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DIRECTORS: APPOINTMENT AND DUTIES

INTRODUCTION:
“A corporation is an artificial being, invisible, intangible and existing only in
contemplation of law.”1 “It has neither a mind nor a body of its own.”2 “A living person
has a mind which can have knowledge or intention and he has hands to carry out his
intention. A corporation has none of these; it must act through living persons.”3
The company is an artificial person and is managed by the human beings. The humans who
runs it are known as Board of Directors. Directors acting collectively are known as Board.
The directors play a very important role in the day to day functioning of the company. It is
the board, who is responsible of the company’s overall performance. On incorporation, a
company becomes a person in the eyes of law, it has a perpetual succession, its members may
come and may go but the company lives till its death as aforementioned. It has a common
seal, which is affixed on all the legal documents executed on behalf of the company in the
presence of and signed by authorised signatory or signatories.4
The Board of directors of a company is a nucleus, selected according to the procedure
prescribed in the Act and the Articles of Association. Members of the Board of directors are
known as directors, who unless especially authorized by the Board of directors of the
Company, do not possess any power of management of the affairs of the company. Acting
collectively as a Board of directors, they can exercise all the powers of the company except
those, which are prescribed by the Act to be specifically exercised by the company in general
meeting.5

DEFINITION OF THE TERM “DIRECTOR” AND “BOARD OF DIRECTORS”

Webster’s Dictionary defines Director as “the person who is appointed for the management
of a company. As a company has a large number of shareholders and all these shareholders
cannot participate in the management of the company, the management of the company is
delivered to some selected persons who are called directors. These persons are dominating
and proficient in the business activity.”
The Companies Act, 2013 does not contain an exhaustive definition of the term “director”.

1
Trustees of Dartmouth College v. Woodward, (1819) 17 US 518, 636.
2
Lenards Carrying Company v. Asiatic Petroleun Company, 1915 AC 705.
3
Tesco Supermarkets Ltd v. Nttrass, 1977 AC 153.
4
Avtar Singh, Company Law, Eastern Book Company at pg. 263.
5
Dr. S.C. Tripathi, Modern Company Law, Central Law Publications at pg 166.
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Section 2 (34) of the Act states that “director” means a director appointed to the Board of a
company.
Whereas, Section 2 (10) states that “Board of Directors” or “Board”, in relation to a
company, means the collective body of the directors of the company.
Thus, a director is a person who directs, conducts, manages, supervises and controls the
functioning of a company. All the Directors of a company are collectively known as the
Board of Directors.6

POSITION OF DIRECTORS
The position that the directors occupy in a corporate enterprise is not easy to explain. They
are professional men hired by the company to direct its affairs yet they are not the servants of
the company. They are rather the officers of the company.

DIRECTORS AS EMPLOYEE OF THE COMPANY

It is sometimes said that the directors are paid employees or servants of a company and stand
in no better position than that of an ordinary employee. A director like any other employee
draws financial reward from the company for the services rendered by him for the benefit of
the company. In this respect there is a master- servant relationship between the company and
the director.7

DIRECTORS AS AGENTS
It was clearly recognized as early as in 1866 in Ferguson v. Wilson8 that directors are in the
eyes of law, agents of the company. The court said:
The general principals of agency, therefore, govern the relations of directors with the
company and of persons dealing with the company through its directors. Since the company
cannot act of its own accord by reason of its artificial character, it acts through human agency
like directors. Cairns, L.J., has observed that the directors are “mere agents of the company.”9
There exists a principal and agent relationship between a company and a director in so far as
director acts within the terms expressly provided for this purpose. A notice to a director will
amount to a notice to the company.10

6
Dr. Kailash Rai, Principles of Company Law at pg 315.
7
H.K. Saharay, Company Law, Universal Law Publishing Co. Fifth Edition, Pg.- 268.
8
(1866) 2 Ch App 77: 36 LJ Ch 67: 15 LT 230.
9
Ferguson v. Wilson, (1866) LR 2 Ch App 77 (89).
10
T.R. Pratt Bombay Ltd. V. M.T. Ltd., AIR 1938 PC 159.
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DIRECTORS AS QUASI- TRUSTEES

Directors are not in the true sense trustees of a company. Directors are equivalent to trustee
but not purely trustees.
There are a number of differences between the position of a director and that of a trustee. A
trustee trustee holds property in his own name subject to equitable obligation to cestui que
trust. But the director never holds the company’s property in his own name. A trustee can
enter into a contract in his own name, but a director can do so only under the seal of a
company. The position of a ttrustee is a creation of equity but the position of a director is a
recognition of the common law in England.
Romer, J., in Re: City Equitable Fire Insurance co. Ltd.,11 has vigorously objected to draw
an analogy between the position of directors and that of trustees. He observed that there is
little resemblance between the duties of a director and the duties of a trustee of a will or of a
marriage settlement. It is indeed impossible to describe the duty of directos in general terms,
whether by way of analogy or otherwise.
In Ramaswamy Iyer v. Brahmayya & Co,12 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.

