Directors of a Company

Meaning of Director as per the Companies Act, 1956

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

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

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

Duties of a Director

There is no exhaustive list defining the duties of the Board of Directors towards the company and shareholders. But based on the analysis of the provisions of the Companies Act, 1956 with regards to a director, some general duties of a Director are mentioned herein:

To file return of allotments: a company must file with the Registrar, within a period of 30 days, a return of the allotments, stating the specified particulars. Failure to file such return shall make the Directors liable as 'officer in default'. A fine, up to Rs.500 per day, till the default continues may be levied.

Not to issue irredeemable preference shares or shares, redeemable after 20 years: A company cannot issue irredeemable preference shares or preference shares, redeemable beyond 20 years. Directors, making any such issue, may be held liable as 'officer in default' and, may be subject to a fine, up to Rs.1, 000.

To disclose interest: A Director, who is interested in a transaction of the company, must disclose his interest to the Board. The disclosure must be made at the first meeting of the Board, held after he has become interested. This is because a Director stands in a fiduciary capacity with the company and, therefore, he must not place himself in a position in which his personal interest conflicts with his duty.

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

Duty to attend Board meetings - A number of powers of the company are exercised by the Board of Directors in their meetings, held from time to time. Although, a Director may not be able to attend all the meetings, but, if he fails to attend three consecutive meetings or, all meetings for a period of three months, whichever is longer, without permission of the Board, his office shall, automatically, fall vacant.

A Director's duties also include the following:

• To convene Statutory, Annual General Meeting (AGM) and also Extraordinary General Meetings;

• To prepare and place at the AGM, along with the balance sheet and, profit and loss account, a report on the company's affairs, including the report of the Board of Directors;

• To authenticate and approve annual financial statement;

• To appoint first auditor of the company;

• To appoint cost auditor of the company;

• To make a declaration of solvency in the case of a Members' voluntary winding up;

It is difficult to describe the duties of directors in general terms, whether by way of analogy or otherwise. The nature of duties of director would depend not only on the nature of the company's business but also on the manner in which the work of the company is distributed between directors and other officials. A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.

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

In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director, is in the absence if grounds for suspicion justified in trusting that officer to perform such duties honestly. A director must of necessity trust the officials of the company to perform properly and honestly the duties allocated to those officials.

When presenting their annual reports and balance sheet to their shareholders and when recommending the declaration of a dividend, directors ought not to be satisfied as to the value of their company's assets merely by the assurances neither of their chairman, nor with the experience or the belief of the auditor howsoever competent and trust worthy he is. All in all, there is no difference between legal and equitable duties of directors. If the directors act within their power with such care as is reasonably to be expected from them, having regard to their knowledge and experience, and if they act honestly for the benefit of the company. They discharge both their legal as well as equitable duty to the company. The directors are not liable for all mistakes they make, although if they had taken more care they might have avoided them.

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

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

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

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

Negligence: As long as the Directors act within their powers with reasonable skill and care, as expected of them as prudent businessmen, they discharge their duties to the company. But, where they fail to exercise reasonable care, skill and diligence, they shall be deemed to have acted, negligently, in discharge of their duties and, consequently, shall be liable for any loss or damage, resulting there from. However, error of judgment will not be deemed as negligence. The Directors cannot be absolved of their liability for negligence by any provisions in the Articles of Association.

Mala fide acts: Directors are the trustees for the money and property of the company, handled by them, as well as for exercise of the powers, vested in them. If they dishonestly or in a mala fide manner, exercise their powers and perform their duties, they will be liable for breach of trust and, may be required to make good the loss or damage, suffered by the company by reason of such mala fide acts. They are also accountable to the company for any secret profits they might have made in course of their performance of duties on behalf of the company. Directors can also be held liable for their acts of 'misfeasance', i.e., misconduct or willful misuse of powers. However, misconduct, which is not willful, shall not amount to 'misfeasance'.

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

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

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

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

Board's powers and restrictions thereon

General powers of Board

(1) Subject to the provisions of this Act, the Board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do:

Provided that the Board shall not exercise any power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting

Provided further that in exercising any such power or doing any such act or thing, the Board shall be subject to the provisions contained in that behalf in this or any other Act, or in the memorandum or articles of the company, or in any regulations not inconsistent therewith and duly made thereunder, including regulations made by the company in general meeting.

(2) No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made.
Certain powers to be exercised by Board only at meeting.

