Powers and Duties of Directors of a Company
A company, by definition, is termed as an artificial person that is incapable of working on its own. As a result, there is a need to appoint a person(s) who act as a company’s spokesperson, known as the company’s Director or an agent. The shareholders of a company appoint the Board of directors. The stakeholders choose two-thirds of the directors in any public or private limited company. The remaining one-third are selected per the guidelines mentioned in the Articles of Association. In this article, we have explained the power and duties of directors of a company.
Section 174(1) of the act specifies that the quorum for a board meeting must include 1/3rd of the total number of directors or two directors, whichever is higher. If, in any case, the directors are not physically present to attend the meeting, they must be present on audio/video calls to be a part of the meeting.
It is essential to note the following when calculating the quorum.
- When 1/3rd or 2/3rd of the directors are concerned for calculation purposes, it can be rounded to one of the final numbers in a fraction form.
- When the strength of the directors is calculated, one should not take into account the Director whose seat is vacant.
- Any board meeting with no quorum must be adjourned and scheduled later. It should then be arranged at the same place and time and on the same day in the following week.
A company is supposed to hold a minimum of four meetings with the Board of Directors, and the maximum gap shouldn’t be more than 120 days between two consecutive sessions. This is because the Board of Directors occupies the highest position of authority, and they have the final say in all the matters concerning the organisation’s well-being.
In such cases, the company, in no particular way, can supervise the Director to take the decision, and all the agreements on behalf of the company should have the Director’s signature(s). Furthermore, there are authorised signatories for signing and approving documents for the company. In their absence, they can permit employees to sign on their behalf.
Meaning of Director
In Section 2(34) of the Companies Act 2013, a director is a “person appointed to the Board of Directors.”. Under the companies act, operations are carried out by the chief agents constituted by the Board of directors. Therefore, the powers and duties of Directors of a company are challenging and require right-minded people to take up the position of responsibility.
The Minimum number of directors for:
- A public limited company: 3 directors
- A private limited company: 2 directors
- A one-person company: 1 director
A company is allowed to have a maximum of 15 directors. However, it can exceed the maximum number by passing a special resolution in a general meeting with the shareholders. Section 157 of the companies act 2013 mentions that Director/ Whole-time director or manager’s age is a minimum of 21 years and a maximum of 70 years. Therefore, any individual younger than 21 years (minor) cannot be appointed company director. A special resolution needs to be passed to appoint a director who has attained the age of 70.
Every person appointed should have a Director Identification Number (DIN) or Corporate Identification Number (CIN) prescribed under section 153 of the act. Moreover, the person acting as Director should be:-
- Of a sound mind
- Capable of entering into a contract
Powers of Directors
The power of a Director is vast since they are the highest authoritative person in the organisation.
Sections 179 and 166 of the Companies Act 2013 prescribes the powers and duties of Directors of a company as
- Exercising power over which the company has the legal authority.
- Taking action on events, the company has legal authority.
While using the power, all directors are intended to adhere to some rules and regulations of:
- The Companies Act
- The Articles of Association
- The Memorandum of Association
- Regulations made by the company
Some specific powers of the Board of directors can be exercised using a resolution passed at a Board meeting. They are
- To make calls
- To issue debentures.
- To borrow money by means or to make loans.
- To invest the funds of the company.
In some cases, consent of the Government is required by the Board for certain activities:
- As per section 268, provisions for the Board’s appointment or reappointment of managing directors must first be approved by the Government.
- As per section 295, the Board has to take the Government’s consent to choose a managing director for the first time.
- Subject to the Government’s consent, the Board has the option to invest in shares of other companies curtaining to the limits specified in section 372 of the Companies Act, 2013.
Duties of Directors
A private limited company, a public limited company, or a one-person company has many duties. Unfortunately, people usually hold the title for namesake and are unknown to the responsibilities that come with the position.
1. Duty to act towards the interest of the company
A director holds a fiduciary* position in a company. Therefore, the Director should exercise their powers keeping in mind the decision’s on the company and its reputation.
Consequently, a director’s honesty but not in the company’s interests is a contract breach.
2. Duty to not misuse assets of the company
No director has legal ownership of the properties of the company. They are organisations.
A director is, in layman’s, the caretaker of the assets of the company. They can use them and employ them to fulfil their purposes only.