DIRECTORS AS ORGANS OF THE COMPANY

In the eyes of law there are two type of persons i.e., artificial persons and natural persons.
According to Neville, J.- Man uses his bodily organs for a purpose, Corporation uses men.
The Board of Directors are the brain and the bran only of the company, which is the body and
the company can and does act only through them.13
Thus, the Board of Directors represent the mind or will of the company. “when the brain
functions the corporation is said to function”. The Calcutta High Court in Gopal Khaitan v.
State,14 had put emphasis on the organic theory of corporate life. A theory which treats
certain officials as organs of the company, for whose action the company is to be held liable
just as a natural person is for the action of the limbs”.

COMPOSITION OF DIRECTORS
According to Section 149 of the Act, it is mandatory for every company to have a Board of
Directors, the composition should be as follows:

11
13 Ch D 696.
12
[1966] 1 Comp LJ 107.
13
Supra note 2 at pg 171.
14
AIR 1969 Cal. 132.
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 Miminum 3 Directors in a Public Company;

 Minimum two Directors in case of a Private Company;
 Minimum one Director in case of a One Person company.
 One woman Director: Rule 3 of Companies (Appointment and Qualification of
Directors) Rules, 2014, prescribes that the following class of companies shall appoint
at least one woman director-
1) every listed company;
2) every other public company having :-
 paid–up share capital of one hundred crore rupees or more; or
 turnover of three hundred crore rupees or more .
 One Director who has stayed in India for minimum 182 days in the previous calendar
year (resident in India in the previous year).
A company can appoint maximum fifteen directors. A company may appoint more than
fifteen directors after passing a special resolution in general meeting and approval of Central
Government is not required.

APPOINTMENT OF DIRECTORS
It may be reiterated that only individuals i.e. natural living person can be a director of a
company and no body corporate, association or firm can be appointed as a director of a
company. Explaining the reason as to why only an individual can be appointed as a director,
the Supreme Court in Oriental Metal Pressing Works(P.) Ltd. V. Bhaskar Kashinath
Thakre, observed that the office of a director is to some extent an office of trust, therefore,
there should be somebody who can be held responsible for the failure to carry out the trust
and it might be difficult to fix that responsibility if the directors were a company or an
association or a firm. It is for this very reason that the Act prohibits its assignment of the
office by a director.
Section 149 of the Act provides that no body corporate, association or firm can be appointed
as director of any company, and only an individual can be so appointed. No company shall
appoint or re- appoint any individual as director of the company unless he has been allotted a
Director Identification Number (DIN) under Section 158 of the Act.

