of acompany, if, he has been found to be of unsound mind by aCourt of competent jurisdiction and the finding is in force heis an un discharged insolvent he has applied to be adjudicatedas an insolvent and his application is pending he has beenconvicted by a Court of any offence involving moral turpitudeand sentenced in respect thereof to imprisonment for not lessthan six months, and a period of five years has not elapsed

from the date of expiry of the sentence he has not paid anycall in respect of shares of the company held by him, whetheralone or jointly with others, and six months have elapsed fromthe last day fixed for the payment of the call an orderdisqualifying him for appointment as director has been passedby a court and is in force unless the leave of the court hasbeen obtained for his appointment in pursuance of thatsection.

The Central Government may, by notification in the OfficialGazette, remove :-

the disqualification incurred by any person in virtue ofclause (d) either generally or in relation to any company orcompanies specified in the notification; or

the disqualification incurred by any person in virtue ofclause (e)

A private company which is not a subsidiary of a publiccompany may, by its articles, provide that a person shall bedisqualified for appointment as a director on any grounds inaddition to those specified above.

No person to be a director of more than twenty companies

No person shall, hold office at the same time as director inmore than twenty companies.

Where a person already holding the office of director intwenty companies is appointed, as a director of any othercompany, the appointment :- shall not take effect unless suchperson has, within fifteen days thereof, effectively vacatedhis office as director in any of the companies in which he wasalready a director; and shall become void immediately on theexpiry of the fifteen days if he has not, before such expiryeffectively vacated his office as director in any of the othercompanies aforesaid. Where a person already holding the officeof director in nineteen companies or less is appointed, as adirector of other companies, making the total number of his

directorships more than twenty, he shall choose thedirectorships which he wishes to continue to hold or to acceptso however that the total number of the directorships, old andnew, held by him shall not exceed twenty. None of the newappointments of director shall take effect until such choice,is made; and all the new appointments shall become void if thechoice is not made within fifteen days of the day on which thelast of them was made.

In calculating the number of companies of which a person maybe a director, the following companies shall be excluded :-

a private company which is neither a subsidiary nor a holdingcompany of a public company an unlimited company anassociation not carrying on business for profit or whichprohibits the payment of dividend a company in which suchperson is only an alternate director, that is to say, adirector who is only qualified to act as such during theabsence or incapacity of some other director.

Any person who holds office, or acts, as a director of morethan twenty companies in contravention of the foregoingprovisions shall be punishable with fine which may extend tofive thousand rupees in respect of each of those companiesafter the first twenty.

The disqualification referred to in clauses (d). (e) and (j)shall not take effect,- for thirty days from the date of theadjudication sentence or order where any appeal or petition ispreferred within the thirty days aforesaid against theadjudication, sentence or conviction resulting in thesentence, or order until the expiry of seven days from thedate on which such appeal or petition is disposed of wherewithin the seven days aforesaid, any further appeal orpetition is preferred in respect of the adjudication,sentence, conviction, or order, and the appeal or petition, ifallowed, would result in the removal of the disqualification,until such further appeal or petition is disposed of.

If a person functions as a director, knowing that his officehas vacated on account of the above provisions, shall beliable to a fine upto Rs. 500/- per day of default.

A private company which is not a subsidiary of a publiccompany may, by its articles, provide, that the office ofdirector shall be vacated on any grounds in addition to thosespecified in above

Removal of directors

A company may, by ordinary resolution, remove a director (notbeing a director appointed by the Central Government inpursuance of section 408) before the expiry of his period ofoffice. This provision shall not apply where the company hasavailed itself of the option given to it of proportionalrepresentation on the Board of Directors to appoint not lessthan two-thirds of the total number of directors according tothe principle of proportional representation.

Special notice shall be required of any resolution to remove adirector, or to appoint somebody instead of a director soremoved at the meeting at which he is removed.

