Corporate Law Project - Duties of Directors

8/10/2019 Corporate Law Project - Duties of Directors

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TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................... 3

Research Methodology ............................................................................................................... 5

ENGLISH LAW ............................................................................................................................. 6

INDIAN POSITION ..................................................................................................................... 10

DUTIES OF DIRECTORS UNDER COMPANIES BILL, 2011 ................................................ 13

ARE THESE CHANGES ENOUGH?.......................................................................................... 15

CONCLUSION ............................................................................................................................. 17

BIBLIOGRAPHY ......................................................................................................................... 18


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INTRODUCTION

A Company, although has a legal personality, it cannot perform acts on its own. It performs its

functions through living persons, who act as agents for the company.1 The Directors of a

Company are its primary agent and are duty bound to carry on the various functions of a

company. It is said that the Directors having been dismissed, the company cannot act.2 They

ought to fulfill the objects of the companys existence which is presc ribed in its Memorandum of

Association (MOA) and his powers to fulfill these objects are prescribed in the Articles of

Association (AOA).3The intention of the company is identified through the acts of its Directors.

They serve as a requisite channel to accomplish the decision making and action taking task of the

corporation.

4

The Companies Act, 1956 attempt to define the term Director entails the term such as

Director includes any person occupying the position of a Director, by whatever name called.

Bowen LJ. has made an elaborate effort to define the position of the Director as agents, trustees

and managing partners with each of these expressions not used as exhaustive of their powers and

responsibilities, but as indicating useful points of view from which they may for the moment and

for the particular purpose be considered.5They are not servants or employees of a company but

an officer who controls the operations of the company.6

However, a managing Director exercises

dual capacity since he is an employee as well as an agent of the company.7

The Companies Act 1956 provides that a public company should have a minimum number of

three Directors and a private company should have a minimum of two Directors.8However, the

Act does not envisage any specific provision that generally governs the duties of Directors. The

duties are instead governed by common law, which judges are required to apply to a given set of

facts and circumstances. Under common law, there are certain broad sets of Director duties:

1Lennards Carrying Co. v. Asiatic Petroleum Co., 1915 AC 705 at p. 713. 2Charanjit Lal Chowdhuri v. UOI and Ors.,3Gower and Davies' Principles of Modern Company Law, 17th Edn.4Avtar Singh, Company Law, 14th Edn, 2005.5Imperial Hydropathic Hotel Co. v. Hampson, (1882) 23 Ch D 1 49 LT 150.6Moriarty v. Regents Garage & Engg Co, [1921] 1 KB 423;Lee v. Lee Air Farming Co.,.7Ram Pershad v. Commissioner of Income Tax, New Delhi MANU/SC/0330/1972.8Section 3, Companies Act, 1956.


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(i) Duty to act with skill, care and diligence, and

(ii) Fiduciary duties (to act in the interests of the company, to avoid conflicts of interest and to

act for proper purposes).9

However, past track record in India indicates that cases where common law Director duties have

been applied are few and far between. For this reason, duties of Directors are incapable of being

defined as clearly as one can in other jurisdictions, particularly in the developed markets.

The Companies Act, 1956 has been amended from time to time in response to the changing

business environment. The 2011 Bill proposes significant changes to the existing corporate law

provisions dealing with mergers and acquisitions and corporate restructuring with some

modifications to the Companies Bill, 2009.

10

If approved by Parliament, it would replace a 55year old legislationthe Companies Act, 1956.

Recently, India has witnessed some major corporate scams. The Companies Bill, 2011 proposes

to bring in a paradigm shift by providing for more stringent norms and increased penalty. The

much anticipated Bill makes sweeping changes to the existing law. While the existing Act has

more than 600 sections, the new bill has been presented with just 470 clauses. As a matter of

fact, the new Bill was introduced to incorporate the changes that had been suggested by many

stakeholders and members after the 2009 Bill had been presented before Parliament.11

In order to induce a greater level of clarity in Directors duties, the Companies Bill, 2011 has a

specific provision that deals with the subject matter. Clause 166 of the Bill is substantially

similar to the provision contained in the Companies Bill, 2009, with some iteration. The UK too

adopted the strategy of codifying Directors duties in the Companies Act, 2006 (sections 171-

177).