APPOINTMENT OF FIRST DIRECTOR

Directors play a crucial role in the management of a company. Therefore, it is highly
desirable that only the persons of proven ability and integrity should be appointed as directors
of a company. The first directors of a company are usually appointed by the subscribers of
the memorandum. In case they do not appoint the directors, all the subscribers who are
individuals and signatories to the memorandum, become directors of the company. They hold
office only upto the date of first annual general meeting in which subsequent directors are
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appointed as provided by Section 149 of the Act. The first directors of most of the companies
are named in their articles.
In the case of a One Person Company, an individual being a member shall be deemed to be
its first director until the directors are duly appointed by the member in accordance with the
provisions of Section 152.15
 Except as provided in the Act, every director shall be appointed by the company in
general meeting.
 He has been allotted a DIN under section 154;
In the earlier Act, minimum qualification shares had to be purchased so as to be qualified for
being a director but the 2103 Act has removed the provisions relating to qualification shares.
Articles of the Company may provide the provisions relating to retirement of the all directors.
If there is no provision in the article, then not less than two-thirds of the total number of
directors of a public company shall be persons whose period of office is liable to
determination by retirement by rotation and eligible to be reappointed at annual general
meeting. Further independent directors shall not be included for the computation of total
number of directors. At the annual general meeting of a public company one-third of such of
the directors for the time being as are liable to retire by rotation, or if their number is neither
three nor a multiple of three, then, the number nearest to one- third shall retire from office.
The directors to retire by rotation at every annual general meeting shall be those who have
been longest in office since their last appointment.
In the case of Usha Chopra (Dr.) v. Chopra Hospital (P) Ltd., 16 the two non-resident Indians
were the first directors of the two- man company. The company appointed the same two first
directors as its subsequent drectors, but no Annual General Meeting was called nor was there
any record of notice of such meeting or information having been to these directors. The court
held that the appointment was wholly illegal and liable to be quashed.
At the annual general meeting at which a director retires as aforesaid, the company may fill
up the vacancy by appointing the retiring director or some other person thereto. If the
vacancy of the retiring director is not so filled-up and the meeting has not expressly resolved
not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at
the same time and place, or if that day is a national holiday, till the next succeeding day
which is not a holiday, at the same time and place.17
If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that
meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be
deemed to have been re-appointed at the adjourned meeting, unless—
(i) a resolution for the re-appointment of such director has been put to the meeting and lost;
(ii) the retiring director has expressed his unwillingness to be so re-appointed;
(iii) he is not qualified or is disqualified for appointment;

15
N.V. Paranjape, Company Law, Central Law Agency at pg 278.
16
(2006) 130 Comp. Cs.( CLB).
17
Supra notw 3 at pg 282.
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(iv) a resolution, whether special or ordinary, is required for his appointment or re-
appointment by virtue of any provisions of this Act; or
(v) section 162 i.e. appointment of directors to be voted individually is applicable to the case.
Punishment - Section 159
If any individual or director of a company, contravenes any of the provisions of section
152,155 and 156 such individual or director of the company shall be punishable with
imprisonment for a term which may extend to 6 months or with fine which may extend to Rs.
50,000 and where the contravention is a continuing one, with a further fine which may extend
to Rs. 500 for every day after the first day during which the contravention continues.

APPOINTMENT OF DIRECTORS BY THE BOARD [SECTION 161]

Subject to the provisions of articles, the Board of Directors has the powers to appoint any
person, other than the person who fails to get appointed as a director in a general meeting.
The appointment of directors includes:
 Appointment of Additional Directors;
 Appointment of Alternate Directors;
 Appointment of Nominee Directors; and
 To fill in casual vacancies of Directors.
Additional Directors- Section 161 (1)
The board of directors can appoint additional directors, if such power is conferred on them by
the articles of association. Such additional directors hold office only upto the date of next
annual general meeting or the last date on which the annual general meeting should have
been held, whichever is earlier. A person who fails to get appointed as a director in a general
meeting cannot be appointed as Additional Director.
Alternate Directors- Section 161 (2)
An alternate director is one who is appointed to act in place of a director who is absent from
the state in which the meetings of the Boards are held ordinarily, for a period of not less than
three months. No person shall be appointed as an alternate director for an independent
director unless he is qualified to be appointed as an independent director under the provisions
of this Act.
An alternate director shall ipso facto vacate office as and when the original director returns.
The person to be appointed as the Alternate Director shall be the person other than the
person
holding any alternate directorship for any other Director in the Company. If it is proposed to
appoint an Alternate Director to an Independent Director, it must be ensured that the
proposed appointee also satisfies the criteria for Independent Directors.
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An alternate director shall not hold office for a period longer than that permissible to the
director in whose place he has been appointed and shall vacate the office if and when the
director in whose place he has been appointed returns to India. If the term of office of the
original director is determined before he so returns to India, any provision for the automatic
re- appointment of retiring directors in default of another appointment shall apply to the
original, and not to the alternate director.
Nominee Director Section 161(3)
This new sub-section now provides for appointment of Nominee Directors. It states that
subject to the articles of a company, the Board may appoint any person as a director
nominated by any institution in pursuance of the provisions of any law for the time being in
force or of any agreement or by the Central Government or the State Government by virtue of
its shareholding in a Government Company.
Appointment of Directors in casual vacancy- Section 161 (4)
If any vacancy is caused by death or resignation of a director appointed by the shareholders in
General meeting, before expiry of his term, the Board of directors can appoint a director to
fill up such vacancy. The appointed director shall hold office only up to the term of the
director in whose place he is appointed.
A vacancy caused by death, resignation or failure to accept the directorship on being elected
would be considered a casual vacancy, but not the one caused due to retirement.

