Major Duties of Directors - Essay Example

Duties of Directors Definition According to the section 2(13) of the companies Act, 1956 "director means any person occupying the position of directors by whatever name he is called." The important factor to determine whether a person is or is not a director is to refer to the nature of the office and its duties. It does not matter by what name he is called. If he performs the functions of a director, he would be termed a director in the eyes of the law even though he may be named differently. A director, may, therefore, be defined as a person having control over the direction, conduct, management or superintendence of the affairs of a company. Again, any person in accordance with whose directions or instructions, the board of directors of a company is accustomed to act is deemed to be a director of the company. Speaking about the importance of directors, Neville J. observed in Bath v. Standard Land Co. (1910) that the board of directors are the brain of a company, which is the body and the company can and does act only through them. It is only when the brain functions that the company is said to function. DUTIES OF DIRECTORS Directors occupy a key position in the management and administration of a company. Their duties are usually regulated by the articles of the company. The duties of a director may be classified under the following heads 1. Statutory duties 2. Fiduciary duties 3. General duties 4. Duties of care, skills and diligence 5. Duty of disclosure 6. Other duties STATUTORY DUTIES The following are the statutory duties of a director 1. Sign the prospectus It is the duty of a director to sign a prospectus and deliver it to the registrar before it is issued to the public. At the time of public issue the directors of the company must sign the prospectus and a copy of it must be submitted to the registrar of companies, before it is issued to the public. 2. Depositing the application money in a scheduled bank It is the duty of the director to see that all the moneys received from applications for shares are kept in a scheduled bank. According to the companies act it is the duty of the director to ensure that all the amounts received from the public in the form of application money are kept in a separate bank account opened with a scheduled bank. 3. Not to allot shares before receiving minimum subscription It is the duty of the director to ensure that no shares are allotted before receiving minimum subscription. The directors have to ensure that before allotting the shares atleast 90% of the issue has been subscribed by the public. 4. Preparation of statutory report The directors must ensure that the statutory report is prepared and forwarded to all its members atleast 21 days before the date of the statutory meeting. The directors should also ensure that all the information provided in the statutory report are true and not misleading. 5. Holding a statutory meeting It is the duty of the director to hold the board meeting atleast once in three months. According to the companies act every company is required to hold a statutory meeting atleast once in every three months and it is the duty of the director to ensure that this provision is complied with. 6. To disclose his interest in a contract If a director is interested in a contract, it is the duty of the director to disclose the nature of his interest. It is the duty of the director to disclose any interest he has in any contract to be entered into by the company. 7. To call for annual general meeting It is the duty of the director to call for annual general meeting every year. The directors have to ensure that the annual general meetings are held according to the provisions of the companies act. 8. To file statutory returns It is the duty of the director to file all the statutory returns with the prescribed authority. 9. To file declaration of solvency It is the duty of the director to take steps for filing the declaration of solvency in the case of voluntary winding up of the company. FIDUCIARY DUTIES The fiduciary duties of the directors are as follows 1. They must exercise their powers honestly and for the purpose for which they were conferred and bona fide for the benefit of the company as a whole. They must act honestly and for the benefit of the company they represent. If they do that, they discharge both their equitable as well as their legal duty to the company. 2. As, fiduciaries they must not place themselves in a position in which there is a conflict between their duties to the company and their personal interests. The fiduciary duties of the directors are owed to the company and not to the individual share holders. They must not therefore make a secret profit out of their position. It they do so, they shall have to account for it to the company. DUTY OF CARE, SKILL AND DILIGENCE Directors should carry out their duties with reasonable care, skill and diligence. Further they are expected o exercise such degree of skill and diligence as is reasonable expected from such persons of their knowledge and status. The standard of care, skill and diligence depends upon the nature of company's business and circumstances of the case. There are various standards of care depending upon a. The nature and type of work b. Division of power between directors and other officers c. General usages and customs in that type of business, and d. Whether directors work gratuitously or remuneratively