Power and Liabilities of Directors | Companies Act 2013

The article 'Power and Liabilities of Directors' is an extensive study about the effective role of directors in the smooth functioning of corporate affairs.

A corporation is an artificial person governed by natural persons, namely its board of directors, also known as directors. Only natural persons, i.e. individuals, can be appointed as company directors. A corporation is an artificial person with distinct legal rights and personality from that of its personnel, such as Directors. The company itself cannot be punished for noncompliance because it is managed and represented by its directors. Certain penalties and consequences also apply to directors. 

Introduction: Board of Directors of a Company

The Companies Act, 2013 does not include a comprehensive definition of the term "director." The word "director" pertains to an individual who has a position on the Board of Directors of a company, as stipulated in Section 2(34) of the Act. A director refers to an individual or entity, whether natural or legal, who has been designated to fulfil the obligations and wield the authority granted to directors according to the Companies Act of 2013.

The Directors of a company, collectively known as the Board of Directors, hold the ultimate executive authority over the company's administration and affairs. The Board of Directors is the central pillar of sound corporate governance because it ensures the long-term protection of shareholders and other stakeholder interests by the Company's Management.

The concept of a board of directors originated from the notion that an independent body of credible and upstanding citizens should safeguard the company's shareholders' interests. Directors serve on a board because they are responsible for making decisions that are in the best interest of the company.

Although the Board is composed of individuals, the individual acts and deeds of directors do not bind the company unless the Board has expressly authorised the individual director to carry out the relevant obligations. Even though the law treats a company as a different body, it is really just legal fiction. There is no such thing. It doesn't have a spirit or a body. It doesn't have the ability to act on its own. This can only happen with help from people. The people in charge of running a business or group are called "directors." People often just call the people on the Board of Directors "the Board."

The board of directors is the company's "brains." They are important for the organisation to work. Most decisions about how a company is run are made at board meetings and other meetings of groups made up of directors for specific tasks.

Conditions for Appointment as Directors

• A Director can only be a real person.
• A person can't be a director if they don't have a Director Identification Number (DIN).
• The licensing body will give the person a Digital Signature Certificate (DSC) so that they can be named as a director.
• Under the Companies Act of 2013, every person who wants to be a director must present his or her DIN and a declaration that they are qualified for the job.
• On form DIR-2, each candidate will say whether or not they are ready to be a director before or after they are chosen.
• Under Subsection 1 of Section 164 of the Companies Act of 2013, a person may not be able to be a director if they don't meet the requirements.
• No one can be a director of more than twenty companies or corporations at the same time, even if they hold other board roles.
• Also, a person shouldn't be a member of more than ten public companies.

Minimum and Maximum number of directors to be appointed

Section 149(1) of the Companies Act, 2013 requires that a public company have at least three directors, a private company have at least two directors, and a One Person Company have at least one director. There is a maximum of fifteen (15) directors per company. A corporation may have more than fifteen directors without the approval of the central government if the shareholders' meeting passes a special resolution allowing it.

Power of Directors :

1. In every organisation, the board of directors wields the greatest influence. Section 179 of the Companies Act 2013 stipulates that the administrators of a company have complete discretion over all matters within their jurisdiction and functional sphere.

2. The authority of the board of directors is specified in Section 179 of the Companies Act of 2013. The Board of Directors has the authority to exercise all of the organisation's legal capabilities and all of its powers. In exercising its authority, the Board of Directors must adhere and comply with the following rules and provisions: the Companies Act, the Memorandum of Association, and the Articles of Association, as well as any regulations adopted by the shareholders at a general meeting of the company.

3. The board of directors may not exercise or make decisions that are intended to be exercised or made at the General Meeting. Section 179 of the Companies Act 2013 states that a resolution voted on at a General Meeting cannot invalidate provisions established by the board of directors prior to the resolutions.

4. The board has certain powers that can be exercised only through the adoption of resolutions at routinely scheduled board meetings. Section 175 of the 2013 Companies Act requires this action. Consequently, the board of directors has the authority to do the following, but only through a board meeting resolution:

5. Call for stockholder approval on the following: (a)buying back securities and shares (b)issuing new securities and shares (c)borrowing money (d)investing that money (e)granting loans (f)approving the financial statement (g)approving a merger (h)diversifying the firm (i)acquiring another company.

6. Furthermore, it is worth noting that the board's jurisdiction has significantly increased in accordance with Rule 8 of the Companies Rules 2014. During board meetings, many types of motions might be proposed. Making financial contributions to political issues, the process of hiring or terminating senior executives and the appointment of internal and secretarial auditors may be considered among jurisdictional powers

7. The Directors possess the powers of delegation to make investments, lend money, or offer guarantees or securities that may be executed by the Board of Directors by a resolution passed at a board meeting. The individuals who hold positions on the Board of Directors, the Managing Director, the Manager, and other corporate executives, including the head of a branch office, are collectively referred to as "principal officers.”