VOTING ON DIRECTORS APPOINTMENT [SECTION 162]

The appointment of every director in a public company or in its subsidiary must be made by
ordinary resolution at the general meeting. It therefore follows that candidates cannot be put
to vote en bloc, but each candidate must be voted on individually. A single resolution shall
not be moved for the appointment of two or more persons as directors of the company unless
a proposal to move such a motion has first been agreed to at the meeting without any vote
being cast against it.
A resolution moved in contravention of aforesaid provision shall be void, whether or not any
objection was taken when it was moved. A motion for approving a person for appointment, or
for nominating a person for appointment as a director, shall be treated as a motion for his
appointment.

APPOINTMENT BY PROPORTIONAL REPRESENTATION [SECTION 163]

It must be reiterated that the basic method for appointment of directors is election by simple
majority of the shareholders. There is, however, one serious defect in this method that a
substantial minority cannot succeed in placing even a single director on the Board. Therefore,
Section 163 enables the minority to place their representatives on the Board by means of
proportional representation. This system is also known as cumulative voting system. The
articles of a company may provide for the appointment of not less than two-thirds of the total
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number of the directors of a company in accordance with the principle of proportional

representation, whether by the single transferable vote or by a system of cumulative voting or
otherwise and such appointments may be made once in every three years and casual
vacancies of such directors shall be filled as provided in subsection (4) of section 161.
Right of persons other than retiring directors to stand for directorship- Section 160
A person who is not a retiring director shall be eligible for appointment to the office of a
director at any general meeting, if he, or some member intending to propose him as a
director, has, not less than fourteen days before the meeting, left at the registered office of the
company, a notice in writing under his hand signifying his candidature as a director or, as the
case may be, the intention of such member to propose him as a candidate for that office,
along with the deposit of one lakh rupees or such higher amount as may be prescribed which
shall be refunded to such person or, as the case may be, to the member, if the person
proposed gets elected as a director or gets more than 25% of total valid votes cast either on
show of hands or on poll on such resolution.
Notice of candidature - Section 160(2) and Rule 13
The company shall inform its members of the candidature of a person for the office of a
director or the intention of a member to propose such person as a candidate for that office, at
least seven days before the general meeting by serving individual notices to members through
e-mail and where no e-mail address is available then in writing and by placing notice of such
candidature or intention on the website of the company, if any.
If the company advertises such candidature/intention, not less than 7 days before the meeting
at least once in a vernacular newspaper in the principal vernacular language of the registered
office’s district and at least once in English language in an English newspaper circulating in
that district in which the registered office of the company is situated, then it shall not be
required to serve individual notices upon the members as aforesaid.

DISQUALIFICATIONS FOR APPOINTMENT OF DIRECTOR [SECTION

164]
Section 164 provides that the following persons are not eligible and shall not be appointed as
director of any company:
a) A person certified by a Court of competent jurisdiction to be of unsound mind;
b) An undischarged insolvent;
c) A person who has applied to be adjudicated as an insolvent and his application is
pending;
d) A person who has been convicted by a Court for any offence whether involving moral
turpitude or otherwise and sentenced in respect therefore to an imprisonment of not
less than six months and a period of seven years or more has not elapsed from the date
of the expiry of the sentence;
e) A person has been disqualified from being appointed as a director by an order of a
court, tribunal and the order is in force;
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f) A person has not paid any calls in respect of shares of the company held by him and
six months have elapsed from the last day fixed for the payment of the call;
g) A person has been convicted of an offence dealing with related party transactions
under Section 188 at any time during the last preceding five years;
h) He has not complied with the provisions of sub- section (3) of section 152
The disqualifications referred in clauses (d), (e) and (g) shall not take effect for thirty days
from the date of conviction order of disqualification and where an appeal or petition is filed
or until the expiry of seven days from the date on which such appeal is disposed off.
A private company may provide for any disqualifications in addition to the ones mentioned
above.

DUTIES OF DIRECTORS TOWARDS THE COMPANY

Under the Companies Act directors are accountable for their acts done on behalf of the
company. Besides the statutory duties which the directors have to perform to ensure strict
compliance with the various provisions of the Act they also have certain duties which arise
out of their fiduciary relationship with the company.

