(12.14.10) Duties of Directors

Duties of directors may be divided under two heads: 1. Statutory duties; and 2. Duties of a general nature. The statutory duties are the duties and obligations imposed by the Companies Act. These have been discussed at appropriate places. Important among them are:

  (a) To file return of allotments. Section 75 charges a company to file with the registrar, within a period of 30 days, a return of the allotments stating the specified particulars. Failure to file such return shall make directors liable as ‘officer in default’. A fine upto Rs 500 per day till the default continues may be levied.

  (b) Not to issue irredeemable preferences shares or shares redeemable after 10 years. Section 80, forbids a company to issue irredeemable preference shares or preference shares redeemable beyond 10 years. Directors making any such issue may be Held liable as ‘officer in default’ and may be subject to fine upto Rs 1,000.

  (c) To disclose interest [Ss.299-300]. A director who is interested in a transaction of the company must disclose his interest, to the Board. The disclosure must be made at the first meeting of the Board Held after he has become interested. This is because a director stands in a fiduciary capacity with the company and therefore, he must not place himself in a position in which his personal interest conflicts with his duty. Interest should be such which conflicts with the duties of the director towards the company.

Notice, however, that the Companies Act does not debar a company entering into a contract in which a director is interested. It only requires that such interest be disclosed. An interested director should not take part in the discussion on the matter of his interest. His presence shall not be counted for the purpose of quorum. He shall not vote on that matter. If he does vote, his vote shall be void. Non-disclosure of interest makes the contract voidable and not void. Where the whole body of directors is aware of the facts, a formal disclosure is not necessary (Venkatachalapathi v. Guntur Mills).In this case a loan was advanced by the wife of a director creating a mortgage on the property of the company. The director did not disclose his interest and he even voted on the matter. The company later sued to have mortgage set aside. Held, the fact was known to all directors and a formal disclosure was not necessary. As regards voting by the interested director, it was Held that the voting would not render the contract void or voidable unless in the absence of that vote, there would have been no quorum qualified to contract.

  (d) To disclose receipt transferee of property. Section 319 provides that any money received by the directors from the transferee in connection with the transfer of the company’s property or undertaking must be disclosed to the members of the company and approved by the company in general meeting. Otherwise the amount shall be Held by the directors in trust for the company. This money may be in the name of compensation for loss of office but in essence may be on account of transfer of control of the company. But if it is bona fide payment of damages of the breach of contract, then it is protected by s.321(3).

  (e) To disclose receipt of compensation from tranferee of shares. If the loss of office results from the transfer (under certain conditions) of all of the shares of the company, its directors would not receive any compensation from the transferee unless the same has been approved by the company in general meeting before the transfer takes place (s.320). If the approval is not sought or the proposal is not approved, any money received by the directors shall be Held in trust for the shareholders who have sold their shares.

Section 320 further provides that in pursuance of any agreement relating to any of the above transfers, if the directors receive any payment from the transferee within one year before or within 2years after the transfer, it shall be accounted for to the company unless the director proves that it is not by way of compensation for loss of office.

Section 321 further provides that if the price paid to a retiring director for his shares in the company is in excess of the price paid to other shareholders or any other valuable consideration has been given to him, it shall also be regarded as compensation and should be disclosed to the shareholders.

Some other statutory duties are: to attend Board meetings; to convene and hold general meetings; to prepare and place before AGM financial accounts; to make declaration of solvency.

The general duties of directors are as follows:

  (A) Duty of good faith. The directors must act in the best interest of the company. Interest of the company implies the interests of present and future members of the company on the footing that the company would be continued as a going concern.

A director should not make any secret profits. He should also not exploit to his own use the corporate opportunities. In Cook v. Deeks (1916) AC 554, it was observed that “Men who assume complete control of a company’s business must remember that they are not at liberty to sacrifice the interest which they are bound to protect and while ostensibly acting for the company, direct in their own favour business which should properly belong to the company they represent. “ In this case here was an offer of a contract to the company. Directors who were the holders of shares of 3/4 of the votes resolved that the company had no interest in the contract and later entered the contract by themselves. Held, the benefit of the contract belonged in equity to the company.

As regards the director selling his property to the company there would be breach of faith and he would have to account for the profit to the company if the property was acquired by him under circumstances which made it in equity the property of the company. But if the property in equity as well as in law belonged to him, there is no breach of faith [Burland v. Earle (1902) AC83]. In this case the plaintiff was a director in one company and a shareholder and a creditor in another company. The second company was being wound up and the plaintiff purchased the assets of the second company at a public auction, in four lots. One such lot he sold to the former company (in which he was a director) at almost three times the price he had paid for it. The lower court decided that he should accounts for the profit on resale to the company. But the Privy Council overruled this decision.

Also if the property is acquired by a director by reason of the fact he is a director and in the course of the exercise of the office of director, then the profit on resale of such property would belong to the company [Regal Hastings Ltd. v. Gulliver & others (1942) 1 AUER 378].

  (B) Duty of care. A director must display care in performance of the work assigned to him. He is, however, not expected to display an extraordinary care but that much care only which an ordinary prudent man would take in his own case. Justic Romer in Re City Equitable Fire Insurance Company observed, “His (director’s) duties will depend upon the nature of the company’s business, the manner in which the work of the company is distributed between the directors and other officials of the company. In discharging these duties a director must exercise some degree of skill and diligence. But he does not owe to his company the duty to take all possible care or to act with best care. Indeed, he need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. It is, therefore, perhaps, another way of stating the same proposition that directors are not liable for mere errors of judgement.”

Similar view was expressed in Langunas Nitrate Co. v. Lagunas Nitrate Syndicate (1899) 2 Chi. 392, in the following words: "If directors act within their powers, if they act with such care as is to be reasonably expected of them having regard to their knowledge and experience and if they act honestly for the benefit of the company they discharge both their equitable as well as legal duty to the company.”

Section 201 states that a provision in the company’s Articles or in any agreement that excludes the liability of the directors negligence, default, misfeasance, breach of duty or breach of trust, is void. The company cannot even indemnify the directors against such liability. But if a director has been acquitted against such charges, the company may indemnify him against costs incurred in defense. Section 633 further states that where a director may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust but if he has acted honestly and reasonably and having regard to all the circumstances of the case, he ought fairly to be excused, the court may relieve him either wholly or partly from his liability on such terms as it may think fit.

  (C) Duty to attend board meetings. A number of powers of the company are exercised by the Board of Directors in their meetings Held from time to time. Although a director is not expected to attend all the meetings but if he fails to attend three consecutive meetings or all meetings for a period of three months, whichever is longer, without permission, his office shall automatically fall vacant.

(D) Duty not to delegate. Director being an agent is bound by maxim ‘delegatus non protest delegate’ which means a delegate cannot further delegate. Thus, a director must perform his functions personally. A director may, however, delegate in the following cases;(a) where permitted by the Companies Act or articles of the company; (b) Having regard to the exigencies of business certain functions may be delegated to

other officials of the company.

Some other duties are: to convene statutory, annual general meeting and also extraordinary general meeting general meeting when required by the shareholders of the company; to prepare and place at the AGM along with the balance sheet and profit and loss account a report on the company’s affairs; to make a declaration of solvency in the case of a Member’s voluntary winding up.

The duties of the directors are usually regulated by the company’s articles. While performing their duties, they must display reasonable care, honesty, good faith, skill and diligence. As they stand in a fiduciary relationship to the company and they are agents and trustees in certain respects, they are bound to exercise in the performance of their duties a reasonable degree of skill and care.