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All about rights, duties and liabilities of a Director


G S Rao 
posted on 12 September 2011


INTRODUCTION:

 

Prosecution of Mr. Keshub Mahindra, for the Bhpoal gas tragedy which resulted in loss of several lives, sent shock waves in  the Corporate world. Mr. Kesub Mahindra was non Executive Chairman on the Board of Union carbide. A debate started all over the country as to whether non executive chairman or part time directors have any liability in such cases. Even the Ministry Corporate Affairs has sought suggestions from all quarters whether there should be amendment to the effect to exclude part time directors from the ambit of liability. In this article an attempt has been made to convey to the prospective directors their rights, duties and obligations in a lucid manner.

 

DEFINITION OF DIRECTOR

 

Section 2(13) of the Companies Act, 1956, defines a Director as any person, occupying the position of Director, by whatever name called. The Articles of association generally contains provisions as to their appointment, retirement rights duties and remuneration.

 

ROLE OF THE BOARD OF DIRECTORS

 

The Board of Directors are elected representatives of the shareholders of the company. The Board of Directors of a company collectively are responsible for making policies and good governance process  The Board has a fiduciary position and holds the position of trusteeship to protect and enhance shareholder value through strategic management and governance. The Board should have complete freedom to think, decide and act in the best interest of the Company and stakeholders. Board’s responsibilities inherently demand the exercise of judgment for which the Board necessarily has to be vested with powers and a reasonable level of discretion.

 

COMPOSITION OF BOARD

 

The Board of directors consists of part time directors and whole time directors. Part time Directors are those who only attend board meetings and contribute to the framing of polices and decision making in the board meetings.  Whole time directors as the name itself implies devote whole time and are treated as employees. Similar is the position of  Managing director and this category of directors  are entrusted with substantial powers of management to look after the day to day affairs of the company.

 

Listed companies have to comply with Clause no.49 which deals with Corporate Governance. As per Corporate Governance clause, the Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors. If  chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors.

 

Independent directors are those who do not have any material pecuniary relationships or transactions with the company and are not related to the promoters or person on the board  or senior management and not an executive in the past 3 years. The directors from the above criteria can be classified as follows :-

 

·   Non- executive independent: They can exercise their judgment without any influence of promoters.

 

·   Executive Non independent: These are those  who are in full time employment and are subject to influence of promoters or  its group. Normally  designated as Chairman cum Managing Director  or whole time director.

 

·  Non executive Non independent : These directors  are those who lose their independence or susceptible for influence by promoters for e.g., if  any director is related to promoters or group company, or has material pecuniary interest in transactions with the company, or a past  employee elevated as director etc.

 

APPOINTMENT OF DIRECTORS

 

If first directors are not named in the Articles of Association, the subscribers to the memorandum of association shall be deemed to be the first Directors. The power to appoint directors is exercised by the shareholders in First Annual General meeting as per the provisions of Section 255 and regulations in the Articles of Association. At the First Annual General meeting shareholders will appoint not less than 2/3 rd of the total strength as directors liable for retirement and every year 1/3 of such retiring directors shall be liable for retirement. The directors who retire as per provisions of Section 256 are those who have been longest in the service and get elected automatically(retiring directors) unless they decide not to continue and have expressly given by notice expressing such intention.

 

The Board of directors can also appoint directors as per the provisions of the Companies Act,1956 in the following cases:-

 

a)  Additional Directors  u/s 260  who hold office up to the ensuring Annual general meeting.

 

b)  Director  in a vacancy caused by resignation /death of a regular director u/s 262 to hold office up to the term of original director in whose place he is appointed.

 

c) Alternate Directors u/s 313 to represent original director who is away and such director holds office till the original director returns.

 

LIMIT ON NUMBER OF DIRECTORSHIPS:

 

A director can hold office in 15 companies. In computing this limit, directorship in private companies, associations carrying on business not for profit, alternative directorships   are excluded in counting this limit. .The more the number of directorships held, the less is the availability of the time and the quality of contribution. Therefore the Act has fixed the limit on number of directorships. Any violation of this will attract fine up to  Rs.50,000/ for each directorship held in excess of limit. Even Clause no.49 stipulates that a director shall not be a member of in more than10 committees or act as Chairman in more than 5 companies across all companies in which he is a director.

 

DIRECTORS  POWERS, DUTIES, RIGHTS AND RESPONSIBILITIES:

 

Directors should have a vision to frame policies to achieve high level of performance. To achieve high level of performance, they must set the goals of the company.  They must have powers to carry on objectives of the company. Then comes duties and responsibilities of directors. Directors also have certain rights which can be exercised to protect themselves and also the interest of the company. The provisions of Companies Act  and  the articles of association of the company spell out  rights, duties powers and responsibilities of Directors. Section 291 of the Act provides that subject to the provisions of the Act, the board of directors 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.