Directors must exercise the degree of skill which may reasonable be expected of a person of their knowledge and experience. But a. They are not liable for errors of judgment b. They are not bound to give continuous attention to the company's affairs c. They may properly entrust duties to some officials of the company and in the absence of grounds for suspicion they are justified in trusting those officials. DIRECTOR'S DUTY OF DISCLOSURE A director shall not enter into any contract with the company except with the consent of its board of directors - 1. For the sale, purchase or supply of any goods, materials o services, or 2. For underwriting the subscription of any shares or debentures of the company These restrictions also apply to the relatives of a director, a firm of which such a director or the relative is a partner, any other partners in such a firm, or a private company of which the director is a member or director. Where the company has a minimum paid-up share capital prescribed by the companies act, the above contracts shall be entered into only with the previous approval of the central government. For getting the approval of the central government, an application shall be made in the prescribed manner along with the fees. Exceptions The above rule does not apply to or effect 1. Contract for the purchase of goods from the company or the sale of the goods to the company for cash at the prevailing market prices. 2. Contracts for sale, purchase or supply of goods in which either of the parties' does business, provided the value of the goods does not exceed Rs. 5000 in any year. 3. Any transaction of a banking or insurance company in the ordinary course of business. In circumstances of urgent necessity a director, relative, firm, partner, or a private company referred to above may enter into any contract for the sale, purchase or supply of goods without obtaining the consent of the board. The consent of the board shall, however, be obtained within three months of the date on which the contract is entered into. The consent must be given by a resolution passed at the meeting of the board. If the board does not give consent to any contract, anything done in pursuance of the contract shall be voidable at the option of the board of directors. GENERAL DUTIES The following are the general duties of a director 1. Duty of good faith It is the duty of the director to observe good faith. They must act bona fide in the interest of the company. They should not make any secret profit. If they are interested in any contract to be entered into by the company they must disclose the nature of their interest to the company. 2. Duty of reasonable care Directors must discharge their duties with care and diligence. If they are guilty of negligence than they are personally liable for the loss incurred to the company. In short, the directors must perform their duties with care and diligence and for the welfare and benefit of the company 3. Duty to attend the board meetings It is the duty of the directors to attend the board meetings regularly. If a director absents himself from 3 consecutive board meetings or from all the meetings of the board for a continuous period of 3 months whichever is longer without obtaining leave of absence from the board than he is liable to vacate his office. Therefore a director must attend the board meetings regularly. 4. To act within the powers It is the duty of the director to act within the power of his authority. The directors must exercise only those powers which are conferred upon him by the articles of the company. If director acts beyond his powers and the company suffers a loss, than the director is personally liable to make good the loss to the company. Therefore the director of a company must act a. In accordance with the company's constitution b. Only exercise powers for the purpose for which they were conferred. 5. To promote the success of the company The director of a company must act in such a manner so as to promote the success of the company. He must act in such a manner as he considers in, good faith, to promote the success of the company and for the benefit of its members as a whole, and in doing so have regard to a. The consequence of any decision in the long term. b. The interest of the employees of the company. c. The need to foster the company's relationship with suppliers, customers and others. d. The impact of the company's operations on the community and others. e. The desirability of the company maintaining a reputation of high standards of business conduct. f. Then need to act fairly as between the members of the company. 6. To exercise independent judgment A director of a company must exercise independent judgment. This duty is not infringed by his acting a. in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or b. in a way authorized by the company's constitution 7. To avoid conflicts of interest A director of as company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possible may conflict with the interest of the company. This duty would apply to a transaction between a director and a third party involving the exploitation of any property, information or opportunity available to the company eg taking advantage of a contract that came to him as a result of directorship. This duty would apply to a transaction between a director and a third party involving the exploitation of any property, information or opportunity available to the company eg taking advantage of a contract that came to him/her as a result of the directorship. S.175 does not extend to a transaction between a director and his/her own company - where there is a separate obligation to declare an interest to the board (s.177 for proposed transactions and s.182 for existing transactions). No breach of s.175 if situation cannot 'reasonably be regarded as likely to give rise to a conflict of interest': s.175 (4) (a). 