On receipt of notice of a resolution to remove a directorunder this section, the company shall forthwith send a copythereof to the director concerned, and the director (whetheror not he is a member of the company) shall be entitled to beheard on the resolution at the meeting. Where notice is givenof a resolution to remove a director and the directorconcerned makes representations in writing to the company (notexceeding a reasonable length) and requests their notificationto members of the company, the company shall, unless therepresentations are received by it too late for it to do so :-

in any notice of the resolution given to members of thecompany state the fact of the representations having beenmade; and send a copy of the representations to every memberof the company to whom notice of the meeting is sent If a copyof the representations is not sent as aforesaid because they

were received too late or because of the company's default,the director may (without prejudice to his right to be heardorally) require that the representations shall be read out atthe meeting.

However, copies of the representations need not be sent outand the representations need not be read out at the meetingif, on the application either of the company or of any otherperson who claims to be aggrieved, the Company Law Board issatisfied that the rights conferred by this provision arebeing abused to secure needless publicity for defamatorymatter and the Company Law Board may order the company's costson the application to be paid in whole or in part by thedirector.

A vacancy created by the removal of a director if he had beenappointed by the company in general meeting or by the board inon a casual vacancy, be filled by the appointment of anotherdirector in his stead by the meeting at which he is removed,provided special notice of the intended appointment has beengiven.

A director so appointed shall hold office until the date up towhich his predecessor would have held office if he had notbeen removed as aforesaid.

If the vacancy is not filled, it may be filled as a causalvacancy in accordance with the provisions.

The above provisions of removal of a director shall not affect:-

any compensation or damages payable to him in respect of thetermination of his appointment as director or of anyappointment terminating with that as director any other powerto remove a director which may exist apart from thisprovision.

Conclusion

A Director is an agent of the Company for the conduct of thebusiness of the company. Directors of a company have fiduciaryrelationship with the company as well as the shareholders whenhe acts as an agent or officers of a company.

The director as the Companies Act, 1956 indicates, holds anextremely important position in the administration andmanagement of a Company. It must be noted that the directoractually works in different capacities at different times toensure that the company is run in a legal and an efficientmanner. The Act places immense responsibility on the soldiersof the directors.

Directors are bound to use their fair and reasonable diligencewhile discharging their duties and they shall act honestly,and with such care as may be reasonably expected from, havingregard to their knowledge and experience.

The Companies Act has also seeks to introduce an element ofobjectivity in the office of a director, for this purpose theact also introduced the office of independent directors.However, the office of independent director has not been assuccessful in bringing efficient and honest corporate

governance as it was expected. The Satyam scam is the biggestexample!

Therefore, it can only be concluded that the Companies Actshould be suitably be amended to introduce such in builtchecks and balances that the office of a director does notbecome an absolute, which practically is the case.

Accountability is an important element of Board effectiveness.There should be some mechanism for evaluating the performanceof the directors. The extent of liability of a director woulddepend on the nature of his directorship. In applying thegeneral equitable principles to company directors, fourseparate rules have emerged. They are (1) that directors mustact in good faith in what they believe to be the in the bestinterest of the company (2) they must not exercise powersconferred upon them for purposes different from those forwhich they are conferred. (3) that they must not fetter theirdiscretion as to how they shall act and (4) that without theinformed consent of the company, they must not placethemselves in a position in which their personal interests orduty to other persons are liable to conflict with the dutiesto the company. Three propositions in regard to the duties andresponsibilities of directors:

(1) a director need not exhibit, in the performance of hisduties, a greater degree of skill than may reasonably beexpected from a person of his knowledge and experience

(2) a director is not bound to give continuous attention tothe affairs of his company, his duties being of anintermittent nature to be performed at periodical boardmeetings or committee meetings.

(3) in respect of such duties as may be properly left to someother official having regard to the exigencies of business orthe articles of association of the company, a director is, inthe absence of grounds for suspicion, justified in trustingthat official to perform such duties honestly.

BIBLIOGRAPHY:

COMPANY ACT WIKIPEDIA LEAGALSERVICES.COM INDIANKANOON.COM MANUPATRA.COM COMPANY LAW BY AVTAR SINGH COMPANY LAW BY PARANJAPE COMPANY LAW ACT 2013