Difference between Directors and Shareholders under the Companies Act of 2013

The article discusses the differences between Director and Shareholder of a company under the Companies Act, 2013. It also discusses that regardless of the massive lines of contrast between directors and shareholders, both of them are an indispensable piece within the framework of a company, and assume a critical position in the achievement of a company’s success.
Estimated Reading Time: 10 minutes

Introduction

A company has been defined as an artificial entity, having a legal sanctity which tends to possess a “separate identity” and “perpetual succession”.[1] In accordance to section 2(20)[2] of the definition clause of the 2013 Act any entity that is incorporated as a company under the Act or any other relevant law will be deemed as a company. The Apex Court alluded to the meaning of Corporation as given by C. J. Marshall of U.S.A. in the famous case of Dartmouth College[3], in the landmark judgement of S. S. Dhanoa v Municipal Corporation Delhi[4], wherein a cooperation has been explained to be a “legal creature which exists only in law and its characteristic properties are the ones conferred impliedly or expressly upon it by law.”

This same definition can be extended as an equivalent to the legal position of a company. The Company will not lose its identity to the majority shareholder under any circumstances.[5] There are various individuals who contribute in different manners to the working of a company, inclusive of directors and shareholders. Inevitably, the core business and management are dealt with by the Board of Directors, while the shareholders are under a responsibility to keep the company afloat. Moreover, in an ideal context, a company director’s obligations in equity are his obligations in law, implying that anything he might be relied upon to do as an individual with a fiduciary duty towards the company, and this will be the standard he will be assessed against. The shareholders, on the other hand, also play a significant job in the running of a company as each shareholder is also a member of the company and represents his ownership of that division of the company.

This article is subsequently an endeavour to underline the fundamental differences between the roles played by the directors and shareholders in a company under the Companies Act of 2013 and underlining the meaning, scope and extent of the same under the current Company Law in enforce.

Meaning and Position of Directors

The directors of a company are individuals who have been elected by the shareholders for conducting, managing and supervising the affairs of the company. In accordance with Sec. 2(13) of the Companies Act., “Director includes any person occupying the position of director by whatever name called.” This underlines an individual performing the duties of a director will be deemed to be a director irrespective of the name by which he is called.

The Director’s position in a company has been referred to by Bowen LJ on account of Imperial Hydropathic Hotel Co Blackpool v. Hampson[6]as an adaptable position in a corporate body. It is a significant distinction to understand that directors within a company are not each other’s agents but rather are to act as agents of the company. A director is likewise a trustee of the company, as he is answerable for the conduct of business for the benefit of the company and furthermore, uses the property and capital of the company to lead that business. A director may sometimes, also act in the capacity of a managing partner but in most circumstances their position is seen as agents or trustees of the company.

·      Directors as agents

A director acts in the position of a controller of the affairs of the company and not as a servant.[7] In the landmark judgement of Ferguson v. Wilson[8], it was precisely reiterated that the directors are the agents of a company according to law. The equation shared between the directors and the company is on similar lines of the general principle of agency. Therefore, the company is to be held responsible when its agents sign on behalf of the cooperate entity and these agents have to declare in case of a personal interest in the transactions of the company.

·      Directors as Trustees

Through a strict perspective, directors are not the trustees, but are positioned as trustees of the company’s properties and money, that is heavily influenced by them or under their control. The Madras High Court on account of Ramaswamy Iyer v. Brahamayya and Co[9]., in regards to director’s capacity of applying funds and assets of the company and for the abuse of power, held that , “the directors are liable as trustees and after their death, the cause of action survives against their legal representative.” Another explanation because of which the directors are seen as trustees is a direct result of the nature of their office. They are the paid officers of a company and are not to be placed as trustees for shareholders and hold no fiduciary duty to them.[10]

Appointment of Directors

The appointment of Directors of a company is regulated by the Company’s Act, 2013, wherein it lays down the minimum number of directors required in different kinds of companies.[11] A company is to have a maximum of 15 directors and may appoint more only after the passing of a special resolution. Moreover each company is mandated to have a minimum of one director who has stayed in India in the previous year for a period of 182 days or more. The appointment of directors to a company, takes place in the General Meetings of the company[12] and after the appointment, every director is assigned a Director Identification Number (DIN). The Articles of Association of the company lay down the rules for retirement of directors through annual rotation. Otherwise permanent appointment can only be given to one-third of the directors, while the tenure for the rest has to be determined by rotation.

