Relationship of Director with Company

The directors of a company are said to be heart and soul of a company and all the acts of the appointed directors are responsible for the position of the company in the market. This article provides a primer on roles and resoposibilites of directors under the Companies Act, 2013. It also briefly provides the penalities which would be imposed on the directors in case of non-compliance of their obligations.
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Introduction

Directors are said to be the heart and soul of a company as all the crucial decisions of the company are the outcome of their deliberations and their application of mind. This happens because though a company has a separate legal entity but still it does not have any physical existence. Directors are the persons working and acting on the company’s behalf. They are considered to be the officers of the company and are generally responsible for the day to day transactions undertaken by the company. They are professionals hired for the purpose of managing the affairs of the company. The functions and duties discharged by the persons are the major criteria to determine their directorship. It is famously known and understood that if a person is appointed to control the management of the company and is also authorized by the articles, to enter into contracts on behalf of the company then such person is said to discharge the functions of a director. It is also be noted that an efficient working board of directors is quintessential for the purpose of the smooth functioning of the company and maintaining its goodwill in the market.

The board of directors constitute the key element for corporate governance. The basic functions of the board of directors generally include supervising, monitoring, avoiding opportunistic behaviour on the part of the executives, and providing advice to decision makers to improve the management of the company.[1] The directors generally act on the resolutions passed at director’s meeting. Also, as directors they have the power to bind the company with valid contracts entered by directors on behalf of the company with third parties such as sellers, lenders and such other parties. It has also been noticed that the directors may also be designated as governors, members of the governor council, or the board of management, or any other title which the company might find appropriate, but in the eyes of law they are simply termed as directors.

Legal relationship of Director with Company

A director of a company also acts as trustee, agent, managing partner and employee of the company. The role of a director as each one of these is as follows:

  1. Director as an agent: Directors generally act as agents of the company as the company cannot work on its own. Cairns, LJ. observed: “The company itself cannot act in its own person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent.”[2] Thus, all the provisions and conditions relating to agency are applicable in the contracts relating to agency are applicable in the contracts entered by the directors of the company. In all such contracts the company shall be held liable. Notwithstanding, anything contained in the provisions relating to agency, there are certain acts for which only the director shall be made liable. The acts are as follows:
  2. When the contract is not in the name of the company or the company’s name has been wrongly written;
  3. The directors shall also be liable if any act has been done where the director has exceeded his authority; and
  4. When the signature is made in such a way that it is difficult to ascertain that it is principal’s signature or agent’s signature.
  5. Directors as trustees: In order to understand the functions of director as a trustee it is appropriate to first peruse the term trustee. Hence, trustee is a person in whose favour the legal ownership of the assets is transferred and the assets are administerd by the trustee for the benefit of other.[3] In the matter of Brahnmyya & Co.,[4] the Hon’ble Madras High Court held that “the directors of a company act as trustees for the company, and considering their  power of  applying funds of the company and misusing of the power they could rendered liable as trustees and on their death the cause of action survives against their legal representatives.” It should be taken into account that despite all the powers vested in the directors, the directors shall make good for any loss incurred by the company due to their directions as generally a trustee would do.
  6. Directors as Managing Directors: when a company is considered as a large partnership then the directors are considered to be in the position of a managing director. This is generally ascertained from the fact that memorandum of association (hereinafter referred as MoA) and articles of association (hereinafter referred as AoA) confer vast powers in the hands of directors for controlling the management of the company.
  7. Directors as employees of the company: It shall be duly noted that a director is an elected member of the company and nobody has the power to interfere in the matters and power exercised by the directors except in certain circumstance. Further, an employee is generally a person appointed by a contract of service which enable him to serve as an employee of the company. Unlike directors, the rights and powers of an employee are determined by the employer and he can also interfere in all such acts. Directors are an exception to this, as they are elected representatives of the company who are engaged in controlling the affairs of the company. Although directors are not employees or servants of the company but there are no specific provisions which prevent them to accept the employment of the company. This was also observed in the matter of R.R. Kothandaraman v CIT (1957)[5].

Sometimes, the directors also accept the contract of employment along with directorship then such directors can be considered as employee of the company. In such cases, the director shall be endowed with remuneration and other benefits that are generally provided to employees of the company, in addition to the remuneration entrusted to directors. Directors are also entrusted as officers in certain cases where the acts undertaken by them give rise to penalty. In such cases they are also known as ‘officer in default’. The term ‘officer’ includes all such directors and key managerial person (hereinafter referred as KMP) who are accustomed to act according to the directions of the board of directors.