9A Ramaiya, A guide to Company Law, 17 thEdn. 2010.10Robert Goddard, India: Company Law reform and the Companies Bill, Corporate Law and Governance,

September 2011, http://corporatelawandgovernance.blogspot.in/2011/09/india-company-law-reform-and-

companies.html11KPMG, The Companies Bill, 2011 presented before the Lok Sabha, December 2011,

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/india-

dec20no2.pdf
http://corporatelawandgovernance.blogspot.in/2011/09/india-company-law-reform-and-companies.htmlhttp://corporatelawandgovernance.blogspot.in/2011/09/india-company-law-reform-and-companies.htmlhttp://corporatelawandgovernance.blogspot.in/2011/09/india-company-law-reform-and-companies.htmlhttp://corporatelawandgovernance.blogspot.in/2011/09/india-company-law-reform-and-companies.html


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The bill seeks to establish a new benchmark for corporate governance in comparison to the

existing framework under the Companies Act 1956. In short, India has a chance with the

Companies Bill 2011 to take a lead in corporate governance innovation rather than following

developments in the United States or the United Kingdom.12

The new Bill seeks to repair and

fine tune the 1956 Act. While the intentions are good, it cannot be forgotten that the road to hell

is paved with good intentions too. There are some grey areas in the Act. However, the new Act

still promises to be a welcome change to plug the ambiguities, increase disclosures and

compliances, promote better governance and responsibility and provides safeguards for all

stakeholders. The Act has also proposed a few industry-friendly measures like one person

companies, the dormant company and allowing a small companys merger. More importantly, it

offers immense opportunities for all professionals.

Research Methodology

The Researcher has adopted the doctrinal form of research in completing this project. This form

of research was most appropriate as the project is a study of the duties of Directors under the

English law, Companies Act and the new Companies Bill. Research material used includes

works of eminent researchers about the role of Directors in a company as well as case laws

which provide evidence about the various duties. The researcher has relied upon the various

books available in the NALSAR library. Also, online sources like JSTOR, Google Books, HeinOnline and various university sites have been used. No part of this project is plagiarized and it is

the original work of the Researcher.

12Sonia Shekhar, Companies Bill 2011 - Major Highlights, Articlesbase, http://www.articlesbase.com/ask-an-

expert-articles/companies-bill-2011-major-highlights-5509238.html


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ENGLISH LAW

As mentioned previously, the duties of Directors were derived from basic common law and

equity principles. As emphatically stated by Justice Romner inRe City Equitable Fire Insurance

Company,13the Directors duties depends upon the nature of the companys business, the manner

in which the work of the company is distributed between the Directors and the other officials of

the company.

Some of the general duties enumerated are his duty of good faith, duty of care in the performance

of work assigned to him, duty to exercise diligence and skill, etc. These duties must be exercised

by him not in extra ordinary capacity but as would be reasonably be expected of him to do so

using ordinary prudence.14

He must act in the best interest of the company, which includes

interests of future members as well.15In Cook v. Veeks,16the court emphasized that the Director

must not make secret profits and must not exploit the companys opportunities for enhancing his

own. The Director, being an agent of the company, is bound by the rule of delegatues non potest

delegare and can delegate certain duties to other officials only in cases where it is permitted

under the statute or the AOA.

As Palmer has stated, the fiduciary relationship of a Director exists with the company since he is

not usually a trustee for individual shareholders.17

A Director may accept a shareholder's offer to

sell shares in the company although he may have information which is not available to that other,

and the contract cannot be upset even if the Director knew of some fact which made the offer an

attractive proposition.18

However, there may be certain situations where Directors do owe a

fiduciary duty and a duty to exercise reasonable skill and care in advising members in connection

with a transaction or situation which involves the company or its business undertaking and also

the individual holdings of its members.19

1314Lagunas Nitrate Co. v. Lagunas Nitrate Syndicate (1899) 2 Ch. 392.15Majumdar16(1916) AC 524.17Palmer, Company Law18Percival v Wright [1902] Ch 401.19Pennington, Company Law
http://en.wikipedia.org/wiki/Percival_v_Wrighthttp://en.wikipedia.org/wiki/Percival_v_Wright


