I

Directors of a Company

NATIONAL LAW INSTITUTE UNIVERSITY

LAW OF BUSINESS ASSOCIATIONS- I

VIII TRIMESTER

Directors of a Company

Submitted To-

Dr. KONDAIAH J.
Assistant Professor (Corporate Law)

Submitted By-

AMIT DUBEY
BA LLB (Hons.)-2013-45

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Directors of a Company
TABLE OF CONTENTS

1. Introduction........................................................................................3
2. Role Of Directors................................................................................3
2.1. Directors As Agents......................................................................5
2.2 Directors As Trustees.....................................................................6
3.Powers And Obligations Of Company Directors...................................7
3.1.

General.....................................................................................7

3.2.

Good Faith.................................................................................8

3.3.

Conflict Of Interest....................................................................8

3.4.

Limitation On Use Of Powers.....................................................8

3.5.

Skill And Diligence.....................................................................9

3.6. Duty To Account...........................................................................9

3.7. Duty To Notify.............................................................................10
3.8. Duty To Attend Board Meetings..................................................10
3.9. Duty Towards Employees............................................................10
3.10. Duty To Creditors......................................................................11
3.11. Directors Liabilities..................................................................11
3.12. Fraudulent Or Reckless Trading................................................12
4. Qualifications Of A Director.............................................................13
5.Conclusion.........................................................................................14
6.Bibliography......................................................................................15

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Directors of a Company

INTRODUCTION

The undoubted abuse of the corporate structure by unscrupulous business

people over many years has brought about a change in the attitude of
legislators and lawyers alike in relation to their dealings with and attitudes, in
relation to limited liability companies. Perhaps the greatest illustration of the
change in attitude towards companies is to be found in the Companies Acts,
1956, in this jurisdiction, which have created a web of intricate controls and
regulations to prevent the outright abuse of the corporate personality as had
previously been seen.
Directors now would be well advised to be familiar with their duties and
obligations and furthermore the restrictions placed upon them by the
Companies legislation, and set out below is a general overview of these duties,
obligations and restrictions as they exist today. This project basically deals with
the role and position of the Directors in a Company.

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Directors of a Company

ROLE OF DIRECTORS
A Corporation is an artificial being, invisible, intangible and existing only in
contemplation of law1.It has neither a mind nor a body of its own 2. This makes it
necessary that the companys business should be entrusted to some human agents.
Section 149 of the Act, therefore requires that every public company shall have at least
two directors.
The primary Act governing the law relating to companies in India is the Companies Act,
1956, and Section 2(13) defines a director as including "any person occupying the
position of director by whatever name called". In the words of Bowen LJ,
Directors are described sometimes as agents, sometimes as trustees and sometimes as
managing partners. But each of these expressions is not used as exhaustive of their
powers and responsibilities, but as indicating useful points of view from which they may
for the moment and for the particular purpose be considered.
Directors, in company law, are the agents by whom a trading or public company acts, the
company itself being a legal abstraction and unable to do anything. As joint-stock
companies have multiplied and their enterprise has extended the position of directors has
become one of increasing influence and importance. It is they who control the colossal
funds now invested in trading companies, and who direct their policy (for shareholders
are seldom more than dividend-drawers). Upon their uprightness vigilance and sound
judgment depends the welfare of the greater part of the trade of the country concerned. It
is not to be wondered at that in view of this influence and independence of action the law
courts have held directors to a strict standard of duty.
When a company is formed, the first directors of the company will be named and any
subsequent directors are to be appointed pursuant to the provisions of the Articles of
Association, which is effectively the document governing the internal running of the
company. If the Articles of Association do not provide any specific mechanism for the
appointing of a director the members in general meeting may appoint one. Equally, any
director, other than a director for life, can be removed in general meeting and the Articles
1MARSHALL J in Trustees of Dartmouth College v. Woodward, (1819) 17 US 518, 636 cited in Laski, The
personality of Associations , 29 Hrav LR 404
2 HALDANE LC in Lennards Carrying Co. v. Asiatic Pertroleum Co, (1915) AC 705 at 713.

