INTRODUCTION

A company, firm, corporation or an enterprise is a legally established organization which

comprises of people united to offer services to consumer and make profit. A company could
be of a private owner or could be government owned. Most of the companies are created to make
money gain, which is then used for the growth of the firm. Company has its own assets and
liabilities and company’s assets are not the property of its shareholders. The persons with whom
the responsibility of working and management of a company lies are called as board of directors.
All though share holders own the limited part of the company they cannot run it, part of running
the company is given to directors. Board of directors is the highest authority in the organization
of the company. Board of directors comprises of people who are responsible for the legal actions,
signing documents, taking decisions for the company’s acquisition or merger with another
company, analyzes company’s financial report and decides on dividends.

IMPORTANCE & POSITION OF DIRECTORS IN BOD

Directors are the members of a board of directors. Directors must be individuals. Directors can
be owners, managers, or any other individual elected by the owners of the business entity.
Directors who are owners and/or managers are sometimes referred to as inside directors, insiders
or interested directors. Directors who are managers are sometimes referred to as executive
directors. Directors who are not owners or managers are sometimes referred to as outside
directors, outsiders, disinterested directors, independent directors, or non-executive directors.

The term “director” in Companies Act 2013 under Section 2 (34) is defined as “a director
appointed to the Board of a company”., wherein ―Board of Directors‖ or ―Board‖, in relation to
a company, means the collective body of the directors of the company. As per Chapter XI,
Section 149 of the Companies Act 2013, it is mandatory for every company to have a Board of
Directors, the composition should be as follows:

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 1. Public Company: Minimum 3 and maximum 15 nos. of Directors; at least 1/3 rd number
of Independent Directors

2. Private Company: Minimum 2 and maximum 15 nos. of Directors

3. One person Company: minimum 1 director

4. At least 1 woman director

5. At least 1 Director who has stayed in India for minimum 182 days in the previous
calendar year.

The Companies Act 2013 gives recognition to the idea of Independent Director, which was
earlier part of the listing agreement only. It means a director other than a whole time director or
the Managing Director or a nominee director who fulfills the criteria’s mentioned in Section 149.

As per section 266A and 266B of the Companies Act, 1956 Director Identification Number
(DIN) is a unique identification number issued to existing and/or potential directors of any
incorporated company. As per Companies Act provisions every director shall be appointed by
the company in 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.

An additional director is appointed by the Board of Directors through the Boards vested power to
hold office till next general meeting. An alternate director may be appointed by the Board of
Directors to act as a Director in absence for a period of not less than 3 months and not more than
the allotted period for the director for whom the replacement is.

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 any government regulation or shareholdings,
such directors are known as Nominated Directors.

As per Principle of Proportional representation the articles of a company may provide for the
appointment of not less than two-thirds of the total number of the directors of a company, and
such appointments may be made once in every three years and casual vacancies of such directors
shall be filled as provided in sub-section (4) of section 161.

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People of unsound mind, undischarged insolvent, convicted by a court of any offence and either /
or imprisoned for a period of 7 years or more, convicted of the offence dealing with related party
transactions under section 188.

POWERS & RIGHTS OF BOD

Section 291 of Companies Act, 1956 provides for general powers of the Board of directors. It
mandates that the Board is entitled to exercise all such powers and do all such acts and things,
subject to the provisions of the Companies Act, as the company is authorized to exercise and do.
However, the Board shall not exercise any power and do any act or things which is required
whether by the Act or by the memorandum or articles of the company or otherwise to be
exercised or done by the company in general meeting.

Power of the individual director. Unless the Act or the articles otherwise provide, the

Decisions of the Board are required to be the majority decisions only. Individual directors do not
have any general powers. They shall have only such powers as are vested in them by the
Memorandum and Articles.

Section 292(1) of the Companies Act, 1956 provides that the Board of directors of a company
shall exercise the following powers on behalf of the company and it shall do so only by means of
resolution passed at meeting of the Board:

(a) the power to make calls on shareholders in respect of money unpaid on their shares;

(aa)the power to authorize the buy-back referred to in the first proviso to clause (b) of

sub-section (2) of section 77A;

(b) the power to issue debentures;

(c) the power to borrow moneys otherwise than on debentures;

(d) the power to invest funds of the company; and

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(e) the power to make loan.