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The UK 2006 Companies Act20

replaced and codified the principal common law and equitable

duties of Directors, but it does not purport to provide an exhaustive statement of their duties, and

so it is likely that the common law duties survive in a reduced form. Traditional common law

notions of corporate benefit have been swept away, and the new emphasis is on corporate social

responsibility. The seven codified duties are as follows:

1. S171 UK CA (2006) Directors to act within their powers to abide by the terms of the

companysmemorandum and articles of association and decisions made by the shareholders;

2. S172 UK CA (2006)Directorsto promote the success of the companyDirectors must continue

to act in a way that benefits the shareholders as a whole, but there is now an additional list of

non-exhaustive factors to which the Directors must have regard. This was one of the most

controversial aspects of the new legislation at the drafting stage. These factors are:

i. the long term consequences of decisions

ii. the interests of employees the need to foster the companys business relationships with

suppliers, customers and others

iii. the impact on the community and the environment

iv. the desire to maintain a reputation for high standards of business conduct the need to act

fairly as between members

Directors appointed to the board form the central authority in UK companies. In carrying out

their functions, Directors whether formally appointed, de facto, or "shadow Directors21

owe a

series of duties to the company.22

There are presently seven key duties codified under the

Companies Act 2006 sections 171 to 177, which reflect the common law and equitable

principles. These may not be limited, waived or contracted out of, but companies may buy

20Hereinafter UK CA 2006.21Re Hydrodam (Corby) Ltd [1994] BCC 161; UK COMPANIES ACT 2006 s 251; a shadow Director is typically a

bank or a dominant shareholder, according to whose directions a Director is accustomed to act.22Peskin v Anderson [2001] 2 BCLC 1 and UK COMPANIES ACT 2006 s 170; Directors do not, generally, owe

duties to shareholders or any other group directly. But duties may arise in tort, Williams v Natural Life Health Foods

Ltd [1998]1 WLR 830.Also, when approaching insolvency Directors may owe duties to creditors, eg West Mercia

Safetywear Ltd v Dodd [1988] BCLC 250 andColin Gwyer and Associates Ltd v London Wharf (Limehouse) Ltd

[2003] 2 BCLC 153.
http://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/De_factohttp://en.wikipedia.org/wiki/De_factohttp://en.wikipedia.org/wiki/Shadow_directorhttp://en.wikipedia.org/wiki/Shadow_directorhttp://en.wikipedia.org/wiki/Companies_Act_2006http://en.wikipedia.org/wiki/Re_Hydrodam_(Corby)_Ltdhttp://en.wikipedia.org/wiki/Peskin_v_Andersonhttp://en.wikipedia.org/wiki/Williams_v_Natural_Life_Health_Foods_Ltdhttp://en.wikipedia.org/wiki/Williams_v_Natural_Life_Health_Foods_Ltdhttp://www.publications.parliament.uk/pa/ld199798/ldjudgmt/jd980430/williams.htmhttp://en.wikipedia.org/w/index.php?title=West_Mercia_Safetywear_Ltd_v_Dodd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=West_Mercia_Safetywear_Ltd_v_Dodd&action=edit&redlink=1http://en.wikipedia.org/wiki/Colin_Gwyer_and_Associates_Ltd_v_London_Wharf_(Limehouse)_Ltdhttp://en.wikipedia.org/wiki/Colin_Gwyer_and_Associates_Ltd_v_London_Wharf_(Limehouse)_Ltdhttp://en.wikipedia.org/w/index.php?title=West_Mercia_Safetywear_Ltd_v_Dodd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=West_Mercia_Safetywear_Ltd_v_Dodd&action=edit&redlink=1http://www.publications.parliament.uk/pa/ld199798/ldjudgmt/jd980430/williams.htmhttp://en.wikipedia.org/wiki/Williams_v_Natural_Life_Health_Foods_Ltdhttp://en.wikipedia.org/wiki/Williams_v_Natural_Life_Health_Foods_Ltdhttp://en.wikipedia.org/wiki/Peskin_v_Andersonhttp://en.wikipedia.org/wiki/Re_Hydrodam_(Corby)_Ltdhttp://en.wikipedia.org/wiki/Companies_Act_2006http://en.wikipedia.org/wiki/Shadow_directorhttp://en.wikipedia.org/wiki/De_factohttp://en.wikipedia.org/wiki/Board_of_directors


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insurance to cover Directors for costs in the event of breach23

. The remedies for breaches of duty

were not codified, but follow common law and equity, and include compensation for losses,

restitution of illegitimate gains andspecific performance orinjunctions.