Directors of a Company
of Association cannot interfere with this statutory power. A notice of 14 days must be
given of the intention to hold a general meeting for the purposes of removing a director.
It should be borne in mind that it is a useful practice to separate a person's role as
a director from his position as an employee of the company. Therefore, an individual's
removal as director of a company and the termination of his contract of employment must
be deemed to be separate acts. The company must keep a copy of all its service contracts
at its registered office for inspection by the members of the company. Any director who is
purported to be appointed must be approved in general meeting by the members.
The basic function of the directors is to manage the affairs and activities of the company
and in order to do so, they must have certain powers. It is common in legal parlance to
say that wherever powers go, obligations must surely follow. It is now time to consider
some of these.
2.1. Directors as Agents
It was clearly recognized as early as 1866 in Ferguson vs. Wilson3 that directors are in
the eyes of law, agents of company. The court said:
The company has no person, it can act only thorough directors and the case is as
regards, those directors, merely the ordinary case of principle and agent.
The general principles of agency, therefore govern the relations of directors with the
company and of persons dealing with the company through its directors. Where the
directors contract in the name, and on behalf of the company, it is the company which is
liable on it and not the directors. Thus where the plaintiff supplied certain goods to a
company through its chairman, who promised to issue him a debenture for a price but
never did so and the company went into liquidation, he was held not liable to the
plaintiff4. Similarly, where the directors allotted certain shares to the plaintiff, they were
not liable when the company having exhausted its shares failed to give effect to the
allotment5. But notice to a director will amount to a notice to the company only if the
director is, like an agent, bound in the course of his duty to receive the notice and to
3 (1866) LR 2 Ch 77
4 Elkington & Co v Hurter, (1892) 2 Ch 452
5 Supra note 3

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Directors of a Company
communicate it to the company. It was held in Hampshire Land Co, Re6 that where one
person is an officer of two companies, his personal knowledge is not necessarily the
knowledge of both the companies unless he is under a duty to receive a notice and to
communicate it to the other. Like agents, they have to disclose their personal interests, if
any in any transactions of the company. It should however be remembered that they are
the agents of an institutions and not of its individual members, except when their
relationship arises due to the special facts of a case7.
2.2 Directors as Trustees
Although directors are not properly speeking trustees, yet they have always been
considered and treated as trustees of money which comes to their hands or which is
actually under their control and ever since joint stock companies were invented directors
have been held liable to make good moneys which they have missapplied upon the same
footing as if they were trustees. In Ramaswamy Iyer v. Bramhayya & Co8.,the Madras
High Court observed that:
The directors of a company are trustees for the company and with reference to
their power of applying funds of the company and for misuse of the power they
could be rendered liable as trustees and on their death, the cause of action
survives against their legal representatives.
Another reason why directors have been described as trustees is the peculiar nature of
their office. The directors are persons selected to manage the affairs of the company for
the benefit of the shareholders. It is an office of trust which if they undertake, it is their
duty to perform fully and entirely. Some of their duties of the company are of the same
nature as those of the trustees. For example they, like trustees, occupy a fiduciary
position. Moreover, almost all the powers of the directors are powers in trust 9. The

6 (1896) 2 Ch 743
7 Allen v. Hyatt, (1914) 30 TLR 444: It is a matter of evidence in each case whether a director can be
regarded as a principle officer or agent for income tax purposes.
8 (1966) 1 Comp LJ 107 Mad.
9 See, Berle, Corporate Powers as Powers in trust, 44 Harv LR, 1949 where the learned writer enlists the
powers which have been held as powers in trust.

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Directors of a Company
power to make calls10, to forfeit shares11, to issue further capital12, the general powers of
management13, and the power to accept or refuse a transfer of shares are powers in trust
which have to be exercised in good faith for the benefit of the company as a whole.
Yet, directors are not trustees in the real sense of the word. There is nothing in common
between a director and a trustee of a will or a marriage settlement. Moreover, a trustee is
a legal owner of the trust property and contacts in his own name. A director, on the other
hand is a paid agent or officer of the company and contracts for the company. The real
truth of the matter is that directors are commercial men managing a trading concern for
the benefit of themselves and of all the shareholders in it.

POWERS AND OBLIGATIONS OF COMPANY DIRECTORS

3.1.

General

The powers of the directors are normally those delegated to them by the company. In
practical terms the directors of a company can do anything that the company can do. It
should be borne in mind that neither the directors nor the company can do anything
which is ultra vires; by this is meant beyond the powers of the company. The powers of
the company are defined in the Memorandum of Association and contained in what is
known as the Objects Clause. In addition, a company obviously cannot do anything
which is illegal and the same limitation is placed upon company directors. Once the
directors are acting in good faith and doing their best for the company, the company in
general meeting does not have power to set aside the day-to-day actions of the directors,
provided it can be established that the actions of the directors were within the powers of
the directors.
This does not however make the company powerless in the face of directors. They have a
number of options available to them, one option is by special resolution, i.e. a vote of
10 Alexander v. Automatic Telephone Co. (1900) 2 Ch 56.
11 Esparto Trading Co., Re, (1879) 12 Ch D 191
12 Nanalal Zavr v. Bom Life Assurance Co, AIR 1949 Bom 56
13 Marshall Valve Gear Co. v. Manning, Wardley & Co, (1909) 1 Ch 267.