Duties of Director

It shall be noted that there is no specific provision defining the duties of director but there are certain general duties which can be inferred through the provisions of the Companies Act, 2013 (hereinafter referred as Act). Some general duties are as follows:

  1. A director is responsible to disclose any kind of interest he may hold in any of the transactions that is supposed to be undertaken by the company. Such interest shall be disclosed to the board of directors. Such disclosure shall be made in the first meeting after the interest has been developed or acknowledged. The intent of incorporating such a duty is that, a director stands in a fiduciary relationship with the company and hence, the interest of a director should not conflict with the interest of company. Further, after such disclosure the interested director shall not participate in the discussion for that item. Also, his presence shall not be counted for the purpose of quorum. The interested director is also restricted to vote and in case of non-disclosure of interest by the interested director he shall be subject to fine of Rs. 5,000.
  2. A director shall also be obliged to attend the meeting of the company. Although all the meetings are not supposed to be attended by all the directors, but every director shall not fail to attend three consecutive meetings or all meetings for a period of three meetings, whichever is longer. It shall be kept in mind that such action shall only take place when the concerned director has not attended meetings without the permission of board. In such circumstance, the concerned director’s office shall fall vacant.
  3. A company is restricted to issue irredeemable preference shares or preference shares, redeemable beyond 20 years. Any director committing such acts shall be subject to a penalty of Rs. 1,000.
  4. Further, the director shall also be responsible for conducting statutory annual general meeting (hereinafter referred as AGM) and extra-ordinary general meeting (hereinafter referred as EGM). They are also responsible for deciding the place of such meetings and to prepare annual reports of the company’s affairs. Also, to appoint first auditor and cost auditor of the company. It shall also be duties of all the directors to undertake all such acts which can be beneficial for the company, with reasonable care and attention.

Liabilities of a Director

A director is also entrusted with certain liabilities as a company’s entire business is dependent on the actions of the board of directors. The liabilities of directors are as follows:

  1. A director shall not act dishonestly and if he does so then the director shall be held liable for breaching his fiduciary relationship with the company. The aim of undertaking any transaction on behalf of the company shall be in the interest of the company and not in interest of any other person.
  2. A director shall also ensure that all his acts are in compliance with the Act, MoA and AoA. These shall be complied with as these documents are responsible for determining the limits of a company’s acts and transactions, which the director is also supposed to comply with. All such acts are ultra vires. The directors shall be personally made liable for all such ultra vires acts.
  3. The directors are presumed to work with reasonable care and skills as a prudent man would do in order to discharge their duties. But in case of failure to discharge all such duties the director will be made liable. However, an error of judgment shall be considered to be an exceptional situation and director shall be exempted from liability in such case.
  4. Directors are considered as trustees of company’s assets and liabilities. This statement entails that a director has a great deal of responsibility in his hands and shall always act in the interest of company. When a director fails to do so and does any act which is malafide in nature and consequently, would incur losses or damages for the company then the director shall be made liable to make good all such losses incurred by the company. The Courts in such situations ask the directors to repay the amount or restore the property or to endow compensation.
  5. During scrutinization of the acts of the director, it shall be taken into account that the director has the knowledge of the acts approved by the board of directors. A director’s absence in a board meeting shall not necessarily make him liable for the acts approved by the board of directors. Hence, it can be said that a director is nor responsible for the acts of co-directors unless he has knowledge of such acts.

Conclusion

The directors of a company are said to be heart and soul of a company and all the acts of the appointed directors are responsible for the position of the company in the market. Though the company has separate legal entity than its members, but the members are directly and indirectly responsible for the growth of the company. The fiduciary relationship entrusted with the directors creates the responsibility on the directors to work with skills and such prudence which shall always result in the benefit and growth of the company.  An error of judgment is though not penalised, but any act done with malice or negligence is subject to penalisation under the Act.

 From the above-mentioned provisions, the directors are guided and are bound by the Act, MoA and AoA. All the acts shall be in compliance with these documents and the directors shall always keep the interests of the company paramount. Directors working in their own interest while neglecting the interest of the company are subject to penalty. Further, the article also envisages that the directors are not liable for the acts for co-directors or any decision taken by the board of directors in the meeting in which he was absent, unless he has knowledge of such acts to be done and approves of it. Further, we can conclude that a company is made of its directors and members and a company cannot do any act without its board of directors and other KMP of the company.


[1] C. Jose Garcia Martin &Begona Herrero, Boards of directors: composition and effects on the performance of the firm, Economic research, Volume 31, 2018 – Issue 1, https://www.tandfonline.com/doi/full/10.1080/1331677X.2018.1436454

[2]Ashish Kumar Chandahe, Directors of a Company – Appointment and Legal Relationship,https://www.lawctopus.com/academike/directors-company-appointment-legal-relationship/

[3]Id

[4][ 1966] 1 Comp. LJ 107 (Mad.)

[5](1966) 2 MLJ 473.

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