The Board of Directors of a company shall be entitled to exercise all powers, and to do all acts
and things, as the company is authorised to exercise and do. The Board shall be subject to
restrictions imposed under this Act or in Memorandum or Articles or any regulation of the
Company. The Board shall not exercise any power which is required to be exercised by the
company in general meeting.

No regulation made by the company in general meeting shall invalidate any act of the Board
done prior to these regulations come into existence and effect.

POWERS TO BE EXERCISE IN BOARD MEETING1 :

The Board shall exercise following powers only by means of resolution passed in its meeting:

(a) to make calls on shareholders in respect of money unpaid on their shares;

(b) to authorise buy-back of securities under section 68;

(c) to issue securities, including debentures, whether in or outside India;

(d) to borrow monies;

(e) to invest the funds of the company;

(f) to grant loans or give guarantee or provide security in respect of loans;

(g) to approve financial statement and the Board’s report;

(h) to diversify the business of the company;

(i) to approve amalgamation, merger or reconstruction;

(j) to take over a company or acquire a controlling or substantial stake in another company;

(k) any other matter which may be prescribed.

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Section 179, Sub – Section 3

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The Board may, by a resolution passed at a meeting, delegate to any committee of directors, the
managing director, the manager or any other principal officer of the company or in the case of a
branch office of the company, the principal officer of the branch office, the powers specified in
clauses (d) to (f) on such conditions as it may specify.

Clause (d) which deals with power to borrow money needs many explanations. Nothing in this
clause (d) shall apply to borrowings by a banking company from other banking companies or
from the Reserve Bank of India, the State Bank of India or any other banks established by or
under any Act. In respect of dealings between a company and its bankers, the exercise by the
company of the power specified in clause (d) shall mean the arrangement made by the company
with its bankers for the borrowing of money by way of overdraft or cash credit or otherwise and
not the actual day-to-day operation on overdraft, cash credit or other accounts by means of which
the arrangement so made is actually availed of.

COMPANY TO RESTRICT POWER OF BOARD 2:

The company in general meeting has power to impose restrictions and conditions on the exercise
by the Board of any of the powers specified in this section.

RESTRICTIONS ON POWER OF BOARD 3:

The Board of Directors may exercise particular powers only with the consent of the company
given by way of special resolution passed in general meeting of the company.

These are:

(a) To sell, lease or otherwise dispose of the undertaking;

(b) To invest otherwise in trust securities the amount of compensation received by it as a result
of any merger or amalgamation;

(c) To borrow money; and

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Section 179, Sub – Section 4 of the Companies Act, 2013
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Section 180 of the Companies Act, 2013

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(d) To remit, or give time for the repayment of, any debt due from a director.

No we will discuss some details.

TO SELL, LEASE OR OTHERWISE DISPOSE OF THE UNDERTAKING4 :

The Consent of Company in General meeting by way of special resolution is required to sell,
lease or otherwise dispose of the whole or substantially whole of the undertaking of the
company. Where, the company owns more than one undertaking, than sell, lease or otherwise
dispose of the whole or substantially the whole of any of such undertakings require such consent.

“Undertaking” shall mean an undertaking in which the investment of the company exceeds
twenty per cent of its net worth as per the audited balance sheet of the preceding financial year or
an undertaking which generates twenty per cent of the total income of the company during the
previous financial year.

The expression “substantially the whole of the undertaking” in any financial year shall mean
twenty per cent or more of the value of the undertaking as per the audited balance sheet of the
preceding financial year.

Nothing contained in this clause shall affect—

(a) The title of a buyer or other person who buys or takes on lease any property, investment or
undertaking as is referred to in that clause, in good faith; or

(b) The sale or lease of any property of the company where the ordinary business of the company
consists of, or comprises, such selling or leasing.

Any special resolution passed by the company consenting to the transaction as is referred to in
clause (a) of sub-section (1) may stipulate conditions specified in such resolution, including
conditions regarding the use, disposal or investment of the sale proceeds which may result from
the transactions.