FIDUCIARY DUTIES AND OBLIGATIONS OF DIRECTORS

The duties of good faith and honesty arising out of the fiduciary relationship between the
director and his company are analogous to those of a trustee. The law imposes these duties
upon the directors so that they are not allowed to ‘capitalize their strategic position in the
company to serve their own interest”.18 The Australian Uniform Companies Act has
incorporated statutory provisions containing an explicit reference to the fiduciary obligation
of directors towards their companies. However, since codification of duties of directors may
give rise to technical difficulties and practical problems in the day to day working of the
company the framers of the English as also the Indian Companies Act avoided the inclusion
of fiduciary relationship of directors in the Act. Instead a general statement of the basic
principles underlying this relationship was preferred in the interest of directors and others
concerned with companies management.
The first and the most obvious obligation of persons in fiduciary position to act with honesty.
Greatest faith is expected in the discharge of their duties. Good faith requires that all their
endeavors must be directed to the benefit of the company. The directors being in a fiduciary

18
(1934) 47 Harv LR 1305.
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relationship with the company they should act in good faith with honesty in discharge of their
duties.
Diversion of business opportunities
A director should not exploit to his own use the corporate opportunities. The doctrine of
corporate opportunity has been described as an act of a director or controlling shareholder in
diverting from the benefit of the corporation any enterprise or transaction in which reasonable
persons would agree that the corporation had some expectancy or interest.
In Cook v. Deeks,19 the directors of a company diverted a contract opportunity for their own
benefit and by their votes as holders of three- fourths majority resolved that the company had
no interest in the contract. . Their lordships held that the benefit of the contract in equity
belonged to the company and the director usurped their voting power for personal gain.
Their Lordship observed:
It is quite right to point out the importance of avoiding the establishment of rules as to
directors duties which would impose upon them a burden so heavy and responsibilities so
great that men of good position would hesitate to accept the office. But on the other hand,
men who assume complete control of a company’s business must remember that they are not
at liberty to sacrifice he interests, which they are bound to protect, and, while ostensibly
acting for the company, divert in their own favour the business which would properly belong
to the company they represent.
Where a director is instructed to purchase some property for the company and he purchases
the same for himself and then sells it to the company at a profit, he is liable for the same as he
was under an obligation to act on behalf of the company. But he is under no obligation to
purchase on behalf of the company and purchases on his own account which is subsequently
sold to the company. Is the company entitled to this profit also? This was answered in
negative by the Judicial Committee in the case of Burland v. Earle,20:
One Burland was a director of the plaintiff company. He was also a shareholder and creditor
of another company known as Burland Lithographic Company, which was being would up.
At a public sale by liquidaot, Burland purchased all the aassets of the company in four lots.
The price paid by him for lot 1 was 21,564 pounds and shortly afterwards he sold it to the
plaintiff company for 60,000 pounds. The lower Court held him liable to account for the
profit so made which in equity belonged to the company. But the Judicial Committee of the
Privy Council set aside the decision of the lower court and observed, “there is no evidence
whatever of any mandate to the director to purchase on behalf of the company or that he was
in any sense a trustee for the company for purchase of property. It may be that he had an
intention in his own mind to resell it to the company, but it was an intention which he was at
liberty to carry out or abandon at his own will”. Therefore, he had legally acquired the
property which he later sold to the company hence he committed no breach of trust.

19
(1916) 1 ac 554.
20
(1902) AC 83 (PC).
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In Thomas Marshall (Exports) Ltd v. Guinle,21 a company was importing foreign goods
for resale in U.K. Its managing director formed a new company and solicited orders on its
behalf from the U.K. buyers. He was restrained from this course of conduct. It was a breach
of service contract and also of fiduciary duty.
A director is liable to account to the company for any unauthorized profits made by him by
virtue of his office.22
Position on cessation of directorship
In Industrial Development Consultants Ltd v. Cooley,23 the managing director of a
company tried to get from the Gas Board a Government contract for the company. But the
Gas Board plainly told him that the Government was willing to deal with him personally. He
resigned from the company, under the pretence of ill- health and then promptly obtained the
contract for himself. Having earned a handsome profit, he had to face an action from the
company to account for it.
The court held that the managing director had acted in breach of his duty and therefore, must
account for it.