(1) 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 resolutions passed at meetings of the Board :-

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

(b) the power to issue debentures;

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

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

(e) the power to make loans

[Provided that 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, a principal officer of the branch office, the powers specified in clauses (c), (d) and (e) to the extent specified in sub-sections (2), (3) and (4) respectively, on such conditions as the Board may prescribe:

Meetings of Board

Board to meet at least once in every three calendar months
In the case of every company, a meeting of its Board of directors shall be held at least once in every [three months and at least four such meetings shall be held in every year] :
Provided that the Central Government may, by notification in the Official Gazette, direct that the provisions of this section shall not apply in relation to any class of companies or shall apply in relation thereto subject to such exceptions, modifications or conditions as may be specified in the notification.]

Notice of meetings

(1)   Notice of every meeting of the Board of directors of a company shall be given in writing to every director for the time being in India, and at his usual address in India to every other director.

(2)   Every officer of the company whose duty is to give notice as aforesaid and who fails to do so shall be punishable with fine which may extend to 100[one thousand rupees].

General meetings of the Company

Annual general meeting

[(1) Every company shall in each year hold in addition to any other meetings a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it; and not more than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next:
Provided that a company may hold its first annual general meeting within a period of not more than eighteen months from the date of its incorporation; and if such general meeting is held within that period, it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation or in the following year;

Provided further that the Registrar may, for any special reason, extend the time within which any annual general meeting (not being the first annual general meeting) shall be held, by a period not exceeding three months.]

(2) Every annual general meeting shall be called for a time during business hours, on a day that is not a public holiday, and shall be held either at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situate:

Provided that the Central Government may exempt any class of companies from the provisions of this sub-section subject to such conditions as it may impose:
Provided further that-

(a)    a public company or a private company which is a subsidiary of a public company, may by its articles fix the time for its annual general meetings and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings; and

(b)   a private company which is not subsidiary of a public company, may in like manner and also by a resolution agreed to by all the numbers thereof, fix the time as well as the place for its annual general meetings.]

Contents and manner of service of notice and persons on whom it is to be served

(1) Every notice of a meeting of a company shall specify the place and the day and hour of the meeting, and shall contain a statement of the business to be transacted thereat.

(2) Notice of every meeting of the company shall be given-

(i) to every member of the company, in any manner authorised under the Act

(ii) to the persons entitled to a share in consequence of the death or insolvency of a member, by sending it through the post in a prepaid letter addressed to them by name, or by the title of representatives of the deceased, or assignees of the insolvent, or by any like description, at the address, if any, in India supplied for the purpose by the persons claiming to be so entitled, or until such an address has been so supplied, by giving the notice in any manner in which it might have been given if the death or insolvency had not occurred; and

(iii) to the auditor or auditors for the time being of the company, in any manner authorized under the Act in the case of any member or members of the company:
Provided that where the notice of a meeting is given by advertising the same in a newspaper circulating in the neighbourhood of the registered office of the company, the statement of material facts referred to need not be annexed to the notice as required by that section but it shall be mentioned in the advertisement that the statement has been forwarded to the members of the company.

(3) The accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom it should be given shall not invalidate the proceedings at the meeting.

Explanatory statement to be annexed to notice

(1)   For the purposes of this section-

(a)    in the case of an annual general meeting, all business to be transacted at the meeting shall be deemed special, with the exemption of business relating to (i) the consideration of the accounts, balance sheet and the reports of the Board of directors and auditors, (ii) the declaration of a dividend, (iii) the appointment of directors in the place of those retiring, and (iv) the appointment of, and the fixing of the remuneration of the auditors; and

(b)    in the case of any other meeting, all business shall be deemed special.

(2) Where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular [the nature of the concern or interest], if any, therein, of every director and the manager, if any:

Provided that where any item of special business as aforesaid to be transacted at a meeting of a company relates to, or affects, any other company, the extent of shareholding interest in that other company of every director and the manager, if any, of the first mentioned company shall also be set out in the statement if the extent of such shareholding interest is not less than twenty per cent of the paid-up share capital of the other company.]

(3) Where any item of business consists of the according of approval to any document by the meeting, the time and place where the document can be inspected shall be specified in the statement aforesaid.

Quorum for meeting

(1)     Unless the articles of the company provide for a large number, five members personally present in the case of public company, and two members personally present in the case of any other company,shall be the quorum for a meeting of the company.