The case of Automatic Self-Cleansing Filter Syndicate Co Ltd v. Cuninghame, [1906] 2 Ch 34 is a significant legal precedent that solidifies the notion that directors act as agents of the business, rather than representing the interests of the majority shareholders. In the event that a company's directors have been granted managerial power, it is exclusively reserved for their use.

Section 179 states that the Company may put limits on the Board of Directors power or restrict it in other ways. Also, it is up to the owners to make sure that the board's power is limited and safe. So, the owners vote a regular motion to this effect at a general meeting.

Duties of Directors :

• Individuals should avoid actively seeking or accepting unethical advantages or benefits for personal, family, business partner, or business associate motives. If such acts are undertaken, proper steps should be taken to guarantee the return or surrender of such benefits.
  
• The appointment of an alternate director does not entail work delegation or the designation of a successor.
  
• Giving someone power of attorney authority does not constitute an assignment.
• A monetary fee is levied as the punishment for the violation.
• Engaging in acts that promote goals for the greater good may be seen as a demonstration of good intentions.
  
• It is recommended that rationality and logical thinking be used in daily tasks. Directors are not liable for any later mistakes of judgment that may occur.
• It is recommended that participants refrain from engaging in any activity that may result in personal financial rewards, whether directly or indirectly, that may clash with the firm's goals.

What are the Liabilities of Directors?

The Companies Act in India establishes a clear distinction between civil and criminal liability for directors and officers in instances of business failure. The failure to submit annual returns or comply with obligations regarding the maintenance of statutory registers, the appointment of directors and key managerial personnel, and the necessary disclosures in the explanatory statement for general meetings, results in civil liability in the form of a fine. This fine is to be paid by the company in default, as well as its directors and/or officers who are responsible for the default.

In instances where there are infringements of the Companies Act, specifically pertaining to the failure to notify stock exchanges and adhere to applicable regulations during a public offering, the issuance of shares at a reduced price, or the failure to repay deposits within the legally prescribed timeframe, individuals in positions of authority may face criminal consequences. These consequences may manifest as imprisonment for the officers responsible, with the duration of the sentence being determined by the maximum period specified in the relevant sections of the Companies Act.

Directors may face significant legal consequences if shareholders of a company exercise their rights as outlined in the Companies Act. Shareholders possess the legal right to initiate legal proceedings against firm directors on the grounds of their failure to fulfil their duties in accordance with the provisions outlined in the Companies Act.

Furthermore, it should be noted that a class action lawsuit can be initiated by a limited number of shareholders with the purpose of addressing issues related to oppression and mismanagement. This legal action also serves to prohibit the company and its directors from engaging in any activities that are illegal, deceitful, or exceed the boundaries set forth in the company's charter documents.

Directors, in their capacity as individuals responsible for making decisions pertaining to the operational, managerial, and administrative aspects of a corporation, have a legal responsibility as stipulated by the Companies Act for any breaches or misconduct perpetrated by the company. According to the Companies Act, those who hold key management positions, often referred to as KMPs, include the chief executive officer, managing director, manager, company secretary, whole-time director, chief financial officer, or any other officer who is employed by the business on a full-time basis and designated as such.

Moreover, the Companies Act recognises some individuals who have significant responsibility for the routine operations and management of the enterprise. These individuals, referred to as "officers who are in default," are specifically identified for the purpose of imposing accountability. The individuals serving as officers within the organisation consist of three categories:

(i) a director who is employed on a full-time basis,

(ii) a key management person (KMP), or in the event that a KMP is not present, directors who have been designated by the Board as officers with their written consent to fulfil this role, and

(iii) any individual who has been explicitly assigned by the Board to carry out specific responsibilities related to the maintenance, filing, and distribution of accounts or records.

The Companies Act does not explicitly address the allocation of responsibilities between executive directors and non-executive directors. According to Section 166 of the Companies Act, directors are assigned certain ethical obligations, without any distinction being made between executive and non-executive director roles. In contrast, Section 149(12) of the Companies Act establishes that the liability of an independent director or non-executive director is restricted to instances where the company's actions or omissions were carried out with their knowledge, traceable through the Board's procedures, with their consent or collusion, or in cases where they failed to exercise due diligence.

The Ministry of Corporate Affairs (MCA) elucidated the implications of Section 149(12) of the Companies Act on the accountability of independent and non-executive directors towards Regional Directors, Registrars of Companies, and Official Liquidators, as stated in a letter dated 2 March 2020. In order for independent and non-executive directors to potentially face criminal or civil charges under the Companies Act, it is necessary to satisfy the conditions outlined in Section 149(12) as stipulated by the MCA.