Trading in corporate control

A learned writer says: “ A director who acquires property while in office will, however, be
liable to account for his profit upon resale if two elements are present. He must have acquired
property only by reason of the fact that he was a director and in the course of the exercise of
the office of director.” Regal (Hastings) Ltd v. Gulliver,24 carries the principle to the
farthest limit.

The Regal owned a cinema in Hastings. They took out leases on two more, through a new
subsidiary, to make the whole lot an attractive sale package. However, the landlord first
wanted them to give personal guarantees. They did not want to do that. Instead the landlord
said they could up share capital to £5,000. Regal itself put in £2,000, but could not afford
more (though it could have got a loan). Four directors each put in £500, the Chairman, Mr
Gulliver, got outside subscribers to put in £500 and the board asked the company solicitor,
Mr Garten, to put in the last £500. They sold the business and made a profit of nearly £3 per
share. But then the buyers brought an action against the directors, saying that this profit was
in breach of their fiduciary duty to the company. They had not gained fully informed consent
from the shareholders

The House of Lords, reversing the High Court and the Court of Appeal, held that the
defendants had made their profits “by reason of the fact that they were directors of Regal and
in the course of the execution of that office”. They therefore had to account for their profits to
the company.
21
1979 Ch 227.
22
Boardman v. Phipps (1966) 3 All ER 721.
23
[1972] 1 WLR 443: [1972] 2All ER 162.
24
[1942] 1 All ER 378; [1967]2 AC 134.
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Securities Exchange Board of Indian (Insider Trading ) Regulation 1992

In order to safeguard companies against insider trading, SEBI has framed regulations in 1992
which makes misuse of secret trade information of company by its officials, employees etc.
who have access to it in course of business dealings, an offence and the person found guilty
of inside trading may be removed from employment. For example, where a director in his
official capacity has information and knowledge that company’s forthcoming public issue
will be on a high premium and with the intention of making huge profit, he himself purchases
shares of the company at the then existing lower price, he would be guilty of inside trading.25

DIRECTOR’S DUTY OF CARE

Fidelity alone is not enough. The directors of a company are expected to perform their
functions with reasonable care and attention. They must discharge their duties and obligations
with skill and diligence as expected from a reasonable person of his knowledge and
experience. He has to attend with due diligence and caution the work assigned to him. They
are however, not liable for bonafide error of judgment as observed by Romer J. in Re City
Equitable Fire Insurance Company.26
Whether the director himself should be liable for the tortuous act committed by him during
the working process or the liability should be on the company was the question involved for
consideration in E. Evans &Sons Ltd. V. Spiriband Ltd.,27 it was observed that it would be
wrong to hold the director liable for a tortuous act committed by him while transacting
company’s business because many a times directors are required to take bold, risky and
adventurous decisions in the interest of the company which may fail and result in wrongful
act. Therefore, where the act of the director is bonafide and done in good faith to further the
interest of the company, the liablility has to borne out by the company.
As regards the standard of care and skill expected from directors in performance of their
duties, courts seem to be unanimously agreed that is that of a reasonable person who with the
same knowledge and experience would do in that situation. For assessing the standard of
care, the test is objective, that is how a reasonable man placed under those situations would
act, while on the other hand for the standard of skill the test is subjective i.e., the level
required depends upon the knowledge and experience possessed by each director.
It may be summed that where a director has acted honestly, reasonably and in good faith
having regard to all the circumstances he shall not be liable. Thus in M.O. Verghese v.
Thomas Stephen &Co. Ltd.,28 the director was not held liable for non- disclosure of the fact

25
R v. Goodman, (1992) 2 All ER 789 (CA).
26
(1952) Ch 407.
27
(1985) BCLC 105 (110).
28
(1970) 40 Comp Cas 1131 Ker.
 P a g e | 13

that his joint family already had a contract with the company because the said contract was
entered into by the deceased father about eighteen years ago and he knew nothing about it.
The Bombay High Court in Harish Chandra Maganlak v. Union Of India,29 pointed out
that the law makes no difference between whole-time directors and part- time directors in the
matter of liability arising from their negligence or breach of duty excepting that in case of
part- time directors, they can be more relieved from liability when it is proved that they had
no active role in the management of the company.
In order to ensure discharge company’s functions with greater skill, Section 200 of the Act
provides that while according approval to any appointment of a managing director or whole-
time directors, the Central Government shall have regard to their professional qualification
and experience.
Girni Kamgar Sangharsh Samiti vs Matulya Mills Ltd.,30 the Bombay High Court was
called upon to decide the extent of liability of nominated directors. In this case, ignoring the
directions of the court, the Board of directors of a sick industrial company did not allow the
payment of salary and wages to its workers. The aggrieved workers sued the director
nominated by BIFR for contempt of court and breach of duty for not representing their cause
properly in the Board meeting. Disallowing the petition, the court held that a nominated
director does not have any control on routine transactions of the company because decisions
in Boards meetings are taken by majority. Therefore, the court quashed the criminal
proceedings which were instated against the nominated director.