The first Director's duty under section 171 is to follow the company's constitution, but also only

exercise powers for implied "proper purposes". Directors must display the care, skill and

competence that is reasonable for somebody carrying out the functions of the office, and if a

Director has any special qualifications an even higher standard will be expected. However, under

section 1157 courts may, if Directors are negligent but found to be honest and ought to be

excused, relieve Directors from paying compensation.

The central equitable principle applicable to Directors is to avoid any possibility of a conflict of

interest24, without disclosure to the board or seeking approval from shareholders. This core duty

of loyalty is manifested firstly in section 175 which specifies that Directors may not use business

opportunities that the company could without approval. Shareholders may pass a resolution

ratifying a breach of duty, but under section 239 they must be uninterested in the transaction.

The purpose of the no conflict rule is to ensure Directors carry out their tasks like it was their

own interest at stake. Beyond corporate opportunities, the law requires Directors accept no

benefits from third parties under section 176, and also has specific regulation of transactions by a

company with another party in which Directors have an interest. Under section 177, when

Directors are on both sides of a proposed contract, for example where a person owns a business

selling iron chairs to the company in which he is a Director25

, it is a default requirement that they

disclose the interest to the board, so that disinterested Directors may approve the deal. The

company's articles could heighten the requirement, say, to shareholder approval26

. If such aself

23UK COMPANIES ACT 2006 ss 232-235; while a Director may not have to pay for breach of duties, they will not

be able to avoid negative publicity and possibly appearing in court should the insurance company choose to contest

the claim.24Boardman v Phipps [1966]UKHL 225Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq HL 46126 See UK COMPANIES ACT 2006 s 180(1)(b) and Imperial MerCompanies Actntile Credit Association v

Coleman (1871) LR 6 Ch App 558, Costa RiCompanies Act Railway Company v Forwood [1901] 1 Ch 746,

Motivex v Bulfield Ltd [1988] BCLC 104, 117 andBoulting v ACTAT [1963] 2 QB 606, 636
http://en.wikipedia.org/wiki/Damageshttp://en.wikipedia.org/wiki/Restitutionhttp://en.wikipedia.org/wiki/Specific_performancehttp://en.wikipedia.org/wiki/Injunctionhttp://en.wikipedia.org/wiki/Conflict_of_interesthttp://en.wikipedia.org/wiki/Conflict_of_interesthttp://en.wikipedia.org/wiki/Conflict_of_interesthttp://en.wikipedia.org/wiki/Self_dealinghttp://en.wikipedia.org/wiki/Boardman_v_Phippshttp://www.bailii.org/uk/cases/UKHL/1966/2.htmlhttp://en.wikipedia.org/wiki/Aberdeen_Railway_Co_v_Blaikie_Brothershttp://en.wikipedia.org/wiki/CA_2006http://en.wikipedia.org/w/index.php?title=Imperial_Mercantile_Credit_Association_v_Coleman&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Imperial_Mercantile_Credit_Association_v_Coleman&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Costa_Rica_Railway_Company_v_Forwood&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Motivex_v_Bulfield_Ltd&action=edit&redlink=1http://en.wikipedia.org/wiki/Boulting_v_ACTAThttp://en.wikipedia.org/wiki/Boulting_v_ACTAThttp://en.wikipedia.org/w/index.php?title=Motivex_v_Bulfield_Ltd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Costa_Rica_Railway_Company_v_Forwood&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Imperial_Mercantile_Credit_Association_v_Coleman&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Imperial_Mercantile_Credit_Association_v_Coleman&action=edit&redlink=1http://en.wikipedia.org/wiki/CA_2006http://en.wikipedia.org/wiki/Aberdeen_Railway_Co_v_Blaikie_Brothershttp://www.bailii.org/uk/cases/UKHL/1966/2.htmlhttp://en.wikipedia.org/wiki/Boardman_v_Phippshttp://en.wikipedia.org/wiki/Self_dealinghttp://en.wikipedia.org/wiki/Conflict_of_interesthttp://en.wikipedia.org/wiki/Conflict_of_interesthttp://en.wikipedia.org/wiki/Injunctionhttp://en.wikipedia.org/wiki/Specific_performancehttp://en.wikipedia.org/wiki/Restitutionhttp://en.wikipedia.org/wiki/Damages


