AN INSIGHT TO

1

• AN INSIGHT TO
• Directors Role, Responsibilities and
  Liabilities
• 
  
• 
  

2
This Presentation.

• .is an attempt to highlight the role,
  responsibilities and liabilities of the Directors
  of a Company as outlined under various provisions
  of Companies Act, 1956.

3
Director Directing mind and will of the
Company

• Meaning under the Companies Act,1956
• Section 2 (13)
• Director includes any person occupying the
  position of director, by whatever name called.

4
Who may be appointed as a Director?

• No body corporate, association or a firm
  shall be appointed director of a company, and
  only an individual shall be so appointed.
  (Section 253 )

5
Shadow Director/Deemed Director

• Any person in accordance with whose directions
  or instructions directors are accustomed to act.
  (Section 7)

6
Overcoming mental blocks

• Can a Body corporate become the director of
  the Company?

7
Legal Position of Directors

• As Agents - Directors are the agents of the
  Company .Thus , where the directors contract in
  the name and on behalf of the company it is the
  company which is liable for it and not the
  Directors (Subject to exceptions)
• As Trustee - The Directors of the company
  are trustees(to a limited extent)for the company
  with reference to their power of applying funds
  of the company and for misuse of the power they
  could be rendered liable as trustees.

8
Are Directors Employees?

• Directors are not the employees of the company as
  once elected they enjoy well-defined rights and
  powers under the Companies Act,1956 or the
  Articles of the Company
• Even the shareholders who elect them cannot
  interfere with their rights and powers except
  under certain circumstances

9
Types of Directors - A Glance

Non-Executive
10
Executive Director

• Executive Director means managing
• director or whole- time director .
• Not defined under the Companies Act, 1956.

11
Non-Executive Director

• Non-executive directors are the directors on the
  Board of a company, other than a Managing
  Director and whole-time Director or a Director
  employed in his professional capacity.
• Not defined under the Companies Act, 1956.

12
Understanding- Managing Director

• Meaning under the Companies Act,1956
• Section 2(26) Managing Director means a
  director who, by virtue
• of an agreement with the Company or
• of a resolution passed by the company in general
  meeting or
• by virtue of its memorandum or articles of
  association ,
• is entrusted with substantial powers of
  management which would not otherwise be
  exercisable by him ,
• AND
• includes a director occupying the position of
  managing director by whatever name called
  
• 
  
• Contd...

13
Understanding- Managing Director

• Provided that the power to do
  administrative acts of routine nature when so
  authorised by the Board such as power to affix
  the common seal of the company to any document or
  to draw and endorse any cheque on the account of
  the company in any bank or to draw and endorse
  any negotiable instrument or to sign any
  certificate of share or to direct registration of
  transfer of any share , shall not be deemed to be
  included within the substantial powers of
  management.
• Provided further that a managing
  director of a company shall exercise his powers
  subject to superintendence, control and direction
  of the Board of Directors
• 
  

14
Understanding- Whole Time Director

Meaning under the Companies
Act,1956 Explanation to section 269
whole time director includes a director in the
whole time employment of the company


15
Overcoming Mental Blocks

• Can a company have two Managing directors ?
• Is Managing Director/ Whole Time Director an
  employee of the Company ?
• Whether the whole time employee appointed as a
  part time director can be construed as a whole
  time director?
• If the whole time company secretary is appointed
  as part time director without being entrusted
  with the substantial powers of management, can he
  be regarded as whole time director?