TO BORROW MONEY5 :

4
Section 180 (1) (a),(2),(3) of the Companies Act, 2013
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Section 180, Sub – section 1, clause c, and Sub – section 2 of the Companies Act, 2013

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The Consent of Company in General meeting by way of special resolution is required to money,
where the money to be borrowed, together with the money already borrowed by the company
will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans
obtained from the company’s bankers in the ordinary course of business.

The expression “temporary loans” means loans repayable on demand or within six months from
the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the
issue of other short-term loans of a seasonal character, but does not include loans raised for the
purpose of financial expenditure of a capital nature.

Every special resolution passed by the company in general meeting shall specify the total amount
up to which monies may be borrowed by the Board of Directors.

No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section (1)
shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and
without knowledge that the limit imposed by that clause had been exceeded.

CONTRIBUTION TO BONA FIDE CHARITABLE AND OTHER FUNDS (SECTION

181):

The Board of Directors of a company may contribute to bona fide charitable and other funds.
The prior permission of the company in general meeting shall be required for such contribution
in case any amount the aggregate of which, in any financial year, exceed five per cent. of its
average net profits for the three immediately preceding financial years.

POLITICAL CONTRIBUTION 6:

Political Contribution is one of the intense debates for years. To constitute Political Contribution,
such contribution must be to Political Parties (other organisations of political nature are
excluded). This section say that “political party” means a political party registered under section
29A of the Representation of the People Act, 1951.

LIMIT ON POLITICAL CONTRIBUTION7

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Section 182 of the Companies Act, 2013
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Section 182(1) of the Companies Act, 2013

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A company, other than a Government company and a company which has been in existence for
less than three financial years may contribute any amount directly or indirectly to any political
party. The aggregate of the amount which may be so contributed by the company in any financial
year shall not exceed seven and a half per cent of its average net profits during the three
immediately preceding financial years. No such contribution shall be made by a company unless
a resolution authorising the making of such contribution is passed at a meeting of the Board of
Directors and such resolution shall be deemed to be justification in law for the making and the
acceptance of the contribution authorised by it.

CONSTITUENT OF POLITICAL CONTRIBUTION8.

In addition to direct donation, indirect donations and expenses are also constitute political
donations.

(a) a donation or subscription or payment caused to be given by a company on its behalf or on

its account to a person who, to its knowledge, is carrying on any activity which, at the time at
which such donation or subscription or payment was given or made, can reasonably be regarded
as likely to affect public support for a political party shall also be deemed to be contribution of
the amount of such donation, subscription or payment to such person for a political purpose;

(b) the amount of expenditure incurred, directly or indirectly, by a company on an advertisement

in any publication, being a publication in the nature of a souvenir, brochure, tract, pamphlet or
the like, shall also be deemed,—

1. where such publication is by or on behalf of a political party, to be a contribution of such

amount to such political party, and

2. where such publication is not by or on behalf of, but for the advantage of a political party,
to be a contribution for a political purpose.

DISCLOSURE OF POLITICAL CONTRIBUTION9 :

8
Section 182(2) of the Companies Act, 2013
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Section 182(3) of the Companies Act, 2013

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Every company shall disclose in its Profit and Loss Account any amount or amounts contributed
by it to any political party during the financial year to which that account relates, giving
particulars of the total amount contributed and the name of the party to which such amount has
been contributed.

CONTRAVENTION TO THIS SECTION10 :

If a company makes any contribution in contravention of the provisions of this section, the
company shall be punishable with fine which may extend to five times the amount so contributed
and every officer of the company who is in default shall be punishable with imprisonment for a
term which may extend to six months and with fine which may extend to five times the amount
so contributed.

CONTRIBUTION TO NATIONAL DEFENCE FUND ETC.11 :

The Board of Directors of any company or any person or authority exercising the powers of the
Board of Directors of a company, or of the company in general meeting, may contribute such
amount as it thinks fit to the National Defence Fund or any other Fund approved by the Central
Government for the purpose of national defence. Every company shall disclose in its Profits and
Loss Account the total amount or amounts contributed by it to the Fund during the financial year
to which the amount relates.