DIRECTOR’S DUTY TO INDIVIDUAL MEMBERS

It must be stated that directors owe a duty to their company but not to individual members
while carrying out transactions with such members, whether the directors act on behalf of the
company or on behalf of themselves. It is well settled that directors are not trustees for
individual shareholders. Therefore, directors who purchase shares from members of their
company, are under no obligation to disclose information which they have which might
induce the members to demand higher price. However, if the directors induce the members to
sell their shares at a low price by misleading them, they would be held liable and the
members can claim damages for the loss sustained by them.
Though generally speaking, directors owe no fiduciary duty to the members but in certain
situations they do owe a duty to exercise reasonable skill and care in advising members about
a particular transaction relating to the company or its undertaking.

DUTY TO DISCLOSE PERSONAL INTEREST [SECTION 184]

The relationship between director and the company being that of an agent and principal, the
former occupies a fiduciary position towards the latter. Therefore, directors are under a duty

29
AIR 1990 Bom 34(36).
30
2002 CriLJ (1) (Bom).
 P a g e | 14

to ensure that their personal interests do not clash with those of the company’s interests. The
law expects a director to discharge his duties towards the company without any personal
interest of his own. In order to eliminate the possibility of a conflict of interests of directors
vis-a vis the company, special procedure has been laid down in Section 184 of the Act.
Where a director is interested in a particular transaction of the company, he must disclose it
to the Board at the very meeting after he had become so interested.
The interested director shall not participate in the discussion on the matter in which he is
interested, in the Board. In case, he votes, it would be null and void and the defaulting
director shall be punishable under Section 184(4) of he Act.
Interest means that it should be a kind of personal interest which clashes with the duties of
director towards his company.
The directors owe a duty not only to the company but also to its creditors to ensure that the
propert of the company is not exploited for the benefit of te directors themselves and the
interests of the creditors are not jeopardized

DUTY TO ATTEND BOARD’S MEETINGS

Though, directors are not bound to attend all the meetings of the board. Section 67(1)(b) of
the Act provides that the office of a director shall stand vacated if he absents himself from
three consecutive meetings of the Board of Directors held during a period of twelve months
with or without leave of absence of the Board. Generally, a director is not held liable for
transaction based on the decisions taken in the Board meeting in which he was absent.

DUTY OF DIRECTOR’S TOWARDS OTHER PERSONS

It is true that directors are not personally liable for the contracts entered into by third parties
with the company, instead the company is held liable for such transactions. Likewise if the
contracts entered into by the company are ultra-vires the company, then also directors shall
not be liable because such contracts are void in law. But if the director enters into a contract
with a third person in his own name suppressing the fact that he is doing so in his capacity as
a director of that company, in that case he shall be personally liable to any loss caused to the
company on account of that contract.
Where a director is guilty of fraud or deceit or commits a tort in relation to a company’s
transaction, he shall be personally liable to pay compensation to the person or persons who
sustain damages because of such damages. He shall also be liable for omissions which caused
damages to third party.
The directors may be held criminally liable for acts or transactions which constitute an
offence under the Indian Penal Code. Thus, in U.P. Pollution Control Board v. Modi
Distillery, 31the directors along with the managing director and chairman of an industrial
unit were prosecuted for willful default in furnishing details regarding anti- pollution
measures adopted by the unit. The Court hed that where an offence has been committed by

31
AIR 1988 SC 128.
 P a g e | 15

the company, every person who at the time of the commission of the offences was in charge
and responsible to the company for the conduct, shall be liable.
Directors may be held personally liable to third parties under the Companies Act in the
following circumstances:
 Where they issued a prospectus which did not contain the particulars requires by the
Act; or
 For misrepresentation in the prospectus; or
 Where an irregular allotment was made; or
 Where the company is unable to allot shares within 120 days of the first issue of the
prospectus, and money received from applicants for shares has not been repaid with
10 days; or
 Where the company is being wound up, the directors may be made liable for debts of
the company incurred through fraudulent transactions by directors on behalf of the
company.
Apart from the Act, directors may also incur personal liability to third persons for breach of
implied warranty of authority for acts which although intra vires the company is outside the
scope of their own authority as defined in the articles. Where a director acts in his own name
instead of the company’s name, he shall be personally liable to the third party for damages
resulting form such acts.