 

Powers which can be exercised only at Board meeting by means  of passing of resolutions(Section 292)

 

·         power to make calls on shareholders in respect of money unpaid on their shares

·         power to issue debentures

·         power to borrow moneys otherwise than on debentures

·         power to invest the funds of the company

·         Power to make loans

 

Certain restrictions can be imposed on general powers of the Board  and invariably they have to seek the approval of shareholders in the General meetings in such cases. The sections which deal with restrictions are 293,  294AA  etc. 

 

There are certain powers which can be exercised only with the approval of the shareholders and also Central Government for eg: Sec.294AA(appointment of sole selling agents), Section 295 (Loans to Directors ) etc.

 

Powers which can be exercised either at Board meeting or  by passing  a  resolution by circulation as per provisions of u/s 289.

 

·         Power to appoint the first Auditor of the company within 30 days from the date of incorporation of the company (Section 224(6)].

 

·         Power to fill up casual vacancy in the office of an Auditor if such vacancy is not caused by resignation [Section 224(6)].

 

·         Power to appoint Additional Directors if the Articles permit [Section 260].

 

 

The Board can exercise certain other powers conferred by articles such as forfeiture of shares, to pay interim dividend, preliminary expenses, use of foreign seal, to capitalize profits and issue bonus shares

 

In cases where Individual director does any act without being empowered to do so by the Board,  such acts can be ratified by the Board, if thought fit, by passing an appropriate resolution having retrospective effect

 

RIGHTS OF DIRECTORS:

 

Rights can be categorized into individual rights and collective rights.

 

Individual rights are such as right to inspect books of accounts  {Section 209(4)},Right to receive notices of board meetings (Section 285),right to participate in proceedings and cast vote in favour or against resolutions(Section 300),right  to receive circular resolutions proposed to be passed.(Section 289),right to inspect minutes of board meetings.

 

Collective rights are as follows:-

 

·   Right  to refuse to transfer shares: According to Section 111 of the Act, directors of private companies and deemed public companies are entitled to refuse registration of transfer of shares to a person whom they do not approve.

 

·   Right to elect a Chairman: Regulation 76(1) of Table-A provides that the directors are entitled to elect a chairman for the board meetings.

 

·  Right to appoint a Managing director: The Board has the right to appoint the managing director/ manager (as defined in the Act) of the company.

 

·    Right to recommend dividend: The Board is entitled to decide whether dividend is to be paid or not. Shareholders cannot compel the directors to pay dividend. However they can reduce the rate of recommended dividend. Payment of dividend is the prerogative of the board

 

DUTIES :

 

Directors act as agents of the shareholders and act as a trustees of shareholders. Thus they have a fiduciary duty to protect the property of the company. Simply stated the following are the duties of Directors.

 

Directors must exercise all care and due diligence as a man of ordinary prudence would exercise. It must be noted that Managing or whole time director expected to show greater degree of professional expertise and skill in discharge of their duties.  If they fail or  gross negligence is evident  from their action or non action then they  will be  liable for punishment.

 

Directors as individuals have a duty to attend board meetings and contribute to the deliberations of the board and ultimately to the decision making leading to formulation of policies. Directors are under obligation to disclose their interest whether directly or indirectly in contracts or arrangements with the company(Section299). They are also duty bound to disclose  their directorships in other companies within 20 days of appointment or relinquishment of his office in other companies(Section 305).As per Section 308, directors are also required to disclose their shareholding in the company.

 

Directors as a part of Board perform certain duties collectively.  The following are some of those duties exercised collectively:-

 

·    Approval of  annual accounts and authentication of annual accounts

·  Directors report to shareholders highlighting performance of the company, transfers to reserves, investment of surplus funds, borrowings

·    Appointment of First Auditors

·    Issuance of Notice  and Holding of Board meetings and shareholders meetings

·    Passing of resolutions at board meetings or by circulation.

 

DIRECTORS REMUNERATION

 

Directors are paid remuneration for their efforts in formulating polices and for devoting their valuable time for the company. Directors remuneration consists of sitting fees as per provisions in Articles of association, and Commission   as a fixed percentage of net profits or as a fixed monthly sum as  decided by the shareholders in the general meeting.