Powers of Directors

The directors have their general power vested under sec. 179 of the Companies Act, 2013 in the Board which enables them to exercise their powers which includes issuance of funds, approving of financial statements, applying for amalgamation, merger or reconstruction, borrowing money, granting loans acquiring controlling interest in another company, etc., subject to restrictions. Along with this, the directors of a company can also exercise their power to constitute an audit committee comprising of at least three directors, including independent directors, with independent directors being in the majority[13]; constitute nomination and remuneration committees and stakeholders relationship committee[14]; contribute to the bona fide charitable and other funds[15] and to contribute to the National Defence Fund or any other fund as approved by the Central Government for the purpose of National defence.[16]

The shareholders can only intervene in situations wherein the directors are unwilling to act or in cases of deadlock. The two of the major restrictions on the Board of Directors on the exercise of the power being are:

  1. The board of directors are not competent to do the acts which the shareholders are required to do in general meetings.
  1. The powers of directors are to be exercised in accordance with the memorandum and articles.

Members of the Company

The Companies Act of 2013 defines the term member under proviso 2(55) of the said act and is inclusive of the subscriber to the memorandum of the company, any person who agrees to be a member of the company and any individual who is in possession of the share of the company. Under common parlance the term, ‘Member’, is denoted for a person holding shares in the company, emphasising the shareholders to be the real owners of the company and together constitute this corporate body. Any person can become the member of a company provided they submit a written application not an oral one.[17] A shareholder also referred to as a stock holder gain benefits in the form of increased stock valuation depending on the success of the company and hence assume a significant job in the profits of the company. A definitive decision making power in issues identifying with the appointment and removal of the auditors, directors and other administrative work force rests with shareholders. The general body of members also additionally engage in the controlling and supervising of the powers exercised by the Board of directors. Equity shareholders and Preference shareholder are the two major kinds of shareholder in a company. While the first type of shareholders are the main stakeholders, the latter ones, although have no voting rights owing to their preferred status and fixed dividends, get the dividends first during the distribution.

Rights and Duties of Shareholders

Shareholders have both individual rights and corporate rights in a company but the latter has to be enforced by the majority of shareholders.[18] They can engage in the transferring of shares of the company in accordance to the rules mentioned in the articles of association.[19] Shareholders in a company play a crucial rule in appointing the directors of the company by passing an ordinary resolution.[20] They also have the authority to bring legal action against any director(s) in situation where the act done by the directors is illegal or unconstitutional; fraudulent; malafide in nature; or prejudiced against the affairs of the company. Furthermore, they have a right to call a general meeting and to requisition an extraordinary general meeting of the company[21] along with inspecting all the registers and books of the company and receiving all the credit in case of winding up of the company. 

Owing to the individual legal existence of a company the shareholders are not responsible towards the company’s obligations and most of their duties are limited to breach of directors’ duties in situation where shareholders are given the authority as ordinarily exercised by directors, obligations as maybe provided in the shareholder’s agreement and unpaid amounts on the shares that are held by that shareholder and engaging in the company’s progress.

Analysis and Discussion

Basing on the abovementioned information as provided in this article and the provisions in the Companies Act, 2013, the major point of differences between directors and shareholders within a company in the capacity of their various duties, rights and liabilities under the Companies Act of 2013 are as follows:

  • Role: Directors and Shareholders play substantially different roles in running the company. While the latter is the owner of the company, the former is the manager of the company on behalf of the shareholders, unless it is provided otherwise in the articles of the company.
  • General authority: The directors are directly responsible for the management of the company’s business and obligations because of which they exercise powers on the company’s behalf unlike the shareholders whose duties and liabilities are limited to the shareholder’s agreement and the constitution of the company. However, shareholders may, by passing a special resolution mandate a direction to the directors to take, or refrain from taking any specified action(s). But the resolution cannot invalidate actions of directors prior to the passing of the resolution.
  • Minimum Members: The minimum number of directors for a Public Private company and One person Company are three, two, one respectively whereas the minimum number of shareholders required for a private company is two and for a public company is seven. A one person company can have only one member.
  • Removal: The shareholders are under the responsibility of removing a director but in case of shareholders, they can only be removed by an order given by any judicial or quasi-judicial bodies like NCLT. It is also pertinent to note that shareholders can willingly transfer their shares to others.
  • Receipt of money: While directors receive remuneration and sitting fees or any other fees as provided to them for taking responsibility in any other capacity by the company, shareholders are entitled to receive part of profits in the form of dividends during distribution.
  • Decision making Power: The Board of directors is endowed with the required legal work of the company and is under a duty to operate in the best possible interest of the company. But though the shareholders are not engaged with the everyday business or the company’s management except in situations where they form a part of the board. Power to settle on decisions falls on both directors (for example calling for unpaid shares, consideration of director’s report etc.) and shareholders (like the appointment of auditors and directors, approving of finances, issuance of shares, etc.). This emphasizes that while the everyday decisions are taken by the directors, crucial decisions require the collective approval of the members of the company.

Conclusion

Under the Companies Act of 2013 there are certain decisions that can only be taken by the stakeholders, which includes making changes to the company’s articles. Numerous other decisions maybe taken by the directors provided they have the shareholder’s assent, by methods of passing an ordinary or a special resolution. However, regardless of the massive lines of contrast between directors and shareholders, both of them are an indispensable piece within the framework of a company, and assume a critical position in the achievement of a company’s success. In the complex relation shared by directors and members of a company, the former are obligated to uphold the fiduciary duty towards the company and also hold accountable the members for their stewardship of the company as they provide the shareholders with annual reports and accounts.

Directors are entrusted with the running of the company and have compelling control over the calling and efficient conduct of the company’s meetings. At the same time, the shareholders are considered to be the absolute source of power with a company by the virtue of being the owners of the shares in the company. Directors and shareholders share a mutual dependency on each other, and are under a duty to hold each other responsible in cases of misuse of power or mismanagement which allows transparency to be maintained. Each of them have separate and clear roles within a company and are to be considered as pivotal parts which are responsible for the efficient conduct and running of a company.


[1]CS. Mala KumariUpadhyay, “The Indian Company’s Act 2013 – a boon or bane to Sustainable Development”, IOSR Journal of Business and Management (IOSR-JBM), p-ISSN: 2319-7668. Volume 19, Issue 7.

[2] Section 2(20), The Companies Act, 2013.

[3] Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819)

[4]S.S.Dhanoa v Municipal Corporation Delhi (1981) 3 SCC 431

[5] Solomon v. Solomon & Co. Ltd.(1897) AC 22.

[6]Imperial Hydropathic Hotel Co, Blackpool v Hampson (1883) 23 Ch D 1.

[7]Moriarty v. Regent’s Garage Co, [1921] 2 KB 766.

[8] Ferguson v. Wilson (1866) LR 2 Ch LR 77

[9]RamaswamyIyer v. Brahamayya and Co, AIR 1966 Mad 247

[10]Peskin v. Anderson, [2000] EWCA Civ 326

[11] Section 149, The Companies Act, 2013.

[12] Section 152, The Companies Act, 2013.

[13]Section 177, The Companies Act, 2013.

[14] Section 178, The Companies Act, 2013.

[15] Section 181, The Companies Act, 2013.

[16] Section 183, The Companies Act, 2013.

[17]Sree Ayyanar Spinning and Winning Mills ltd v. V.V.V. Rajendran And Anr., (1973) 43 Comp. Cas. 225 Mad.

[18]Suresh Chandra Marwaha v. Lauls (P.) Ltd, 48 Comp. Cas. 110 (Punj.&Har.).

[19] Section 44, The Companies Act, 2013.

[20] Section 169, The Companies Act, 2013.

[21] Section 100, The Companies Act, 2013.

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