In this article, Sagnik Chatterjee who is currently in IInd Year pursuing BA.LL.B, from Symbiosis Law School, Pune, discusses the Powers and Duties of Directors along with the kinds of Directors under the new Indian Companies Act, 2013.
The companies act what is in force was revised in 2013 and prior to this amendment, there was no statement of legal obligations or duties or liabilities of directors. The acts of directors were previously supervised in the context of their powers in different positions in different companies according to section 291 of the Companies Act, 1956 and other applicable laws, along with their several legal precedents as laid down in common law. The Companies Act 2013 specified the roles and responsibilities of a director alongside amending section 149 which introduces the concept of independent director which was previously a part of listing agreements only, and the duties and liabilities of the same.
Director & the Board in Companies Act
The companies act, 2013 in section 2(34) defines the term “director” as “a director appointed to the Board of a company”. In the same definition clause “Board” in relation to a company, is defined as the collective body of the directors of the company.
As per the amended Companies Act provisions, every director shall be appointed by the company board members and the stakeholders in annual general meeting, provided they have been allotted the Director Identification Number (DIN) and on submission of a declaration that he/she is not disqualified to become a director. Section 166 (4) provides for the appointment of the new director, approval of minimum two-thirds of the total number of the existing directors of the company is needed, and such appointments may be made once in every three years and casual vacancies of such directors shall be filled.
The Power and Duties of a Director
Section 166 of the Companies Act, 2013 states the power and duties of Director Act which applies to all types of Directors. The Duties and Responsibilities can be broadly classified into two categories:
- Promoting corporate governance through the sincerest efforts and being proactive solving of critical corporate issues and mature decision making to avoid unnecessary risks to the corporate entity and its shareholders.
- Keeping a balance between the interests of the company and its stakeholders, instead of his/her personal interests.
The powers and duties of Directors in accordance with Companies Act, 2013 is mentioned below;
- A director has to act in accordance with the Articles of Association (AOA) of the company in any possible circumstances and cannot arbitrarily take any decisions according to his/her own whims and fancies.
- A director must always pursue the best interests of the stakeholders of the company, but also maintain a balance between the objects of the company and Shareholder’s interests in good faith.
A Company cannot make a contract before it is incorporated because, before incorporation, it has no legal existence. Therefore, a Company after incorporation cannot ratify a contract previously made or deny the Contract and that decision depends on the existing directors of the company. It must make a fresh contract. In the case of Kelner v. Baxter the Court of Common Pleas held that where a person purports to sign a contract as an agent, but has no principle in existence at the time, he is personally responsible.
- A director is free to use his/her own judgement to exercise his duties according to the present circumstances at hand but always keeping in mind the interests of the company and with due and reasonable care, skill and diligence.
In the case of R.K. Dalmia and others v. The Delhi Administration it was held that,
“A director will be personally liable on a company contract when he has accepted personal liability either expressly or impliedly. Directors are the agents or the trustees of a Company.”
- A director ought to always know about any conflict of interest situations and should always try to avoid such conflicts for the greater interest of the company.
- Before approving any related party transactions, the Director of the company has to ensure that adequate deliberations are held and such transactions are being approved in the sole interest of the company.
- Confidentiality of sensitive proprietary information, Commercial Secrets, technologies, unpublished price to be maintained by the Directors of the company and should not be disclosed to any third party unless approved by the rest of the board or required by law.
- A Director of a Company must not assign his office and any assignment so made, and if done those acts shall be deemed void.
- If a director of the company contradicts the provisions of this section such director shall be penalized with fine which shall not be less than One Lakh Rupees and which may get extended to five Lac Rupees depending upon the facts and circumstances.
A director is always bound by the Latin maxim delegatus non-potest delegare. He/She gets appointed by the Shareholders because of their faith in his/her skills, competence and integrity and they may not have the same faith in another person delegated by the Director. It was held in the case of J.K. Industries v. Chief Inspector of Factories that the directors being in control of the company’s affairs cannot get rid of their managerial responsibility by nominating a person as the occupier of the factory or delegating his/her own duties to another person not chosen by the Shareholders.
Types of Directors
There are 8 kinds of Directors mentioned in the 2013 acts but before discussing the types here are the minimum requirement of the number of Directors for various kinds of”
i. One Person Company:- One Director.
ii. Private Limited Company:- Two Directors.
iii. Public Limited Company:- Three Directors.
According to the provisions of the amended act a maximum of 15 directors can be appointed in any format of Company be it OPC or Public or Private. But in special circumstances, bypassing Special Resolution a Company can increase the number of Directors beyond 15. The types of Directors are mentioned hereunder;
1. Residential Director:- Residential Directors are those Directors of the Companies who have stayed at least 182 days in India in the previous calendar year or previous financial year as per Section 149(3) of Companies Act,2013.
2. Independent Director:- Independent director in a company, means a director other than a Managing Director, Whole Time Director Or Nominee Director as per section 149(6) of Companies Act 2013. As per Rule 4 of Companies Act 2013, some companies have to appoint at least two(2) Independent Directors;
A} IF, Public Companies having Paid-up Share Capital-Rs.10 Crores or More;
B} IF, Public Companies having Turnover- Rs.100 Crores or More;
C} IF, Public Companies have total outstanding loans, debenture and deposits of Rs. 50 Crores or More.
3. Small Shareholders Directors:- A listed Company may have one director elected by small shareholders. May appoint upon notice of not less than 1000 Shareholders or 1/10th of the total shareholders, whichever is lower have a small shareholder director which elected form small shareholder.
4. Women Director:- According to Section 149 (1) (a) of the 2013 act, certain categories of companies require to have at least One Woman director on the board. Such companies include any listed company and any public company-
- IF, they have Paid Up Capital of Rs. 100 crore or more, or
- IF, they have a Turnover of Rs. 300 crore or more.
5. Additional Directors: As section 161(1) of the New Act an Individual can be appointed as an Additional Directors by a company at the discretion of the existing the Directors and members of the board.
6. Alternate Directors:- A company May appoint if the articles confer such power on the company or a resolution is passed (if a Director is absent from India for atleast three months) as per Section 161(2) Companies Act,2013.
8. Nominee Directors:- In case of mismanagement in running the Company or any kind of Oppressive Directors who are usually appointed by certain shareholders or third parties through contracts or lending public financial institutions or banks or by the Central Government as per Companies Act,2013.
9. Shadow Director:– Shadow Directors are those directors or members not present at the Board of Company Board but has some control over the functions of the company and can easily be appointed as a member of the Board of Director based on his/her will.
The above analysis deals with Powers, Duties as well as liabilities of Directors as per the Companies Act 2013 and also deals with the types of Directors a company can have. The 2013 enacted Corporate Governance in the companies system. However, more than adherence to purpose its relies on adherence for survival which may fail as we have already seen. Hence, here are some suggestions for the improvement of the existing legislature;
- It needs to be more straight forward while assuring shareholders interest.
- Corporate Governance needs to be implemented into the core of the system through tangible benefits to the followers and only then it will become the goal of the companies and will be followed religiously and possibly all stakeholders and shareholders of the companies will have faith in the Companies Act.
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