 

In Companies Act, there are three sections which deal with remuneration and limits on remuneration. These are Section 198( fixes over all limits ) Section 309(remuneration to non hole time directors) Section 269 (deals with remuneration of whole time director /Managing Director)

 

Whole time directors and Managing directors are in the same footing as their appointment and remuneration is governed by specific Section 269 read with schedule XIII of companies Act,1956  Manger/MD/WTD  are the persons vested with substantial powers to carry out day to day functions,

 

Section 309 lays the ceilings on  non executive Directors remuneration

 

If there is a Managing Director/ WTD /Manager  ceiling on remuneration to  non executive Directors is    1% of the net profits of the company

 

If there is no MD/WTD/manager then ceiling to all non executive directors is  3% net profits of the company

 

Directors  are entitled to receive sitting fees for attending Board meetings also which is not treated as part of remuneration.. Directors are entitled to receive remuneration by way of a fee for each meeting of the Board, or a committee thereof, attended by them:

 

Section 198 lays down over all ceiling limits on managerial remuneration, which is 11% of the net profits for all kinds of directors together.

 

RESIGNATION OF A DIRECTOR (WHEN IT TAKES EFFECT?

 

Resignation is a voluntary act and is different from the removal from directorship which is an involuntary act.  When there is a change in the directorship, a return in Form no.32 is filed within 30 days from the effective date of resignation.  In the former case Director himself has to ensure that Form no.32 is filed by the company and insist for a copy of the same for his records to protect himself from any criminal cases for offences that have been committed after his resignation. In the case of removal of director, the company  usually  informs the concerned person about his removal from directorship and also files Form no.32 without fail.

 

On the issue as to when the resignation of a director needs to be accepted by the Board of Directors of the concerned company  there is no clarity in the Companies Act, 1956 and generally the Articles of Association of the companies also do not contain any specific provision to that effect. However when a company files Form No.32 about the resignation of director, it invariably puts a date in the column meant to record the date of the change and such a date happens to be either the date of resignation letter or date of the Board meeting where the resignation letter was placed/discussed.

 

In a number of cases courts held that  where the resignation letter states that it has to take effect immediately, the date of the resignation letter is taken as the date on which the director has resigned. Thus, unless the Articles of Articles of the company concerned contain any specific provision about acceptance of resignation by the Board of Directors of the company, the resignation from directorship takes effect immediately, i.e., from the date of the resignation letter. A director who has resigned would not be liable for anything that happens subsequently.  However it is very important to note that the mere act of sending/posting of the resignation letter by the company director will not by itself relieve the director of his responsibilities for possible future prosecutions, but such a director must insist  the company to file necessary Form No. 32 with the Registrar of Companies and ask for a copy of the said Form No. 32 and the ROC Receipt for having deposited the said Form and to preserve such documents carefully so that his liability gets restricted.

 

VACATION OF OFFICE:

 

A director vacates his office in the following events:-

 

·    if he fails to obtain within the time the share qualification, if any, required of him by the articles of the company;

 

·   if  he is found to be of unsound mind  or he is adjudged an insolvent by a Court of competent jurisdiction;

 

·      if he is convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months;

 

·       if  he fails to pay any call in respect of shares of the company held by him,  within six months from the last date fixed for the payment of the call;

 

·       if he absents himself from three consecutive meetings of the Board of directors, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board;

 

·        if he fails to disclose his interest in contracts or arrangements in contravention of section 299.

 

REMOVAL OF DIRECTORS: A director can be removed by a company before expiry of his term of office. For removing a director, Company has to give a special  notice before moving  any resolution to remove a director u/s 284.On receiving such notice Director concerned can make a representation in writing and notice removing director must state the fact of representation.

 

LIABILITIES OF DIRECTORS

 

Director's are liable for violation of the provisions of the Companies Act and other Acts which may expose them to punishment with fine or imprisonment or with both. The Hon’ble Supreme Court of India held in the case of Maksud Saiyed  Vs State of Gujarat and Others that the vicarious liability of the Managing Director and Director would arise provided any provision exists in that behalf in the statute. If directors are guilty of negligence or found to be misusing their position, they will be liable for civil as well as criminal liability. For eg; if directors make any untrue statements in the prospectus, or do not maintain books of account as per provisions of Section 209 or falsify accounts, criminal liability also arises. Even for cheque bouncing, Section 141 of the Negotiable Instruments Act, imposes vicarious liability on the directors provided an averment is made to that effect in the complaint. The Directors of a company incur a personal liability, if they contract in their own names or where it is ambiguous as to capacity in which they signed the contract. However directors can seek protection against a liability for acts done in good faith. Director will  also relieved of the offence, provided he is able to show that he was not in charge or control of the day to day affairs of the company or Offence in question was committed without his consent/knowledge/connivance and he was not negligent in ensuring that laws are complied.

 

CONCLUSION: Under the existing Act, all directors, including independent directors are held responsible for a company’s actions. However in the Companies Bill 2009, it is proposed to protect independent directors. An independent director will be held responsible for any action only if motive and criminal intent is established in his actions. This is welcome otherwise highly qualified professional would be reluctant to Join the Board’s of company as independent directors.

 

G. S. Rao, Chief Manager(Legal),OCL India Limited


Published in Corporate Law
Source : Companies Act,judgments
Views : 22787
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