Rights, duties and liabilites of Directors

Prosecution of Mr. Keshub Mahindra, for the Bhpoal gas tragedy which resulted in loss of several lives, sent shock waves in the corporate world. Mr. Kesub Mahindra was non Executive Chairman on the Board of Union carbide. A debate started all over the country as to whether non executive chairman or part time directors have any liability in such cases. Even the Ministry Corporate Affairs has sought suggestions from all quarters whether there should be amendment to the effect to exclude part time directors from the ambit of liability. This article focuses on the rights, duties and obligations of directors.

Definition of Director

Section 2(13) of the Companies Act, 1956, defines a Director as any person, occupying the position of Director, by whatever name called. The Articles of association generally contain provisions as to their appointment, retirement rights duties and remuneration.

Composition of Board

The Board of Directors is elected representatives of the shareholders of the company. The Board of Directors of a company collectively are responsible for making policies and good governance process  The Board has a fiduciary position and holds the position of trusteeship to protect and enhance shareholder value through strategic management and governance. Board’s responsibilities inherently demand the exercise of judgment for which the Board necessarily has to be vested with powers and a reasonable level of discretion.

The Board of directors consists of part time directors and whole time directors. Part time Directors are those who only attend board meetings and contribute to the framing of polices and decision making in the board meetings.  Whole time directors as the name itself implies devote whole time and are treated as employees. Similar is the position of Managing director and this category of directors are entrusted with substantial powers of management to look after the day to day affairs of the company.

Listed companies shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors. If chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors. Corporate Governance clause defines an independent Directors as those directors are those who do not have any material pecuniary relationships or transactions with the company and are not related to the promoters or person on the board or senior management and not an executive in the past 3 years.

Appointment of Directors

The power to appoint directors is exercised by the shareholders in First Annual General meeting as per the provisions of Section 255 and regulations in the Articles of Association.

The Board of directors can also appoint directors   Additional Directors u/s 260 who hold office up to the ensuring Annual general meeting, Director  in a vacancy caused by resignation /death of a regular director u/s 262 to hold office up to the term of original director in whose place he is appointed and Alternate Directors u/s 313 to represent original director who is away and such director holds office till the original director returns

Resignation of Directors

Unless the Articles of Articles of the company concerned contain any specific provision about acceptance of resignation by the Board of Directors of the company, the resignation from directorship takes effect immediately, i.e., from the date of the resignation letter.

Powers of Directors

The provisions of Companies Act and the articles of association of the company spell out rights, duties powers and responsibilities of Directors. Section 291 of the Act provides that subject to the provisions of the Act, the board of directors shall be entitled to exercise all such powers and to do all such acts and things as the company is authorized to exercise and do.

Powers to be  exercised only at Board meeting (Section 292)

Power to make calls on shareholders in respect of money unpaid on their shares

Power to issue debentures

Power to borrow moneys otherwise than on debentures

Power to invest the funds of the company

Power to make loans

Certain restrictions can be imposed on general powers of the Board and invariably they have to seek the approval of shareholders in the General meetings in such cases. The sections which deal with restrictions are 293, 294AA etc. There are certain powers which can be exercised only with the approval of the shareholders and also Central Government for eg: Sec.294AA (appointment of sole selling agents), Section 295 (Loans to Directors) etc.

Board can also exercise its powers  by passing  a  resolution by circulation (Section 289) in respect of matters other than those mentioned in Section 292.

Rights of Directors

Rights can be categorized into individual and collective rights.Individual rights are such as right to inspect books of accounts {Section 209(4)},Right to receive notices of board meetings (Section 285),right to participate in proceedings and cast vote in favour or against resolutions(Section 300),right  to receive circular resolutions proposed to be passed.(Section 289),right to inspect minutes of board meetings.

Collective rights are as follows:-

Right to refuse to transfer shares: According to Section 111 of the Act, directors of private companies and deemed public companies are entitled to refuse registration of transfer of shares to a person whom they do not approve.

Right to elect a Chairman: Regulation 76(1) of Table-A provides that the directors are entitled to elect a chairman for the board meetings.

Right to appoint a Managing director: The Board has the right to appoint the managing director/ manager (as defined in the Act) of the company.

Right to recommend dividend: The Board is entitled to decide whether dividend is to be paid or not. Shareholders cannot compel the directors to pay dividend. However they can reduce the rate of recommended dividend. Payment of dividend is the prerogative of the board

Duties of Directors

Directors as individuals have a duty to attend board meetings and contribute to the deliberations of the board and ultimately to the decision making leading to formulation of policies. Directors are under obligation to disclose their interest whether directly or indirectly in contracts or arrangements with the company (Section299). They are also duty bound to disclose their directorships in other companies within 20 days of appointment or relinquishment of his office in other companies (Section 305).As per Section 308, directors are also required to disclose their shareholding in the company.

The following are some of those duties exercised collectively:-

Approval of  annual accounts and authentication of annual accounts

Directors report to shareholders highlighting performance of the company, transfers to reserves, investment of surplus funds, borrowings

Appointment of First Auditors

Issuance of Notice  and Holding of Board meetings and shareholders meetings

Passing of resolutions at board meetings or by circulation.

Directors are paid remuneration for their efforts in formulating policies and for devoting their valuable time for the company. Directors remuneration consists of sitting fees as per provisions in Articles of association, and Commission   as a fixed percentage of net profits or as a fixed monthly sum as decided by the shareholders in the general meeting. As per the provisions in the new companies bill,2009  independent directors  can not receive any remuneration other than sitting fees, expenses for attending board meetings and commission linked to profits.

Liabilities of Directors

Directors are liable for violation of the provisions of the Companies Act and other Acts which may  expose them to punishment with fine or imprisonment or with both. The Hon’ble Supreme Court of India held in the case of Maksud Saiyed Vs State of Gujarat and others that the vicarious liabilities of the Managing Director and Director would arise provided any provision exists in that behalf in the statute. If directors are guilty of negligence or found to be misusing their position, they will be liable for civil as well as criminal liability. For e.g.; if directors make any untrue statements in the prospectus, or do not maintain books of account as per provisions of Section 209 or falsify accounts, criminal liability also arises. Even for cheque bouncing, Section 141 of the Negotiable Instruments Act imposes vicarious liability on the directors provided an averment is made to that effect in the complaint. The Directors of a company incur a personal liability, if they contract in their own names or where it is ambiguous as to capacity in which they signed the contract. However directors can seek protection against a liability for acts done in good faith. Director will  also relieved of the offence, provided he is able to show that he was not in charge or control of the day to day affairs of the company or Offence in question was committed without his consent/knowledge/connivance and he was not negligent in ensuring that laws are complied.

Under the existing Act, all directors, including independent directors are held responsible for a company’s actions. However in the Companies Bill 2009, it is proposed to protect independent directors. An independent directors will be held responsible for any action only if motive and criminal intent is established in his actions. This is welcome otherwise highly qualified professional would be reluctant to Join the Board’s of company as independent directors.

G. S. Rao, Chief Manager (Legal), OCL India Limited.

Email: gsrao@ocl.in