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dealing transaction has already taken place, Directors still have a duty to disclose their interest

and failure to do so is a criminal offence, subject to a 5000 fine.27

Finally, under section 172 Directors must "promote the success of the company". This somewhat

nebulous provision created significant debate during its passage through Parliament, since it goes

on to prescribe that decisions should be taken in the interests of members, with regard to long

term consequences, the need to act fairly between members, and a range of other "stakeholders",

such as employees28

, suppliers, the environment, the general community29

, and creditors30

. Many

groups objected to this "enlightened shareholder value" model, which in form elevated the

interests of members, who are invariably shareholders, above other stakeholders. However, the

duty is particularly difficult to sue upon since it is only a duty for a Director to do what she or

"he considers, in good faith, would be most likely to promote the success of the company"31

.

Proof of subjective bad faith toward any group being difficult, Directors have the discretion to

balance all competing interests, even if to the short term detriment of shareholders in a particular

instance. There is also a duty under section 173 to exercise independent judgment and the duty of

care in section 174 applies to the decision making process of a Director having regard to the

factors listed in section 172, so it remains theoretically possible to challenge a decision if made

without any rational basis.32

27

UK COMPANIES ACT 2006 ss 182-183.28 UK COMPANIES ACT 1985 s 309, which stipulated that shareholders and employees interests had to be

considered. No Companies Actses were ever brought under this provision. Older Companies Actses such as Hutton

v West Cork Railway Co (1883) 23 Ch D 654 andParke v Daily News Ltd [1962] Ch 927 suggested Directors of

insolvent companies could not protect employees, though this had been reversed by statute, IA 1986 s 187 and UK

COMPANIES ACT 2006 s 247 (Power to make provision for employees on cessation or transfer of business).29UK COMPANIES ACT 2006 s 172(1)(a)-(f)30UK COMPANIES ACT 2006 s 172(3)31UK COMPANIES ACT 2006 s 172(1)32Regentcrest Plc v. Cohen,[2001] 2 BCLC 80
http://en.wikipedia.org/wiki/Self_dealinghttp://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Shareholder_valuehttp://en.wikipedia.org/wiki/CA_1985http://en.wikipedia.org/wiki/Hutton_v_West_Cork_Railway_Cohttp://en.wikipedia.org/wiki/Hutton_v_West_Cork_Railway_Cohttp://en.wikipedia.org/w/index.php?title=Parke_v_Daily_News_Ltd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Regentcrest_plc_v_Cohen&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Regentcrest_plc_v_Cohen&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Parke_v_Daily_News_Ltd&action=edit&redlink=1http://en.wikipedia.org/wiki/Hutton_v_West_Cork_Railway_Cohttp://en.wikipedia.org/wiki/Hutton_v_West_Cork_Railway_Cohttp://en.wikipedia.org/wiki/CA_1985http://en.wikipedia.org/wiki/Shareholder_valuehttp://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Self_dealing


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INDIAN POSITION

In a very contradictory fashion, Section 2(10) of the Companies Act, 1956 defines the Board of

Directors of a company as the collective body of the Directors of the company. Section 2(34)

in turn defines a Director as a Director appointed by the Board of the Company. So neither

section actually sheds any clarity on who a Director is, or what his/her duties are.33

A few tenets exist as regards the position of a Director and his general duties. The following are

certain statutory provisions under the Companies Act, 1956, which enumerate the various

circumstances where the Director owes a certain duty towards the company and its members:

a) To file return of allotments (Section 75) - In case the company fails to file the return of

the allotments stating the prescribed particulars with the Registrar within 30 days, theDirectors will be held liable as officer in default and a daily fine may be imposed till the

default continues.

b) Must not issue irredeemable preference shares or shares redeemable after 20 years