The MCA explicitly states that the accountability for filing information or records with the registry, maintaining statutory registers or meeting minutes, and complying with directives from relevant statutory authorities does not fall under the purview of independent directors and non-executive directors of a company unless otherwise specified by the Companies Act or explicitly instructed by said authorities.

Considering the aforementioned points, the accountability of independent directors and non-executive directors is confined to the knowledge they possess, which can be substantiated through Board procedures and/or any action or inaction by the company in which said directors have consented or colluded, or when they have neglected their responsibilities with due diligence.

Types of Liabilities

A person's "personal liability" refers to legal responsibility that rests solely on his or her shoulders. Although, in general, a company's responsibility is not passed on to its director, the Companies Act, 2013 does provide for some circumstances in which liability may be imposed, often including fiduciary duties.

Here are a few examples of such a situation:

1. Tax Obligation - In the event that any private company is wound up and the tax assessed cannot be recovered, the director or directors are jointly liable for the same under Section 179 of the Income Tax Act 1961, which allows for an examination of the situation in the event that dues from a private company cannot be recovered or the tax assessed is not found to be recoverable. The burden of proof is on the Director to demonstrate that he was not at fault for the company's default.

2. Untruthful Claims - A Director's personal assets may be at risk if he makes misleading claims about his firm unless he can demonstrate that he did so in good faith or revokes his permission by making a public denial of the statements' accuracy.

3. Loans to Companies - A Director's personal assets are generally protected from being attached to satisfy the obligations of the business unless it can be shown that such debts are attributable to the director's fraudulent acts.

4. Deceptive Business Practises - Indulging in activities that go against the goals or interests of the firm might result in personal culpability for the director, particularly if the actions are malicious.

5. Shareholder Responsibility - If the director is responsible for falling bankrupt or entering liquidation, the director's personal interests in the company's shares and shareholdings will become legally binding.

B. Liabilities of Criminal Nature

1. Dishonoured Checks - If a company or directors owner knew or should have known that the company was committing financial fraud or wrongdoing, he could be held legally responsible for checks that bounce.

2. Fiduciary Duty Failure - Directors are granted significant authority, which they must use for the benefit of the organisation. There is always the possibility of a conflict of interest, but if one does exist, the director in question should disclose it and work to earn the shareholders' trust at the annual meeting. If this is not the case, he will be held responsible for indemnifying the company for breach of fiduciary duty. In their capacity as fiduciaries, directors are expected to treat the company's assets and property with the same care they would their own.

3. Illegal Acts - Certain powers are granted to directors by the Companies Act, like the Memorandum and Articles of Association. If they do anything that plainly exceeds their authority, they will be held accountable. However, if the actions of the directors lie within the intra-vires jurisdiction of the business, the shareholders may vote to ratify them at a general meeting. Nonetheless, if the company endures a loss as a consequence of the directors' ultra-vires conduct, it may pursue compensation from them.

4. Negligence - When a director fails to take the right care and precautions, he or she is held personally responsible for any damage caused by that person's carelessness. But the mistake won't be seen as a sign of carelessness.

Conclusion

The board of directors is the "brains" of an organisation. They play a crucial function in the organisation and are essential to its success. The 2013 Companies Act gives them explicit permission to completely commit to the company. To prevent their abuse, certain restrictions are placed on the use of these abilities. The Companies Act employs a comprehensive interpretation of the term "officer who is in default." This interpretation encompasses not only directors and officers who are directly implicated in the alleged default but also directors who possess knowledge of such misconduct in any capacity. This includes directors who have received the minutes of Board meetings wherein resolutions authorising the company to engage in potentially wrongful actions were passed.

Hence, notwithstanding the protective measures outlined in the previous section, non-executive directors (including the Nominee Directors) and independent directors may incur legal responsibility under the Companies Act for purported misconduct committed by the business, provided that they had awareness of such misconduct in any manner. In cases when a company lacks Key Management Personnel (KMPs) or full-time directors, the appointment of independent directors might serve as a viable alternative.

Given these circumstances, it is imperative for directors to possess a comprehensive understanding of and thoroughly review all papers and documents provided by the company as part of the agenda papers for Board meetings. This is necessary in order to seek elucidation, express reservations, and ensure that their perspectives on these matters are duly acknowledged and documented in the pertinent proceedings of the Board meetings. It is also important to consider any indemnities and other protective clauses incorporated within the applicable agreements.

References

[1] Appointment and Qualifications of Directors, Available Here

[2] Directors and Their Powers, Available Here

[3] Liability of a director under Indian Companies Act 2013, Available Here

[4] Liabilities of Directors under the Companies Act, 2013, Available Here

[5] Directors Liabilities - A Companies Act perspective, Available Here

[6] Liability of a Company's Director, Available Here

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