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Directors of a Company
75% or more of the members in general meeting, where they can amend the Articles of
Association and thereby alter the powers of the directors.
In addition, it should be noted that directors can be removed from their office as directors
by an ordinary resolution, i.e. a vote of 51% or more of the members in general meeting.

3.2.

Good Faith

Every director has a duty to act in good faith in the interests of the company. Even though
the company itself is an artificial legal personality, the duty is still owed to the company,
not to the shareholders or creditors of the company, though some duties to creditors and
shareholders are in fact imposed by statute.

3.3.

Conflict of Interest

At all times directors have a duty to avoid conflicts of interest and by this is meant
effectively that a director must not do anything for and on behalf of the company where
his motivation and loyalites would be divided in that his own self interest, of someone
connected to him, may be given equal stature to that of the company. As we will see later,
in the event of such actions taking place, the director has a duty to account to the
company for any profits or gains he may have made as a result of this, and in
consequence thereof, the companies have certain rights against the director for acting in
circumstances of such conflict of interest.

3.4.

Limitation on Use of Powers

The powers conferred by the Articles of Association on the directors for the purposes of
managing the affairs of the company may only be used for the purposes for which they
were intended. Therefore, any hidden motivation or purpose which is not in the interest of
the company may lead to the allegation of abuse of powers and could lead to considerable
difficulties for the director in question.

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Directors of a Company
3.5.

Skill and Diligence

It is a generally accepted principle that the position or status of director is not a

professional position. However, a director in exercising his duties is expected to exercise
skill and diligence14. What is often problematic is to determine the level of skill or
diligence which is to be required. It is generally accepted and has been stated in a number
of cases in English and Irish Courts, that a director is expected to exercise reasonable
skill and diligence to a level which could reasonably be expected from a person of the
director's individual knowledge and experience. This is not to say however that errors of
judgment would not occur, but provided that the errors of judgment are reasonable, the
director will not necessarily be answerable therefore. It is also acknowledged that the
directors are not generally 24 hours servants of the company and that they may devote
some of their energy and time to other pursuits and interests, and this is not per se to be
taken as a failure to exercise reasonable skill and diligence.

3.6. Duty to Account

A director of a company is under a duty to account for all benefits that he receives by
virtue of his position as a director. Any contract that a director enters into where the
company of which he is director is the other party to that contract, is voidable, i.e. can be
set aside at the election of the company in general meeting. In addition of course, the
contract can be ratified. Any contract which is proposed between the director and the
company must, pursuant to statute, be preceded by a disclosure of the director's interests
to the board of directors.
A register must be kept of said director's interests. It should be noted in addition that the
duty to account for all benefits received by virtue of position as director is not limited
exclusively to contracts but also includes loans and quasi loans given by the company,
any credit transactions, and any guarantees or security given by a company for loans
given by third parties to directors.

14 RE Forest of Dean Coal Mining Co, (1878) 10 Ch D 450.

Directors of a Company
3.7. Duty to Notify
Directors are also under a duty to notify the company in writing of their interests in
company shares or debentures, and dealings in the company shares or debentures. This
also includes interests of spouses and minor children in the same shares and debentures.
3.8. Duty to attend Board meetings
Duties of directors are of intermittent nature to be performed at periodical board
meetings. In other words, they are not bound to pay continuous attention to the affairs of
the company. As Romer J in City Equitable Fire Insurance Co, Re15 remarked they do
not undertake to manage the company. A director is not even bound to attend all the
meeting of the board, although he is under an obligation to attend whenever in the
circumstances he is reasonably able to do so.
According to section 283 (g) the office of a director will be vacated if he absence
himself from 3 consecutive meeting of the board, or from all meetings of the board for a
consecutive period of 3 months, which ever is longer, without obtaining leave of absence
from the board. Moreover, a director habitual absence from the board meetings may,
taken in light of other circumstances, become evidence of negligence on his part. In an
early case, in which liability was imposed for failure in this respect, the court said, if
some persons are guilty of gross non attendance, and leave the management entirely to
others, they may be guilty by this means if breaches of trust are committed by others.16

3.9. Duty towards Employees

Directors owe no duty to companys employees. In cases where directors have exercised
their discretion for the benefit of employees and for example, made ex gratia payments to
them, the courts have considered those payments not in relation to the directors duties
but, actually, whether they are ultra vires the company.
But nevertheless, they have a duty to act in the interest of the employees. Directors whilst
acting in the interests of the company have a duty to have regard to the interests of the
15 (1925) 1 Ch 407
16 Charitable Corpn. v. Sutton, (1742) 26 ER 642

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Directors of a Company
company's employees as well as the members/shareholders of the company. Since the
duty imposed on the directors is over to the company and not to the employees
themselves, the duty can be enforced only in the form of a fiduciary duty to the company.