16
Independent Director

• As per Clause 49 of Listing
  Agreement
• Independent Director shall mean a
  non-executive director of the company who
• apart from receiving directors remuneration,
  does not have any material pecuniary
  relationships or transactions with the company,
  its promoters, its directors, its senior
  management or its holding company, its
  subsidiaries and associates which may affect
  independence of the director
• is not related to promoters or persons occupying
  management positions at the board level or at one
  level below the board
• has not been an executive of the company in the
  immediately preceding three financial years

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Independent Directorcontd

• is not a partner or an executive or was not
  partner or an executive during the preceding
  three years, of any of the following
• the statutory audit firm or the internal audit
  firm that is associated with the company, and
• the legal firm(s) and consulting firm(s) that
  have a material association with the company.
• is not a material supplier, service provider or
  customer or a lessor or lessee of the company,
  which may affect independence of the director
  and
• is not a substantial shareholder of the company
  i.e. owning two percent or more of the block of
  voting shares.

18
Important sections under Companies Act, 1956 as
are applicable to Directors

• Sections 255 to 269 relating to appointment.
• Section 274 relating to disqualifications.
• Section 283 relating to vacation of office.
• Section 284 relating to removal.
• Sections 198, 309,310 and 311 relating to
  remuneration.

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Appointment of Directors

• Subscribers- as Directors
• Appointment of first Directors
• Appointment at general meeting
• Appointment by the Board of Directors
• Appointment by third parties, and
• Appointment by Central Government.

20
Appointment by the Board of Directors
Appointment by the Board of Directors

• Additional Directors
• (Section 260)

21
Additional Directors

• Section 260
• Nothing in section 255, 258 or 259 shall affect
  any power conferred on the Board of directors by
  the articles to appoint additional directors
• Provided that such additional directors shall
  hold office only up to the date of the next
  ensuing annual general meeting of the company
• Provided further that the number of the
  directors and additional directors together shall
  not exceed the maximum strength fixed for the
  Board by the articles.

22
Brainstorming-additional directors

• Whether a resolution passed at the board meeting
  necessary for appointment of additional
  Directors?
• Filing of return under section 303(2) Whether
  necessary?
• Can an additional director be appointed as
  Managing/ Whole time director?
• Can general body appoint additional directors?

23
Filling of casual vacancies among directors

• Section 262
• (1) In the case of a public company or a private
  company which is a subsidiary of a public
  company, if the office of any director appointed
  by the company in general meeting is vacated
  before his term of office will expire in the
  normal course, the resulting casual vacancy may,
  in default of and subject to any regulations in
  the articles of the company, be filled by the
  Board of directors at a meeting of the Board.
• (2) Any person so appointed shall hold office
  only up to the date up to which the director in
  whose place he is appointed would have held
  office if it had not been vacated as aforesaid.

24
Brainstorming-Casual vacancy

• Can a Resolution by circulation be passed for
  appointment of a director by way of casual
  vacancy?
• Filing of return under section 303(2) Whether
  necessary?
• Whether the casual vacancy arises if a director
  appointed in general meeting does not assume
  office?
• Whether the vacancy arising on account of
  resignation ,etc of a director appointed by way
  of casual vacancy can be filled again by way of
  casual vacancy?

25
Alternate Directors

• Section 313
• (1) The Board of directors of a company may, if
  so authorized by its articles or by a resolution
  passed by the company in general meeting, appoint
  an alternate director to act for a director
  (hereinafter in this section called the original
  director) during his absence for a period of not
  less than three months from the State in which
  meetings of the Board are ordinarily held.
• (2) An alternate director appointed under
  sub-section (1) shall not hold office as such for
  a period longer than that permissible to the
  original director in whose place he has been
  appointed and shall vacate office if and when the
  original returns to the State in which meetings
  of the Board are ordinarily held.
• (3) If the term of office of the original
  director is determined before he so returns to
  the State aforesaid, any provision for the
  automatic re-appointment of retiring directors in
  default of another appointment shall apply to the
  original and not to the alternate director.

26
Brainstorming-Alternate directors

• Can the general meeting itself appoint alternate
  directors ?
• Filing of return under section 303(2) Whether
  necessary?
• Is the alternate director the agent of the
  original director?
• Can the Company appoint Alternate Director as MD
  , in case of absence of MD for 3 months?
• Can alternate director be appointed as additional
  director?
• Can director of the company be alternate to
  another director?

