(12.14.2) Directors and their Legal Position

In this Part following matters are discussed: (a) Legal Position of Directors (b) Legal Provisions as regards directors and (c) Director’s Powers, Duties and liabilities. Section 2 (13) defines a director as including “any person occupying the position of director, by whatever name called. “This is a definition based purely on function; a person is a director if he does whatever a director normally does. But the Act gives no further guidance on the function, duties and position of a director. In reality, directors are the persons who direct, conduct, manage or superintend a company’s affairs. Sectopn 291 has entrusted the management of the affairs of the company in their hands. They chalk-out the general policy of the company within the framework of the Memorandum of the company. They appoint the Company’s officers and recommend the rate of dividend. The directors of company are collectively referred to as the ‘Board of Directors’.

The exact position of ‘director’ is hard to define, as no formal definition, either statutory or judicial, of the term has been given. However, judicial pronouncements have described them as (i) agents, (ii) trustees, or (iii) managing partners.

The directors act as agent of the company and the ordinary rules of agency apply. They exercise the to powers and are subject to duties within the framework  of the company’s Articles, and the Act. For instance, they may make contracts on behalf of the company and they will not be personally liable as long as they within the scope of their authority. But if they contract in their own name, or fail to exclude personal liability, they also will be liable. If the directors exceed their authority, the same act may be ratified by the company. But if they do something beyond the objects clause of the company, then the act is ultra vires and the company cannot ratify the same. But directors are not agent for the individual shareholders, they are the agents of the company-the artifical person.

The directors have also been described as trustees. But they are not trustees in the full sense of the term in as much as no proprietary right, of the company’s property are transferred to them and, therefore, they enter into contracts on behalf of the company and in the name of the company. On the other hand, in the case of a trust, the legal ownership of the trust property is transferred to the trustee and therefore, he can enter into contract in his own name, but whatever he does, he does for the benefit of the beneficiaries.

Although directors are not trustees in the real sense of the term, they occupy an office of the trust and are in certain respects in the position of trustees for the company. Such cases are:

  (i) They are trustees of money which comes to their hands or which is actually under their control. If they misapply company’s money, they have to make good the same as if they were trustees.

  (ii) They are trustees for exercising powers conferred on them for the benefit of the company. For instance, powers to allot shares, to make calls. forfeit shares should be exercised bona fide in the interests of the company.

  (iii) They stand in a fiduciary relationship to the company and, therefore, whenever there is clash of his personal interests with that of the company, he should keep in mind the company’s interests.

A director is in no way a trustee for individual shareholders except when the former induces the latter by misrepresentation to sell the shares to him.

The directors are also sometimes described as managing partners. They manage the affairs of the company on their own behalf and on behalf of other shareholders who elect them.

Are the directors employees of the company? They are not employees of the company or employed by the company, nor are they servants of the company, or members of “Company’s staff” . A director can, however, hold a salaried employment or an office in addition to that of his directorship which may, for these purposes, make him an employee or servant and in such a case he would enjoy rights given to employees as such; but his directorship and his rights through that directorship are quite separate from his rights as employee.