(Section 80) - Any Director making such an issue will be liable for fine upto Rs. 10, 000.

c) Must disclose interest (Section 299 - 300) - A Director who is interested in the

transaction of the company must disclose the same to the Board. Any director or his

relative, a firm in which he or his relative is a partner or a private company in which he is

a Director or member shall not enter into any contract with the company for sale,

purchase, supply of any goods, materials or services and for underwriting the

subscriptions of any shares or debentures of the company, since he is an interested

director.34

However, if the consent of the Board members by a resolution passed at their

meeting is granted, then the aforesaid contracts may be pursued. Thus, there is an

obligation upon the Director to disclose the nature of his concern or interest at a meeting

of the Board of Directors before entering into the contract for consideration. In cases

where the whole Board is aware of the facts of the transaction and the Directors interest

in the same, a formal disclosure is not necessary.35

33L.V.V. Iyer, Guide to Company Directors Powers, Rights, Duties & Liabilities, 2 ndEdn, 2003.34Section 297, Companies Act, 1956.35Venkatachalapati v. Guntur Mills AIR 1929 Mad. 353.


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In order to constitute a sufficient disclosure, a general notice must be given to the Board

by a Director specifying that he or his relative is a member or Director of a specific body

corporate and must be regarded as an interested party in the arrangement or contract

between the two companies.36

Such notice must be renewed at the beginning of every

financial year or else it shall expire.37

On failure to disclose the Director will be liable for

fine upto Rs. 50, 000.38

Further, he cannot participate or vote in the Board proceedings.39

d) Disclosure of receipt from transfer of property (Section 319)

e) Disclosure of receipt of compensation from transferee of shares (Section 320)

f) Duty to attend Board meetings (Section 283(1)(d))

g) To convene AGMs and extraordinary general meetings (Section 165, 166, 169)

h) To authenticate and approve the annual financial statement (Section 215)

i)

To appoint the auditors of the company (Section 224, 233B)

j) To make declaration of solvency in case of members voluntary winding up (Section 488)

Apart from these, some general principles include that directors only owe their essential duties to

the corporation, and not to individual shareholders, employees or creditors; a Director's core duty

is to remain loyal to the company and avoid conflict of interest; a Director owes a fiduciary duty

to fellow Directors and to the company.40

However, owing to a lack of clarity as to duties of

Directors under the present Act, most judicial decisions in India interpret the same using

common law principles.

The Supreme Court in Bajaj Auto Ltd. v. N.K. Firodia and Anr.,41

held that while exercising

discretion, the Directors will Act for the paramount interest of the company and for the general

interest of the shareholders because the Directors are in a fiduciary position both towards the

company and towards every shareholder. The Directors are therefore required to act bona fide

and not arbitrarily and not for any collateral motive. The action of the Directors must be set aside

if the same was done oppressively, capriciously, corruptly or in some other way malafide.42

36Section 299(3), Companies Act, 1956.37ICICI v. Parasampura Synthetics Ltd. (1998) 17 SCL 51.38Section 299(4), Companies Act, 1956.39Section 300(1), Companies Act, 1956.40AK Majumdar and GK Kapoor, Company Law and Practice, 16 thEdn., 2011.4142Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala and Ors.


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However, the Director does not have any statutory duty to perform so far as individual

shareholders are concerned subject of course to any special arrangement which may be entered

into or a special circumstance that may arise in a particular case.43

Even if the Directors owe

some duty to the existing shareholders on the footing of there being some fiduciary relationship

between them.44

Thus, the fiduciary duty of the Directors to the company should not be equated

with the duty to the shareholders.

InDale and Carrington Investment Private Ltd. and Another v P.K. Prathapan and Others,45

the

Supreme Court held that the fiduciary capacity with which the Directors have to act enjoins upon

them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due

diligence and in the interest of the company they represent. They have a duty to make full and

honest disclosure to the shareholders regarding all important matters relating to the company.