3. Duty to not pocket secret profits
All the financial statements and records would easily be accessible as a company director. Thus, they have to make sure that the information remains confidential and is not disclosed in any case. The Director should also be faithful to the records and not make untold profits.
4. Duty to attend and participate in the meetings of the company
Every Director must participate in the discussion of the company. However, according to the Companies Act 2013, any director who is absent from three consecutive board meetings or from all the conferences held in three months, whichever is longer, can be removed from being the company’s Director.
Fiduciary– A fiduciary is a person who holds a legal or ethical relationship of trust. Typically, a fiduciary prudently takes care of money for another person.
General Powers and Duties of Directors
1. Act within Powers
It is the fundamental law in the Companies Act. The company’s Memorandum of Association (MoA) states that in the event of any action taken or agreement made by the directors on behalf of the company out of their proper scope, it is considered void and null.
- These are not legally binding on the company. The object clause of MoA limits the activities of the company to
- Use the funds of the company for the company.
- Carry the business trade according to the specifications of the MoA. The ultra vires act as a safeguard to the stakeholders and investors of the company.
2. Taking Decisions in Good Faith
The company’s Directors should take decisions in good faith for the benefit of the company and its employees. The success of a company is a long-term goal. It is, as a result, the Director (s) of the company’s responsibility to approve the activities the organizations should take to achieve their goals.
3. Reduce Conflicts
Conflicts refer to a situation where the Director’s interests or interests of other directors owe, are or may be at odds with the organization’s interests. Every Director should avoid activities that do not favour the interest of the organization.
For example, the Director of company A is also the Director of company B, a potential competitor of A.
There are three major conflicts that every Director is supposed to refrain from ideally:
- Duty to avoid situational conflicts of interest
- Responsibility to not accept anything from third parties
- Duty to declare transactional conflicts
4. Key Managerial Personnel
The management functions of making essential decisions fall under Key Managerial Personnel (KMP). A whole-time KMP can be appointed by companies that fall under section 203(1) with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, which are:
- Every listed company
- Public Companies have paid-up share capital of 10 Crore rupees or more.
- Public Companies have paid-up share of 5 Crore rupees or more.
KMP consists of 5 types of authoritative positions within a company:
- Whole-time Director
- Company secretary
- Chiede financial officer
- Chief executive officer
5. Writing Factual Financial Statements
In a true sense, the companies have to keep written financial reports and update the performance and position of the company to the concerned parties. However, the Director is responsible for ensuring that these statements are an accurate and authentic representation of the companies’ financial affairs.
For confirmation, the Director has to sign a declaration in the Director’s report to put it into effect. When signing, the directors should consider that they may be liable to civil and criminal penalties if the statement is not true to the nature stated.
Types of Directors
One of the Director’s elemental powers and duties is making rational and sound decisions and managing the company affairs. Therefore, they have a diverse role ranging from being the company’s agents to being called a trustee.
These 3 Types of Directors Play, a Crucial Role in an Organization:
1. Executive Director
An executive director is the senior operating officer of the organization. As per Rule 2(1)(k) of the Companies Rules, 2014, “Executive Director” means a Whole Time Director as defined in clause (94) of section 2 of the act. Executive directors are responsible for administering the funds under the direction of the President of the Board. In addition, they exercise general supervision over the company and coordinate the activities of the Board.
2. Non- Executive Director
They are the non-working directors of the company. They will provide independent oversight and serve on bodies concerned with delicate issues of the company. The powers and duties of Directors of a company of this type are limited to planning and policymaking. They are not bound to be attentive towards the organization’s affairs continuously. Non- Executive directors are responsible for monitoring the activities of the Executive Director and acting in the interest of the company’s stakeholders. They are responsible for objectively looking at propositions made by the company’s executive team.
3. Independent Director
A director that aids in improving the corporate credibility and government standards is called an independent director of the company. They act as guides, coaches and mentors to the company. Having no professional relationship, they will have an unbiased approach towards the company. The provisions related to the appointment of an independent director are contained in section 149 of the Companies Act, 2013.
Independent Directors have the responsibility to report unethical behaviour or any verified fraud. They need to keep themselves well informed about the company and the external environment in which the company operates. Protect the legitimate interests of the company, its stakeholders and the employees. To ensure that independent directors evaluate the performance of the company’s executive and non-executive directors, independent directors should meet once a year without the participation of the executive and non-executive directors.
