Board of Directors: An Entwined Part of A Company

A company is a fiction of law, having a corporate personality that is independent and distinct from its members. “Company” refers to a company incorporated under Companies Act, 2013 or under the provisions of any other preceding company law.[i] Its elementary feature is “separate legal entity” as decided in the famous case of Saloman v. A Saloman& Co Ltd[ii]and Lee v Lee’s Air Farming Company Ltd[iii]. It is having a trait of perpetual succession, capacity to sue and be sued in its name, limited liability etc. 

In the real sense, company is a juristic person as contrary to natural person and therefore, cannot perform in its own. So, there are certain natural persons who functions and governs it. A company is comprised of members/ shareholders and board of directors who are responsible for its working. The shareholders or members are the virtual owners of the company whereas; the board of directors holds its management. Hence, there is separation of management from ownership in the business of a company. 

 

1. Introduction 

Directors are answerable for the day to day affairs of the company. They hold an important and obliged position in the corporate world. Director means a director appointed to the board of a company[iv], and collectively known as Board of Directors (BOD). It is mandatory for a company to have board of directors consisting of individuals as directors under section 149 of the Companies Act, 2013.    

Board of directors not just maintains the working of the company but also plays a pivotal role in good corporate governance. There are certain rules of conduct that need to be followed by them. If they breach their duties or act in his own interest, it could leads to the unwanted results. Satyam scam is the most appropriate example of it where its directors made false financial statements together with using the company’s money for buying properties in the real estate and thus, manipualated the accounts of the company. Ultimately, when the corporate fraud was came into limelight, the debtors suffered a huge loss. This is done because of less corporate governance practice and fault on the part of directors of the compay. Henceforth, directors are the prominent factor for the good going of a company.[v]

                                                                                                         

2.               Position Held By The Directors

Directors are appointed to deal with the day to day affairs of the company but then too, they are not servants or employees of the company as held in the case Burland v. Earle[vi]. Now, we will look at the different positions that are held by the directors of the company. 

 

2.1 Directors as an agent of the company

Since we know that a company is an artificial person which acts through its directors and therefore it can be said that directors act as agents of the company. Directors on behalf of the company making it liable on itself and not themselves. Therefore, the directors cannot be held personally liable for any default of the company.

In the case of Ferguson v. Wilson[vii], the court had held that the company has no person, it can act only through directors and the case is, as regards to those directors, merely the ordinary case of principal and agent. Similarly, in the case of Elkington& Co. v. Hurter[viii],it was held that where directors enter into contracts on behalf of the company, it is the company and not the directors who are liable there under.

 

2.2 Directors as trustees of the company

A trustee is a person in whom the legal ownership of the assets is vested, which he administers for the benefit of another or others. Directors are marked as the trustees of the assets of the company, and of the authority that is vested over them. The reason being, their job is to supervise and to take care of those assets of the company with the responsibility of implementing theirs duties in the best interest of the company instead of using it for personal benefit or advantage. They are not allowed to function for any undue advantage to which they are not entitled. There exists a fiduciary relationship between a company and its directors and therefore, directors are expected to act in a bonafide and fair manner in respect to all the transactions that they make on behalf of the company.

In Sarathi Leasing Finance Ltd. v. B Narayana Shetty[ix], it was decided by the court that the directors play the role of trustees of the company with respect to its assets, which they handle and examine in the capacity of agents in the transactions entered by them on behalf of the company.

In the case of RamaswamyIyer v. Brahmayya& Co.[x], it was held that the directors of a company are trustees for the company, and with regard to their power of applying funds of the company, if they exploit their powers and cause corruption in any manner then they could be held liable as trustees and, in case of their death, the cause of action survives against their legal representatives (LRs).

3.               Composition of the Board of Directors

Board of directors enjoys the decision making power in the company and therefore, they are called as the brain of the company. The composition of the BOD is given under section 149 of the Companies Act, 2013. 