LEGISLATION PROVISION

The Companies Act has various penal provisions to ensure proper adherence to the Duties and
Responsibilities laid out. In Companies Act 1956, the concept of “Officer in Default” was
inclusive of the Board of Directors. Under Section 2 (60) of Companies Act 2013 the idea of
“Officer who is in Default” has been stipulated under lapse in duty in the circumstances that the
officer is in default for any provision of the act and is part of such contravention either self or
participation without objection shall be liable to penalty or punishment including imprisonment.
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Section 182(4) of the Companies Act, 2013
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Section 183 of the Companies Act, 2013

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The Director under scrutiny here can also include Nominee Directors. The matter is very
sensitive as even if the Director is not part of such meeting , but has received the information of
contravention in any form is liable and can be held party to such act. Hence it is important that
the voice of objection of the Director needs to be mandatorily recorded to avoid any such
implication on innocent person.

The penalty amounts applicable under Companies Act 2013 are more higher in denomination
and very stringent compared to the 1956 amendment. The minimum fine applicable is INR
25,00/-, whereas can be even more than INR 25 Crore. Proven Defaulter on Section 166
(codified duties) can be fined anything between 1-5 lakhs. Some examples of violations which
can attract penalties of 1 crore and above are violations for provisions under

 Section 8 : Not for Profit companies,

 Section 42: Subscription of securities on Private Placement

 Section 46: Duplication and issuance of share certificates with intent to defraud

 Section 74 (3): Failure in repayment of deposits within specified time

 Section 195 (2): Insider Trading

According to Section 149 (12) of Companies Act 2013, an Independent Director is similarly
liable for such acts which is attributable through Board processes with the Director’s knowledge
and with his consent or where the Director has not taken action diligently. Hence it is extremely
important for Independent Directors to give consent to any Board proposal only with due
caution. Although in case of such act of default is noticed by law the summons are issued
irrespective of the category of Director and it lies with the Director to prove its innocence.

Under the Companies Act 2013 certain defaulters can attract imprisonment, mostly non-
cognizable. However offences connected to fraud or intent to fraud are cognizable (no warrant
required for arrest). Like suppressing any material information or furnishing false information is
cognizable under Section 7 (6), providing misleading statement in the prospectus under Section
34, inducing fraudulently for investment is cognizable under Section 36, transfer or transmission

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of shares with intent to defraud under Section 56 and offences related to reduction of share
capital under section 66.

In Companies Act 2013, under Section 245 , Shareholders or group of minimum 100
Shareholders on behalf of all affected parties can bring “class action suit” against the Company
and the Directors for any wrong doing. This will be taken up by National Company Law
Tribunal for expedited resolution for the shareholders. In addition to Companies Act 2013, lots
of other acts are interrelated and can attract penal action based on multiple conflicts. So , the
Director needs to be aware of the interdependencies of different laws and how they can influence
the decisions they are going to implement.

Liability of Directors

The Liability of the Directors can be both joint or collective for any and every act prejudicial to
the interests of the company. Though the Director and the Company are separate entities, under
the following cases the Director may be held liable on behalf of the Company:

 Tax Liability: Unless a Director or any Past Director can prove that the non-recovery or
non-payment of Taxes are attributable as gross neglect or breach of duty, then any
present or past Director (pertaining to the time period of defaulter) will be liable to pay
the shortfall in tax amount and any penalty associated.

 Refunding of share application or excess in share application money

 To pay for qualification shares

 Civil Liability in case of misstatement in Prospectus

 Fraudulent Business Conduct and all associated debts and contracts executed

 Failure in making disclosures as stipulated SEBI (Acquisition of Shares & Takeovers)

Regulations, 1997 and SEBI (Prohibition of Insider Trading) Regulations, 1992 by the
directors may attract legal proceedings by SEBI

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SOME CRIMINAL LIABILITIES ASSOCIATED WITH A DIRECTORS CONDUCT ARE
AS FOLLOWS:

 Cheques Bounced or dishonored: Under Negotiable Instruments Act 1881, signing of

dishonored by a Director may lead to prosecution along with the company

 Offences under Income Tax Act, 1961

 Offences under Labour Laws, specifically in case of Employees Provident Funds and
Miscellaneous Provisions Act, 1952 and Factories Act, 1948