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A clear picture
Sl. No. Particular Section 260 Section 262 Section 313

• 1
• 2
• 3

Type of company
All
Public
All
Authority in AoA
?
X
?
When the original director returns to the state
or until the expiry of office of original
director, whichever is earlier
Tenure
Till the commencement of next AGM
Till the unexpired tenure of the original
director
28
A clear picture
Sl. No. Particular Section 260 Section 262 Section 313

• 4
• 5

Office of director appointed in general meeting
becomes vacant
Director is absent for not less than 3 months
from the state where the board meetings are
ordinarily held
Situation
No specified situation
?
?
?
Whether counted in quorum of board meeting
29
A clear picture
Sl. No. Particular Section 260 Section 262 Section 313
Applicability of filing of Form 32 and Form 29

• 6
• 7

?
?

?
Applicability of Sections 295, 297, 299 and 300
?
?
?
30
Powers of the Board of Directors

• General Powers of the Board under section 291
• Powers entrusted under the Companies Act, 1956

31
General Powers of the Board

• Section 291 of the Companies Act, 1956
• Subject to the provisions of this Act, the Board
  of directors of a company shall be entitled to
  exercise all such powers, and to do all such acts
  and things, as the company is authorized to
  exercise and do
• Provided that the Board shall not exercise any
  power or do any act or thing which is directed or
  required, whether by this or any other Act or by
  the memorandum or articles of the company or
  otherwise, to be exercised or done by the company
  in general meeting
• Provided further that in exercising any such
  power or doing any such act or thing, the Board
  shall be subject to the provisions contained in
  that behalf in this or any other Act, or in the
  memorandum or articles of the company or in any
  regulations not inconsistent therewith and duly
  made there under, including regulations made by
  the company in general meeting.

32
Powers entrusted to Directors under the
Companies Act,1956

• Certain powers of the Board of Directors
  which can be exercised only at a meeting
• Power to make calls on unpaid shares Section
  292(1)(a)
• Power to issue Debentures and borrow moneys
  otherwise than on Debentures Section 292(1) (b)
  (c).
• Power to invest the funds of the Company
  Section 292(1)(d)
• Power to grant loans Section 292(1)(e)
• Power to authorize the buyback of shares
  Section 292(1)(aa)
• 
  
  CONTD..

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Certain powers of the Board of Directors which
can be exercised only at a meeting .. Contd..

• The power of filling vacancies in the Board
  (Section 262)
• Power to make political contributions (Section
  293-A)
• Sanctioning or giving consent to contracts of or
  with any director (Section 297(4))
• Receiving of notice of disclosure of interest
  (Section 299)
• Receiving notice of disclosure of share holdings
  of directors only at a meeting of the Board
  (Section 308)
• Contd

34
Certain powers of the Board of Directors which
can be exercised only at a meeting .. Contd..

• Unanimous consent of all directors present at
  Board meeting necessary for appointing as
  managing director or manager, a person who is
  already managing director or manager of another
  company - Sections 316(2) and 386(2)
• Sanction by unanimous consent of all the
  directors present at a Board meeting necessary
  for making investments in companies, loans etc. -
  Section 372A
• Declaration of solvency- Section 488(1)
• Approval of text of advertisement for inviting
  public deposits- Section 58A read with rule 4(4)
  of the Companies (Acceptance of Deposits) Rules,
  1975.

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Duties of Directors Statutory

• To file return of allotments (Section 75)
• Not to issue irredeemable preference shares or
  shares redeemable after 20 years (Section 80)
• To convene statutory, Annual General Meeting
  (AGM) and also extraordinary general meetings
  Sections 165, 166 169
• To prepare and place at the AGM along with the
  balance sheet and profit and loss account a
  report on the companys affairs including the
  report of the Board of Directors (Sections 173,
  210 and 217).
• To authenticate and approve annual financial
  statement (section 215).
• CONTD.