8. Not to accept benefit from a third party A director of a company should not accept any benefit from the third party for the contract which he enters into on behalf of the company. If he receives any benefit from the third party than he must account for it and pass it to the company. 9. To declare interest in proposed transaction or arrangement A director of a company must declare his interest, if any, in any contract entered into by the company. If the director does not declare his interest, than the he must pass over all the benefits which he has received from the contract to the company. He must also declare the nature and extent of his interest. Subsection (2) allows three methods for making the declaration, but does not impose any particular procedure. Subsection (3) imposes an obligation to update the declaration, but this only applies if the company has not yet entered into the transaction. Subsection (5) ties the duty to being aware of the interest although this is defined as including matters of which s/he ought reasonably to be aware. Subsection (6) lists exceptions to the duty. Note that a sole director would not have to make a declaration because under s.177 (6) (b) there is no need to declare if the other directors are already aware of it. Also, the duty is only to declare to other directors in the first place. RATIFICATION OF THE ACTS OF THE DIRECTOR If a director does any act which is beyond the powers of the director, than such an act may be made binding on the company by ratification. If the members of the company pass a resolution adopting the act of the director than such an act can be made binding on the company. Similarly if a director does any act which is beyond the articles of the company, than such an act may be made binding on the company by passing an ordinary resolution by the members of the company But if the director do any act which is beyond the powers of the company (i.e.) ultra vires the company, than such an act can never be made binding on the company. Even the resolution of all the members cannot make it binding on the company. If directors do any act which is ultra vires the company, then a ratification of such an act even by all the members cannot make it binding on the company. ANALYSIS OF THE DUTIES OF THE DIRECTORS The duties of the director impose a check on the activities of the directors. Duties like duty of conveying the nature of interest if a director is interested in any contract are framed in order to ensure that the directors acts for the benefits of the company and they don't make any secret profits at the expense of the company. Duties of the directors are framed in order to ensure that the interest of the company and share-holders are taken care of. The duty of a director of not putting himself in a position where there is a conflict between his duty and his personal interest has been framed in order to ensure that the directors, while acting as a director of the company, acts only for the benefits of the company and not for their personal benefit. Duty of not accepting the benefits from the third party has been framed in order to ensure that the directors do not make any secret profits from any contract entered into by the directors on behalf of the company. Duties of the director to promote the success of the company, to attend board meetings and to act with reasonable care and diligence has been framed in order to ensure that the directors act to the best of their abilities for the success of the company. Duty of good faith has been framed in order to ensure that the directors do not act fraudulently while discharging their duties towards the company. The statutory duties of the directors has been framed in order to ensure that the all the requirements which the company is required to meet by the Companies Act has been complied with. The fiduciary duties of the director have been framed in order to ensure that the directors do not make any unfair use of their powers and their position in the company. It has been framed to ensure that the powers and position of the directors has been framed for the best interest of the company, its employees and share-holders. Therefore it is clear that the duties of the directors have been framed in order to ensure the proper and successful functioning of the company. CONCLUSION Directors occupy a key position in the functioning and management of the company. Therefore if the directors of the company properly perform their duties towards the company the company cha march ahead on its way to success. Works Cited 1. Shankaran, Ravi (2001), "Company Law and Secretarial Practice" Macmillan: Mumbai 2. Gupta, Chandra (1999), "Company Law", Premiere" Chennai 3. Gupta, Chandra(2001), "Mercantile Law", Premiere: Chennai 4. Jain, Ashish(2004), "Company Law with Cases", Macmillan: Mumbai 5. Joseph, Thomas (2001), "Directors - their powers, duties and liabilities". Premiere: Chennai 6. Shankaran, Ravi (2003), "Company Law and Accounts" McGraw Hill: Chennai Read More