Appointment of Director
Section 152 of the Companies Act 2013 says that an individual appointed as the company’s Director has to be a natural person. Therefore, a legal firm with an artificial legal personality cannot be established as a company agent.
In a private or public company, two-thirds of the Director is appointed by the company’s stakeholders. And the remaining one-third are selected as per the specification of the articles of association. The Articles of Association can dictate any method for the Director’s appointment.
According to a specific policy in the companies act, the organisation can employ the directors according to proportional representation.
Following documents are required for the appointment of a person as Director:
1. The first step is to create a Digital Signature Certificate (DSC).
2. Every Director should have a unique Director Identification Number (DIN) which the Central Government allots.
3. The company shall file Form DIR-12 (particulars of appointment of directors and KMP along with the form DIR-2 as an attachment) within 30 days of the appointment of a director.
4. A letter in writing stating that the said person has agreed to hold the position.
5. An appointment letter is to be issued to a director for their appointment.
6. A notice should be given to call board meetings with an explanatory statement.
At least one women director must be appointed in companies with a paid-up share capital of Rs. 100 Crore or a turnover of Rs. 300 Crores. For every company, it is mandatory to have a Resident Director (a person who has stayed in India for 182 days or more during the financial year).
Removal of a Director
Directors are an essential asset for a company. Any organisation will take a lot of their efforts and valuable time to name someone their Director. But sometimes, there are cases where the company may remove them due to negligence, violation of privacy, or other cases.
Section 169 of the Companies Act, 2013 deals with the removal of Directors. After giving the person a reasonable opportunity to justify the reason for their actions, the company has the right to remove them before the expiry of the term.
Circumstances like these will result in an issue of a “Special Notice” for appointing a new director if the previous one is removed.
The procedure of removal of a director is:
1. The first step is to prepare a notice and the resolution(s) draft that needs to be passed in the board meeting. The company should also convey the agenda of the meeting to all the directors of the company.
2. The company is responsible for imitating the Director removed.
3. The legal notice for removal of the Director needs to be sent 14 days before the meeting is held. In addition, a special note needs to be signed by members holding more than one per cent of the voting power or holding shares on which an aggregate of 5 lakh rupees has been paid on the date of the notice.
4. The directive to be removed has to be permitted to be heard and to be able to speak.
5. Intimating all department heads to remove the directors and prepare the necessary documents is necessary.
Two forms are required for the removal of a director:
The forms need to be filed within 30 days from the passing of the ordinary resolution. The company should make necessary entries regarding removal of Director in the Register of Director and Key Managerial Personals and Register of contracts and arrangements in which directors are interested in Form MBP-4
Liability of Directors
The powers and duties of directors of a company include within itself the added responsibility of being held liable for actions that do not abide with the provisions mentioned in the Companies Act, 2013.
In addition, they will have to face the consequences of their actions. The company, being an artificial person, cannot commit a crime that requires mens-rea.
1. For the Company
Breach of Fiduciary Duty
When the actions of a director directly harm the interest and well-being of the company, the Director is said to violate their fiduciary duty. In such conflicts of interest, the concerned Director should make the necessary disclosures to obtain the confidence of the stakeholders and prevent themselves from liability.
The powers and duties of a company director are subjected to the specification of the Companies Act, the Memorandum and Articles of Association. Anything exceeding these acts will make the Director personally liable. But in cases where their actions are intra-vires (within the Director’s power), the stakeholders can ratify those in the general meeting.
As long as the Director is fulfilling their duties, there is no liability. But if there is a failure to exercise caution to the business operations, they are held personally liable for the damages. An error of judgment is, however, not considered negligence.
Issue of Prospectus with Intent to Defraud
Suppose a director issues a prospectus to defraud the applicants or other persons for any person. In that case, they will be held personally liable for the damages incurred by any person who has subscribed to the securities based on such prospectus.