DUTY TO PREPARE DIRECTORS FINANCIAL STATEMENT AND SEND IT

TO THE REGISTRAR ALONGWITH BOARD’S REPORT
Section 134(1)(c) of the Companies Act, 2013 provides that the Board’s Report will also
include a Director’s Financial statement which shall state that:
 Directors had followed in the preparation of annual accounts, the applicable
accounting standards and given proper explanation relating to material departures, if
any;
 They had selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair
view of the state of affairs of the company at the end of the financial year and of the
profit and loss of the company for that period;
 They had taken proper and sufficient care for the maintenance of adequate accounting
records in accordance with the provisions of this Act for safeguarding the assets of the
company and for preventing and detecting fraud and other irregularities;
 details in respect of frauds reported by auditors under subsection (12) of section 143
other than those which are responsible to the Central Government.32

CORPORATE SOCIAL RESPONSIBILITY OF COMPANY’S BOARD OF

DIRECTORS [SECTION 135]

32
Supra note 16 at pg 284.
 P a g e | 16

A new provision incorporated in the Act provides that every company having a net worth of
rupees five hundred crore or more, or turnover of rupees one thousand crore or more or net
profit of rupees five crore or more during any financial year shall continue a Corporate Social
Responsibility Committee of the Board. The committee shall formulate policy for
implementing the activities specified in Schedule VII of the 2013 Act. The policy shall be
disclosed by the Board on the company’s website. The Committee shall ensure that at least
2% of the average net profit made by the company during the three immediately preceding
financial years shall be spent on such activities. The activities relate to eradication of poverty,
promotion of education, gender equality and women’s empowerment reducing child morality,
ensuring environmental sustainability, enhancing social skills contribution to Prime
Minister’s National Relief Fund, etc.
Experience has shown that after the provisions of Section 135 and Schedule VII of the
Companies Act, 2013 were notified with effect from April 1, 2014 there has been under
performance besides general disinterest from the corporate houses.
According to the Ministry of Corporate Affairs, Government of India, Corporate Social
Responsibility, regardless of scale, scope and functional area is a three part process,
comprising policy, planning and implementation. All three have to be formulated with clarity
and coherence so that it enables a true impact for the betterment of society. CSR activities by
the Indian incorporates may indeed serve as a meaningful and effective medium of social
change.
A workshop of CSR Practitioners Series was conducted by the Economic Times Group and
Nextgen in partnership with Bennett University in February 2017 in Delhi which aimed at
decoding CSR for corporations and helping them understand and explore the ways in which
they can integrate their CSR activities and programmes with their business itself. Some of the
CSR initiatives include educating under privileged children, tree plantation, organ donation
drive, etc. now CSR has become a part of the business strategy itself especially since it is the
Boards of the Corporation that are now getting involved in CSR initiatives.33

33
Supra note 16 at pg 287.
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CONCLUSION

A company has no physical existence of its own. In order to enable a company to live and to
achieve its objects as enshrined in the objects clause of its Memorandum of Association, it
has to depend upon some agency, known as Board of directors.
The Board of directors of a company is a nucleus, selected according to the procedure
prescribed in the Act and the Articles of Association. Members of the Board of directors are
known as directors, who unless especially authorized by the Board of directors of the
Company, do not possess any power of management of the affairs of the company.
The duties of the Board of Directors have been statutorily provided, they have been
streamlined in the Companies Act, 2013 but the Fiduciary duties are the strongest duties as
can’t even control in corporate control.
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BIBLIOGRPAHY

 Avtar Singh, Company Law, Eastern Book Company, Lucknow, 2016.

 Dr. Kailash Rai, Principles of Company Law, Allahabad Law Agency,
Faridabad, 2010
 Dr. S.C. Tripathi, Modern Company Law, Central Law Publications,
Allahabad, Fifth Edition, 2012.
 N.V. Paranjape, Company Law, Central Law Agency, Allahabad, 2016.