In public company, private company and one person company the minimum number of directors as required under the statutory provision is 3, 2 and 1 respectively. And, the maximum number of director is 15, which can be exceed by passing a special resolution in the general meeting of the company. As per the provisions, it is mandatory to have at least 1 women director in the company as may be prescribed.

Additionally, under the new provisions of the new Companies Act, there is a compulsion on every company to employ at least 1 director as “resident director” who stays in India for at least one hundred & eighty two days (182 days) during the financial year.[xi] 

 

4.               Classification of the Board of Directors

The board of directors is classified on the basis of their different powers, functions and the duties conferred on them. A brief about all of term is as follows:

 

A.              Independent Director

As per section 2(47) of the companies Act, 2013, independent director means a director referred in section 149(5) of the Companies Act, 2013. Independent director means a director who is not managing director, or whole time director, or nominee director, and is a possess integrity as well as relevant expertise with experience. He has to follow the requirements given in the schedule 4 of the Act.[xii]The following specified categories of the companies need to have at least 2 independent directors[xiii]:

• Public limited companies with outstanding loans, deposits > or = Rs. 50 Crores
• Public limited company with turnover > or = Rs. 100 Crore
• Public limited share capital > or = Rs. 10 Crores

 

2. Residential Director

It is mandatory for every company incorporated under the Companies Act, 2013 or any other preceding company law to have at least 1 director named as a resident director, the one who stays in India for 182 days as per the the financial year.[xiv]

 

3. Additional director

BOD has power to appoint any person, not being the person who fails to get appointed as a director in a general meeting of the shareholders, as an additional director at any time who shall hold office till the date of the next AGM or the last date on which the AGM should have been held, whatever is earlier.[xv]

 

4. Alternate director

The BOD of a company may appoint a person, not being a person who is holding any alternate directorship  in the company, to act as an alternate director for a director during his absence for min 3 months.[xvi] 

 

5. Women director

Every listed companies and public companies having 

• turnover > or = Rs. 300 crore, or
• Paid up capital > or = Rs. 100 crore

are required to have at least 1 director as women director. 

 

6. Nominee director

Nominee director is a person nominated by an institution including banks, financial institutions, or the central government when they have interest in the company.[xvii] 

Hence, this is the classification of board as given in the statute. 

 

5. Duties of directors in a company

Directors are appointed to look after or to take care the working of the corporate business. However, there are some restrictions on their powers. They have certain rights, liabilities & duties which they should remember while acting as director of the company. They have different set of duties, some are governed by the statute, some by the Companies Act while some are originated from the law of contract. 

Earlier the Companies Act was silent regarding the duties of directors. The Ministry of Corporate Affairs i.e. MCA set up the “J.J. Irani Committee” which recognized the significance of the duties of directors. These duties vary from company to company as according to the Articles of Association (AOA) of the company.  Section 166 of the Companies Act, 2013 point wise describes and explains various duties of the directors which they are ought to remember which acting as such. Every director must be aware of his/her duty in the respective company so that the company has a strong and ethical Board of Directors. Some of the duties are enlightened accordingly:

1. A director has a duty to act in according with the articles of the company i.e. AOA as per the Companies Act.[xviii] Directors must not use their discretion in deciding any fact in the company. They must act in accordance with what is given in the Articles of the company.
2. A director has a duty to act in good faith and legitimate manner with the aim of promoting the objects of the company as stated in the Memorandum of Association (MOA) for the welfare and interest of its members as a whole, including the employees of the company and preservation as well as protection of the environment by various CSR activities.[xix] The director is under the fiduciary obligation where he has to act honestly in carrying out his functions. He cannot act malafide in discharging his tasks and is not expected to abuse his powers or position in whatsoever manner. In Fateh Chand Khad v. Hindsons (Patiala) Ltd.[xx], the court puts light on the term “to act honestly” and explained that it includes the duty not to utilize the knowledge as well as the position which he posses to detriment or to damage the interest of the company.
3. A director shall perform his duties and functions with due and reasonable care. He is duty-bound to exercise skill as well as diligence while serving out as a director of the company.[xxi]  It is mentioned in the Companies Act that the directors must deliver his functions and tasks with due care and skill. If in any case, he fails to follow the basic standard of reasonable care, skill and diligence, he or she may be held personally liable for his or her acts and punishment of compensating the company would incur on him. In Re, City Equitable Fire Insurance Co.[xxii],  a director need not to show in discharging his functions the degree of care and skill as his duty than what is generally expected from the person his intelligence and experience. They are liable for the negligence under the Companies Act.
4. As per the Act, a director shall not be associated with any situation in which he derives his interest, whether direct or indirect which varies from the company’s interest. And if does so, he will be liable under the Companies Act, 2013. 
5. According to the Act, a director of the company is prohibited from making any undue gain or advantage which he is not entitled for or holds a legitimate interest on it. This prohibition extends to his relatives as well. And if he do so, then he shall be held guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company. For example, if any director does not disclose or partially disclose his interest while setting out the notice calling meeting of shareholders, which results any profit to him, he shall be held responsible for making compensation to the company for the amount or benefit incurred to him.[xxiii]
6. It is the duty of the director to attend the Board of Directors meeting as prescribed by the Articles of the company. As per Companies Act, if the director absents himself from all the meeting of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board.[xxiv] On non-performance of his duty to attend BOD meeting, the shareholders can remove the directors because they are the virtual owners of the company. In Charitable Corpn. V. Sutton[xxv], it was held that if some directors are guilty of gross non-attendance, and leave the management entirely to others they may be guilty of breach of trust.
7. As per the Companies Act, it is the duty of director to disclose his interest.[xxvi] The director shall at the first meeting of the Board in which he participates, make a disclosure of his interest or any of his relative’s interest in any company, or companies or bodies corporate or firms. In Parker v. Mc. Kenna[xxvii], held no person who is acting as an agent be allowed to put himself into a position in which his interest and his duty will be in conflict. In the case of Walchandnagar Industries v. Ratan Chand[xxviii], the Bombay H.C. held that the director who is interested in a transaction of a company, is bound to disclose his interest to the board at the first meeting, after he has become so interested. And if the director contravene his duty to disclose his interest, he shall be punishable with imprisonment of 1 year or fine exceeding 1,00,000 rupees, or with both.[xxix]
8. At the time of compulsory winding up of the company, it is the duty of the director to extend his full cooperation to the Company Liquidator in discharge of his functions[xxx] and duties and if he fails to do so, he shall be punishable with imprisonment which may extend to six months or with fine which may extend to fifty thousand rupees, or with both.[xxxi]
9. According to the Companies Act, a director is not allowed to assign his office or any of his assignment and if he does so, it shall be held void under law.[xxxii]
10. If the director of a company makes an infringement of any provision or requirements of Section 166 of the Companies Act, 2013, such director shall be held punishable with a fine varies from 1,00,000 rupees to 5,00,000 rupees.[xxxiii]

Hence, these are the duties conferred on the board of directors (BOD) under the statutory provisions. 

 

6. Conclusion  

Board of directors are like Einstein to the company who regulates and administers its functioning with their genius intellectual. They have control over the company. By the above-mentioned paras, we have seen broader aspect of the board of directors. The companies act states very strict provisions that need to be followed by the directors in order to ensure transparency and accountability in the business. Many a times, it has been seen that the directors act like ombudsman to look after the problems of shareholders. Company, as a whole depends upon the directors. If they implement provisions wisely and accurately then the company would never be indulged in any fraud or scandal. 

Henceforth, directors plays a pivotal role for good corporate governance and to build up high standards in the company. So, it is right to say that “board of directors are an entwined part of a company”.

 

This blog is authored by Maitreyi Agrawal, student of Amity Law School, Amity University, Madhya Pradesh.