Duties of the Directors in India
Before discussing the duties of the Directors, allow us to explain the requirement of imposing duties on the Directors. Directors together called the Board of Directors or Board are responsible for the management of the company and handling day-to-day affairs of the Company. The duties of the board of directors are designed to ensure that directors act in the best interests of the Company and its stakeholders and do not use the position for their benefit. In short, the duties of the directors are imposed to protect the interest of the company and its stakeholders.
In India, Section 166 of the Companies Act, 2013 deals with the duties of the directors and it provides that a director of the company –
a. Shall act in accordance with the articles of the Company.
Articles also called Articles of Association (AOA) of a company contain byelaws to govern the internal affairs of the company. It contained the rules and regulations regarding shares, capital, general meetings, voting rights, directors, dividends and reserves, accounts and audits, borrowings, winding-up, etc.
b. Shall act in good faith –
To promote the objectives of the company for the benefit of its members as a whole, and
In the best interests of the company, its employees, the shareholders, and the community, and for the protection of the environment.
Directors act on behalf of the company in fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company with utmost faith.
c. Shall exercise his duties with due and reasonable care, skill and diligence and exercise independent judgement.
While discharging from the duties, a director must act honestly and also exercise a certain degree of skill and diligence. Reasonable care is difficult to define. There should be a negligence on the part of the directors. Directors will not be liable for mere judgement of error when duties are discharged by a reasonable care, skill, and diligence. Directors must make their judgment independently not on the dictates of any other person or company.
d. Shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
Whenever a director has a situation of conflict of interest, either he should rescue himself or he is bound to take the decision which would be in the interest of the company, failing to do so would breach his fiduciary duties. The interest of directors in any contract or other transaction must be disclosed along with the nature of interest.
e. Shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
Undue gain is a gain that is not legitimately due. The fiduciary responsibility of a director is not to use the resources of the company for his own benefit, he can not enrich himself at the cost of the company. A director shall be liable to pay an amount equal to undue gain to the company, but it must also be noted that undue gain or an attempt to undue gain both are forbidden under the law.
f. Shall not assign his office and any assignment so made shall be void.
A director is forbidden to transfer his office or delegate it to someone else. Nobody can act for him or on his behalf and attend the board meetings.
g. If a director of the company contravenes the provisions mentioned above, such director shall be punishable with a fine which shall not be less than one lakh rupees, but which may extend to five lakh rupees.
To conclude, a director must act,
· in accordance with the articles,
· in good faith, exercise his duties with due and reasonable care, skill and diligence with independent judgement,
· without a conflict of interest, undue gain and assigning his office to someone else,
· in the best interest of the company and its stakeholders.
We would be grateful to have feedback in the comment box and you also may suggest “what would you like to know more about corporate governance?”.
To know more about startup advisory, virtual CFO, business valuation, accounting, corporate and taxation laws in India, subscribe to our mailing list at the bottom of this page and be the first to know updates.
Your Growth Advisor!
Comments