36
Duties of Directors Statutory

• Duty to attend board meetings
• To appoint first auditor of the company (Section
  224)
• To appoint cost auditor of the company (Section
  233B)
• To disclose interest (Section 299-300)
• To disclose receipt from transfer of property
  (Section 319)
• To disclose receipt of compensation from
  transferee of shares (Section 320)
• To make a declaration of solvency in the case of
  a Members voluntary winding up (section 488).
• 
  
  CONTD

37
Duties of Directors General

• Duty of good faith Directors must act in the
  best interest of the
• 
  company and should not make any secret
• 
  profits.
• Duty of care - Director must display
  such care in
• 
  performance of work assigned to him
• 
  which a man of ordinary prudence would
• take
  in his own case
• Duty not to delegate - Director being an agent
  is bound by the
• 
  maxim delegatus non potest delegate
• 
  subject to certain exceptions.

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Liabilities of Directors

• Liability to the company
• Liability to third parties
• Liabilities for breach of statutory duties
• Liability for acts of co-directors
• Criminal liability.

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Liabilities to the company

• Breach of fiduciary duty- where a director acts
  dishonestly to the interests of the company, he
  will be held liable for breach of fiduciary duty.
• Ultra vires acts- Directors are supposed to act
  within the parameters of the provisions o the
  Companies Act, Memorandum and Articles of
  association, since these lay down the activities
  to the limits of the company and consequently to
  the powers of the Board of Directors. Where the
  directors act ultra vires, they are liable to
  indemnify the company for any loss/damage
  suffered due to such act.
• 
  
• 
  
  CONTD...
• .

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Liabilities to the company CONTD..

• Negligence - Where the Directors fail to
  exercise reasonable care, skill and diligence,
  they shall be deemed to have acted negligently in
  discharge of their duties and consequently shall
  be liable for any loss or damage resulting there
  from.
• Misfeasance - Directors can also be held
  liable for their acts of misfeasance ,i.e.,
  misconduct or wilful misuse of powers .

41
Liability to third parties

• Liability under the provision of Companies Act,
  1956
• Mis-statement in Prospectus (section 62 and 63)
• Irregular allotment (section 71)
• Unlimited liability (section 322 and section 323)
• Fraudulent trading (section 542)
• Liability for breach of warranty of authority
• The directors may be proceeded against
  for any loss sustained by any third party where
  they transact any business which is ultra vires
  the company or the articles of association of the
  company.

42
Liability for breach of statutory duty

• The Companies Act, 1956 imposes
  numerous statutory duties on the directors under
  various sections of the Act. Default in
  compliance of these duties attract penal
  consequences .

43
Liabilities for acts of co-directors

• A director is the agent of the company (except
  for matters to the dealt with by the company in
  the general meeting) and not the agent of the
  other members of the Board. So nothing done by
  the Board can impose liability on a director who
  did not participate in the boards action or did
  not know about it. To incur liability he must
  either be a party to a wrongful act or must
  consent to it.

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Criminal Liability

• Apart from civil liability director of a company
  may also incur criminal liability under common
  law as well as Companies Act and other statutes.
  Some of them (fine or /and imprisonment) are as
  follows
• Filing of untrue prospectus or statement in lieu
  of prospectus Section 44(4)
• Failure to repay deposits (Section 58A)
• Failure to repay excess application money
  Section 93
• Fraudulently renewing a share certificate or
  issuing a duplicate share certificate section
  84(3)
• Undischarged insolvent acting as director
  section 202(1)
• Default in distributing dividends section 207
• Failure to supply information to auditors
  section 221(4)
• Failure to disclose interest section 299 (4)
• Failure to disclose shareholding section 308(3)
• Acting as director or manager after removal by
  the Company Law Board Section 407 (2)

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• Thank you