2. For Third Party
None of the Director (s) of a company is liable to third-party contracts, even if the company has initiated the arrangement with the said party. Thye will only be held personally responsible if :
- The contract is in a personal capacity
- Where the principal is not disclosed
- When it is a pre-incorporation contract
- When the contract is ultra-vires
3. Criminal Liabilities of the Director
The Director will not be held liable when the company’s criminal activities are concerned. The court has mentioned the concept of alter-ego, which can only be applied to make the company responsible for the acts of the directors.
The supreme court has analysed the company’s criminal liability for the action of the person in control of the company and has communicated that the company will be held liable and not the other way around.
Liabilities in the case of Independent and Non-Executive Directors
The Independent and Non-Executive Directors can be held liable if acts of omission or commission have been conducted under their knowledge.
What is the Liability of the Directors?
Liability in Case of Tax
If companies cannot pay taxes, the Director is liable to pay. However, the Director can escape paying the tax if they can prove that the non-recovery of such tax is not due to the breach, gross neglect, or misconduct on their part.
Refund of the Share Application Money
A director is personally liable to refund the share application or excess share application money.
In some cases, a director(s) ‘s liability may be unlimited if specified in the Memorandum or a special resolution is passed in the general meeting.
If a director signs a dishonoured check knowingly, they can be prosecuted along with the company.
Offences in Income tax
If a company commits an income tax fraud, the person in charge is held personally liable (usually the Director of the company).
Fraud on Minority Shareholders
If the Director pursues discriminatory actions for stakeholders with fewer shares, directors will be held liable.
Further Issue of Capital
To expand the business operations, a company can raise funds through the issue of rights and bonus shares to the existing stakeholders in proportion to the shares already held by them within the company.
Companies consider it economical to increase their subscribed capital after the incorporation. This step usually increases the financial reserve and incentivises the company’s stakeholders.
When companies think of issuing additional capital, they must comply with Section 62 of the companies act, 2013.
Such shares are offered to:
- Persons who, at the date of the offer, are holders of equity shares of the company in proportion to the paid-up share capital on those shares by sending a letter of recommendation subject.
- Checking the authorised capital for issuing shares through preferential allotment is a necessary step a company has to follow.
- Preferential allotment involves the bulk allocation of fresh issue of shares by a company to individuals, venture capitalists and companies at a pre-determined price. In addition, the company usually adopts a preferential budget for people who want to acquire a strategic stake.
Presiding General Meeting
Section 160 of the Companies act, 2013, provides for the rights of a person to stand for the position of Director in a general meeting of a company.
People who are eligible to give notice under section 160 are:
- Individual members of the company
- A non-member of the company
A deposit of Rs. One lakh needs to be made by the person who wishes to stand for the position of Director at least 14 days before the general meeting at the Registrar Office of the company.
However, exemption of paying the deposit amount is for:
- Independent directors
- Director recommended by Nomination and remuneration committee.
- Director recommended by the existing Board of the company.
The company that is exempted from section 160 are:
- Private company
- Companies where a ballot system is adopted for the election of directors.
- A company where the Government holds the entire paid-up capital.
- A subsidiary of a government company
Remuneration of the Directors
Remuneration, in simple words, is the amount of money that needs to be paid to the person for the work they’ve done.
There are three ways remuneration of a director is prescribed:
- Through the profits of the company
- Though the approval of the shareholders
- Through the central Government
Section 197 specifies the remuneration of directors as:
- In the case of public limited companies, not more than 11% of the net profit should be paid as remuneration, whether it is for a managing director or a whole-time director.
- A company having one Director should pay only 5% of its net profits as remittance to the Director.
The maximum remuneration for directors
|Less than five crores||30 Lakhs|
|More than five crores but less than 100 crores||42 lakhs|
|More than 100 crores but less than 250 crores||60 lakhs|
|250 crores and above||Sixty lakhs along with 9.99% of the capital above Rs. 250 crore|
- Sometimes a company can pay up to 200% of the above mentioned managerial remuneration if the stakeholders have approval. For this purpose, a special resolution needs to be passed.
- If a manager holds shares up to Rs. 5 Lakhs or more and the Director is not related to a promoter two years before their appointment, the company may pay him 2.5% of the profits or 5% with the approval of the stakeholders.
Some facilities are paid to the directors as a part of remuneration. The company incurs these rewards and compensation.
- Rent-free accommodation expenditures
- Life insurance, pension annuity and gratuity
- Expenditure on the maintenance of the vehicles used by the Director.