Derivative action is defined as an action by one or more shareholders of a company where the
cause of action is vested in the company and relief is accordingly sought on its behalf. Though it
must be brought in a representative form . A shareholder may bring an action against the
company and its Directors in respect of matters which are ultra vires the Memorandum or the
Articles of the company and which no majority shareholders can sanction. Directors and the
company would also be liable if the conduct of the majority of the shareholders constitutes a
“fraud on minority”, i.e., a discriminatory action. To safeguard the interests of the company, any
member or members may bring a derivative action.

The Liability of any or all the Directors of a limited company can be unlimited if so specified in
the Memorandum or approved through a Special resolution authorized by Articles of association.
Any and all provisions provided in Article of Association to indemnify directors against default,
negligence, breach of duty or trust is void as per Companies Act. However in case innocence of
the director is proven such indemnity can be enforced. Hence this is a very important clause for
Directors and one should always be aware of and try to utilize this to the maximum benefit
possible. The Companies Act allows a company for taking insurance for protection against loss
caused to it by Directors, also the Director can take insurance policy to compensate for loss
incurred due to liability to the company for which premium can be paid by company itself.

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CONCLUSION

Board of directors is indeed most significant body, which virtually rule a company. Not
only, appointment and qualification of director as well as their duties, vacation,
resignation, removal are subject to close scrutiny by investors, professionals and regulators.
Board of directors has a set of executive directors who are appointment and managerial
remuneration has some other significant aspect of corporate governance. The appointment
of independent directors is one of the most significant contributions of this bill to corporate
governance practices in India. This all-powerful company board exercises its powers in board
meeting but it has some statutory and other board committees. Now we will discuss power of
board of directors under present bill.

The analysis above is daring enough for someone to opt for becoming a Director, however it is
not that difficult to adhere to if the Directors are fulfilling their duty in the best interest of the
stakeholders. The Directors needs to be more prepared now than before to avoid any grave
circumstance against them or against the company. They should attend as many board meetings
as possible and should be fully aware of the company’s business. They need to come very much
prepared and alert before joining a board meeting. Only participation in meeting is no more
enough, it also needs to be ensured all questions or expressed dissents are properly recorded in
the minutes of the meeting, this is extremely important and is a pertinent evidence avoid the legal
hassles at a later date. Proper training for directors on Corporate Governance is necessary and
will equip them to work in the best interest of the organization. It needs to be ensured by self that
the Directors are not remaining unadvised, however knowledgeable or experienced someone may
be it will be prudent practice to legal advice in case of doubts or critical situations. Directors
Liability Insurance is very important for Directors now.

The Companies Act 2013 has very well played its role in enacting Corporate Governance in the
very core of the companies system. However, more than adherence to purpose its relies on
adherence for survival which may fail it someday like all previous amendments. It needs to be
more straight forward while assuring shareholders interest. Fear may allow necessary shield to
hold the corrupt people for some time however it will not be long that bypass to such rules are
already being invented. Corporate Governance needs to be imbibed into the soul of the system
through tangible benefits to the followers , only then it will become the goal of the companies

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and will be followed religiously. The best thing is all stakeholders and shareholders of the
companies have faith in the Companies Act and it will keep enlightening the path to universal
Corporate Governance.

REFERENCES

1. Companies Act 1956

2. Companies Act 2013
3. http://vle.du.ac.in/mod/book/view.php?id=8158&chapterid=9463
4. http://www.mondaq.com/india/x/154260/Directors+Officers+Executives+Shareholder
s/Liabilities+Of+Directors+Persons+Who+Can+Bring+Actions+Against
5. Corporate Governance – Directors’ Duties and Liabilities under Companies Act, 2013
by Rabindra Jhunjhunwala & Stuti Galiya
6. http://www.mondaq.com/india/x/329264/Directors
7. https://www.icaew.com/en/technical/business-resources/legal-regulatory-tax-
governance/directors-duties/the-icaew-guide-to-the-duties-and-responsibilities-of-
directors

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