The Directors are generally expected not to place themselves in a position where their duties

towards the company conflict with their personal interests.46

While companies today have thus defined the rights, powers and duties of Directors in their

Articles of Association, a need was felt for legal clarity on this issue. The Dr J.J. Irani

Committee report has suggested that the list of duties of a Director should be inclusive, and not

exhaustive in view of the fact that no rule of universal application can be formulated as to the

duties of the Directors.Various Bills have been introduced in the Parliament which has vouchedfor a separate provision for the duties of Directors, but none of them have been passed yet.

47

43Sangramsinh P . Gaekwad and Ors . vs . Shantadevi P . Gaekwad ( Dead ) thr . Lrs . and Ors .44Nanalal Zaver and Anr. v. Bombay Life Assurance Co. Ltd. and Ors.45[2004] 62 CLA 245 (SC)46National Textile Workers Union and Ors . vs . P . R . Ramakrishnan and Ors .4713 Bills presented before Parliament - Veerapa Moily; See, Doshi, Companies Bill: The Final Cut, The Firm,

CNBC TV18,http://thefirm.moneycontrol.com/story_page.php?autono=585776.
http://thefirm.moneycontrol.com/story_page.php?autono=585776http://thefirm.moneycontrol.com/story_page.php?autono=585776


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DUTIES OF DIRECTORS UNDER COMPANIES BILL, 2011

The Companies Bill 201148

provides for various clauses envisaging the duties of Directors but

Clause 166 actually codifies this power. The Clause included in the Companies Bill is broad and

sweeping. Clause 166 is the new provision introduced to define the duties of a Director and

declares that it would be a punishable offence to commit a breach of those duties.

Clause 166 reads as follows:

(1) A Director of a company shall act in good faith in order to promote the goals of the

company and in the best interest of the company, its members as a whole, its employees, the

shareholders, the community and for the protection of environment.

(2) A Director of a company must exercise his duties with due and reasonable care, skill and

diligence and must have an independent judgment.

(3) Directors of a company shall not involve themselves in a situation where they may have a

direct or indirect interest that can conflict with the good of the company.

(4) The Directors of a company must not misuse or attempt to misuse the resources of the

company for any undue gain either for themselves or to their relatives, partners, or associates

(5) Directors of a company cannot decide the successor to their position. A Director has to be

elected democratically. Any such allocation shall be void.

(6) If a Director of the company is found guilty of violating the provisions of this section such

Director shall be punished with a fine which shall not be less than Rs 5,000 and may extend to

Rs 25,000 a day, for every day after the first day during which the violation continues.

The Bill seeks to introduce a new corporate entity called a one person company which should

have at least one Director and the duties of Directors under Clause 166 apply very well to

48 http://www.mca.gov.in/Ministry/pdf/The_Companies_Bill_2011.pdf


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Director of one person company too. It defines concepts such as connected persons, shadow

Directors, de facto Director, etc.49

The new Bill also provides that a Director of a company 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. A Director of a company 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.50

Further, a Director of a company shall not assign his office and any assignment

so made shall be void.

49Clause 216, 217, 218, Companies Bill, http://www.djei.ie/publications/commerce/2011/Companies%20Bill%20-

%20Part%205%20-%20Soft%20Copy.pdf.50Twenty First Report, The Companies Bill, 2011, Standing Committee on Finance, August 2011,

http://164.100.47.134/lsscommittee/Finance/21_Report_Companies_Bill.pdf
http://164.100.47.134/lsscommittee/Finance/21_Report_Companies_Bill.pdfhttp://164.100.47.134/lsscommittee/Finance/21_Report_Companies_Bill.pdf


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ARE THESE CHANGES ENOUGH?

There are two opposing points of view here. The first advocates that there be minimal legal

restrictions on the role of the Directors, their powers, rights and duties. The company, according

to this view, should be free to decide what exactly its Directors should and should not do. The

other point of view believes that good corporate governance requires that at least the basic duties,

responsibilities and powers need to be spelled out in law, and the company should be allowed to

fill in the details. Clause 166 broadly adheres to the former point of view but also gives a gentle

nod of acknowledgement to the latter overall, it brings no great advance to the law, nor does it

go far beyond the tenets we have already spelled out earlier.51

At the outset, it is necessary to note that this is only a partial codification of Directors duties. It

is not possible to prescribe rules for every situation in which Directors actions can be judged.