3.10. Duty to Creditors

Up until a few years ago, the general attitude of the courts was inconsidering that
directors are not trustees for creditors of the company. The creditors have certain rights
against the company and its members but they have no greater rights against the directors
than against any other members of the company. They had only those statutory rights
against the members, which are given to them in winding up.
Now, instead of owing a duty directly to a creditor, the position is that directors have, in
fulfilling their duties to the company in certain circumstances, most notably when the
company is insolvent, a duty to consider the interests of creditors. Conformation that a
director does not owe duties to creditors as such was made in Kuwait Asia Bank EC v.
National Mutual Life Nominees Ltd17, where in the judgment of the Privy Council, it was
stated that a director does not by reason only of his position as director owe any duty to
creditors of the company.

3.11. Directors Liabilities

A director can always be sued at common law under the tort of negligence, i.e. the failure
to take reasonable care or a breach of a duty of care to the company in circumstances
where he has acted negligently. In general terms, the director as an agent of the company
is entitled to an indemnity against claims being made against the company, which said
acts may in fact have been carried out by the company director.

3.12. Fraudulent or Reckless Trading

Directors should be aware of the fact that if in the course of a winding-up or liquidation
of a company, it appears that a director was knowingly a party "to the carrying on of any
17 (1991) 1 AC 187

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business of the company in a reckless manner", or was knowingly a party to the carrying
on of any business of the company "with intent to defraud creditors of the company or
creditors of any other person or for any fraudulent purposes, the Court is at liberty to
make such a director personally liable without any limitation of liability for all or any
part of the debts or liabilities of the company".
That is, if a director has misapplied or retained or become liable or accountable for any
money or property of the company, or has been guilty of any misfeasance or other breach
of duty or trust in relation to the company, the Court may order the director to repay or
restore the money or property, or any part, with interest at such rate as the Court thinks
fit, or to contribute monies to the assets of the company by way of compensation in
respect of the misapplication, retainer, misfeasance or other breach of duty or trust, as the
Court thinks just.

QUALIFICATIONS OF A DIRECTOR
Most parties would be qualified to act as a director of a company as no specific
qualifications are required, except that the articles of the company may provide that a
certain number of shares will have to be held by each director. Such shares are called

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Directors of a Company
qualification shares. However, there are certain categories of person who are specifically
excluded and prohibited from being directors of companies18.
For instance,
1. Where he is of unsound mind, provided that the fact has been certified by a court of
competent jurisdiction and the finding is enforced;
2. Where he is an undischarged insolvent;
3. Where he has applied to be adjudicated as an insolvent;
4. Where he has been sentenced to at least six months of imprisonment for an offence
involving moral turpitude and five years have not elapsed from the date of expiry of
the sentence.
5. Where he has not paid for six months any call on shares;
6. Where he has been disqualified under section 203 of the Act for the purpose of
preventing fraudulent persons from managing companies.

CONCLUSION

The director is the kingpin of the functioning of a

company. His role is not only indispensable to its working
but is also vital to its economic well being, since it is
18 Section 274

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Directors of a Company

with them that all the powers of management are

vested. Day to day corporate decision making can be
carried out only under the able leadership of a director.
Hence, it is pertinent to understand the role, office,
duties and liabilities of a director while interacting with
any company.

BIBLIOGRAPHY

Books
1. Singh, Avtar, Company Law, 11th edn., Eastern Book Company (1998)
2. Datey, Company Law, 2nd Edition, Taxmanns Publishing House(2000)

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Directors of a Company

Articles
3. Directors Wider Responsibilities- Problems, Conceptual, Practical &
Procedure, Leonard Sealy, Monash University Law Review, Vol.13, No.3,
September 1987
4. New Developments in Directors Duties; The Victorian Stance on Financial
Competence, Julie Dodds, Monash University Law Review, Vol.17, No.1, 1991

Websites
5. http://www.howtolaw.co.nz
6. http://58.1911encyclopedia.org/D/DI/DIRECTORS.htm
7. http://www.tallaght.com/lawyer/commercial/director