(2)     Unless the articles of the company otherwise provide, the provisions of sub-sections (3), (4) and (5) shall apply with respect to the meetings of a public or private company.

(3)     If within half an hour from the time appointed for holding a meeting of a company, a quorum is not present, the meeting, if called upon the requisition of members, shall stand dissolved.

(4)     In any other case, the meeting shall stand adjourned to the same day in the next week, at the same time and place, or to such other day and at such other time and place as the Board may determine.

(5)     If at the adjourned meeting also, a quorum is not present within half an hour from the time appointed for holding the meeting, the members present shall be a quorum.

Chairman of meeting

(1) Unless the articles of the company otherwise provide, the members personally present at the meeting shall elect one of themselves to be the chairman thereof on a show of hands.
(2) If a poll is demanded on the election of the chairman, it shall be taken forthwith in accordance with the provisions of this Act, the chairman elected on a show of hands exercising all the powers of the chairman under the said provisions.
(3) If some other person is elected chairman as a result of the poll, he shall be chairman for the rest of the meeting.

Proxies

(1)   Any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a member or not) as his proxy to attend and vote instead of himself; but a proxy so appointed shall not have any right to speak at the meeting:

(2)   The instrument appointing a proxy shall-

(a)    be in writing; and

(b)   be signed by the appointer or his attorney duly authorised in writing or, if the appointer is a body corporate, be under its seal or be signed by an officer or an attorney duly authorised by it.

(3)   An instrument appointing a proxy, if in any of the forms set out shall not be questioned on the ground that it fails to comply with any special requirements specified for such instrument by the articles.

(4)   Every member entitled to vote at a meeting of the company, or on any resolution to be moved thereat, shall be entitled during the period beginning twenty-four hours before the time fixed for the commencement of the meeting and ending with the conclusion of the meeting, to inspect the proxies lodged, at any time during the business hours of the company, provided not less than three days' notice in writing of the intention so to inspect is given to the company
Voting to be by show of hands in first instance

At any general meeting, a resolution put to the vote of the meeting shall, unless a poll is demanded under section 179, be decided on a show of hands.
178. Chairman's declaration of result of voting by show of hands to be conclusive.

A declaration by the chairman in pursuance of section 177 that on a show of hands, a resolution has or has not been carried, or has or has not been carried either unanimously or by a particular majority, and an entry to that effect in the books containing the minutes of the proceedings of the company, shall be conclusive evidence of the fact, without proof of the number or proportion of the votes cast in favour of or against such resolution.

Minutes of proceedings of general meetings and of Board and other meetings

Every company shall cause minutes of all proceedings of every general meeting and of all proceedings of every meeting of its Board of directors or of every committee of the Board, to be kept by making within [thirty] days of the conclusion of every such meeting concerned, entries thereof in books kept for that purpose with their pages consecutively numbered.

(1A) Each page of every such book shall be initialled or signed and the last page of the record of proceedings of each meeting in such books shall be dated and signed-

(a) in the case of minutes of proceedings of a meeting of the Board or of a committee thereof, by the chairman of the said meeting or the chairman of the next succeeding meeting;
(b) in the case of minutes of proceedings of a general meeting, by the chairman of the same meeting within the aforesaid period of [thirty] days or in the event of the death or inability of that chairman within that period, by a director duly authorised by the Board for the purpose.

(1B) In no case the minutes of proceedings of a meeting shall be attached to any such book as aforesaid by pasting or otherwise.]

(2) The minutes of each meeting shall contain a fair and correct summary of the proceedings thereat.

(3) All appointments of officers made at any of the meetings aforesaid shall be included in the minutes of the meeting.

(4) In the case of a meeting of the Board of directors or of a committee of the Board, the minutes shall also contain-

(a) the names of the directors present at the meeting; and

(b) in the case of each resolution passed at the meeting, the names of the directors, if any, dissenting from, or not concurring in, the resolution.

(5) Nothing contained in sub-sections (1) to (4) shall be deemed to require the inclusion in any such minutes of any matter which, in the opinion of the chairman of the meeting-
(a) is, or could reasonably be regarded as, defamatory of any person;

(b) is irrelevant or immaterial to the proceedings; or

(c) is detrimental to the interests of the company.

Explanation.- The chairman shall exercise an absolute discretion in regard to the inclusion or non-inclusion of any matter in the minutes on the grounds specified in this sub-section.

A resolution will be taken to be passed at the Board meeting if a majority of the Directors give their consent to the same.