That necessarily has to be left for a principles-based determination, usually by judges in specific

cases, and hence the role of courts in implementing these duties cannot be taken away. While the

statutory provisions do give some guidance, much would depend on the manner in which courts

interpret these duties, on which previous jurisprudence is scant. Moreover, with issues

surrounding delays and costs in the court system, it is not clear if a body of judge-made law (in

terms of principles) is likely to emerge to guide the actions of Directors. Hence, it is not clear if

the codification of the duties will necessarily result in a tangible enhancement when it comes toenforcing the duties.

52

One crucial change from the duties contained in the Companies Bill, 2009 is noteworthy. The

previous Bill required Directors to act in the best interest of the company. This epitomizes the

shareholder model of corporate governance wherein the primary role of the Directors is to

protect the interests of the shareholders, and at most the interests of creditors in the event of

insolvency.53

51Special Correspondent, Duties of the Director under Companies Bill, 2011, Business Line - The Hindu, December

2011, http://www.thehindubusinessline.com/industry-and-economy/article2729513.ece52V Umakanth, Companies Bill, 2011: Duties of Directors, Indian Corp Law, December 2011,

http://indiacorplaw.blogspot.in/2011/12/companies-bill-2011-duties-of-Directors.html.53I Qube, Duties of Director: A Wholistic View, KSR & Co Company Secretaries,

http://www.insol.org/emailer/Jan2012_downloads/India_Duties%20of%20Directors.pdf.


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However, the new Bill also requires Directors to act in the interests of employees, the

shareholders, the community and for the protection of the environment. This encapsulates the

stakeholder model of corporate governance wherein the Directors are required to take into

account the non-shareholder constituencies as well. This is consistent with the renewed emphasis

on Corporate Social Responsibility.54

While it seems unlikely that any duties owed by Directors

in connection with non-shareholder constituencies can be justifiable or enforceable in a court of

law, this at least prevents shareholders from initiating actions against Directors for not solely (or

even primarily) considering shareholder interests.

54Caroline Van Zile, Indias Mandatory Corporate Social Responsibility Proposal: Creative Capitalism M eets

Creative Regulation in the Global Market, Asian-Pacific Law & Policy Journal Vol. 13, Issue 2, 269 - 303, 2012.


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CONCLUSION

The Companies Bill, 2011 seeks to establish a new benchmark for corporate governance in

comparison to the existing framework under the Companies Act 1956. In short, India has a

chance with the Companies Bill 2011 to take a lead in corporate governance innovation rather

than following developments in the United States or the United Kingdom. The new Bill seeks to

repair and fine tune the 1956 Act.

I believe that the new Bill proposed will bring about a more structured corporate framework,

which is very much in line with the changing times that India is witnessing today. Investors have

become much smarter and more aware of their rights and privileges, and one cannot fool them

and take them for a ride.

However when it comes to the implementation and execution front, our system has always

lacked in putting forth a foolproof framework free off any bureaucracy. Hence, though it is of

some cheer to the investor community that this bill has been introduced with hopes to improve

the way corporate India functions, in realty one has to wait and watch how the actual Act will

work and help protect investor interests.


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BIBLIOGRAPHY

Books Referred:

Avtar Singh, Company Law, 14th Edn, 2005

A Ramaiya, A guide to Company Law, 17th

Edn. 2010.

AK Majumdar and GK Kapoor, Company Law and Practice, 16

thEdn., 2011

L.V.V. Iyer, Guide to Company Directors Powers, Rights, Duties & Liabilities, 2nd

Edn,

2003

Websites Referred:

www.kpmg.com

www.articlesbase.com

www.mca.gov.in

www.thehindubusinessline.com

www.indiacorplaw.blogspot.in
http://www.kpmg.com/http://www.kpmg.com/http://www.articlesbase.com/http://www.articlesbase.com/http://www.mca.gov.in/http://www.mca.gov.in/http://www.thehindubusinessline.com/http://www.thehindubusinessline.com/http://www.indiacorplaw.blogspot.in/http://www.indiacorplaw.blogspot.in/http://www.indiacorplaw.blogspot.in/http://www.thehindubusinessline.com/http://www.mca.gov.in/http://www.articlesbase.com/http://www.kpmg.com/

Corporate Law Project - Duties of Directors

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