All-About the Directors of a Company

Table of Contents

1. Legal position of a Director

2. Director is not an employee

3. Director has some traits of an agent of the company

4. Director has some traits as ‘trustee’

5. Directors cannot enter into pooling arrangement

6. Corporate Opportunity cannot be diverted for personal gains

7. Specific duties of a director

8. Rights of director and limitations

9. Legal liability of a director

10. Compliance Certificates from executive directors

11. Liability under Companies Act on ‘officer in default’

12. Personal liability of Director for company’s dues

Check out Taxmann's Company Law Ready Reckoner which covers a Topic-wise commentary on provisions of the Companies Act, 2013, along with relevant Rules, Case Laws, Circulars, Notifications. It also features a guide to the Companies (Amendment) Act, 2020, to understand the amendments quickly.

1. Legal position of a Director

Directors are entrusted with collective responsibility of managing and directing affairs of the company. They are professional men appointed by shareholders. A director is not an employee of the company. It is not possible to correctly describe his relationship with the company. Directors are described sometimes as agents, sometimes trustees and sometimes as managing partners. They have some attributes of each of them, but they are neither trustees, nor agents nor managing partners in full sense of the term.

1.1 Duties of director towards company

Following duties of directors have been specified in section 166 of Companies Act, 2013.

Director to act according to Articles – Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company – section 166(1) of Companies Act, 2013.

Director to act in good faith and in interest of all stakeholders – A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company, its employees, the shareholders, the community and for the protection of environment – section 166(2) of Companies Act, 2013.

Exercise due diligence, care and independence – A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment – section 166(3) of Companies Act, 2013.

No conflict of interest with company – A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company – section 166(4) of Companies Act, 2013.

No undue gains or advantages – A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates. If such director is found guilty of making any undue gains, he shall be liable to pay an amount equal to that gain to the company – section 166(7) of Companies Act, 2013.

Not to assign his office – A director of a company shall not assign his office and any assignment so made shall be void – section 166(6) of Companies Act, 2013.

Punishment for not discharging the duties – If a director of the company contravenes the provisions of this section, such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees – section 166(7) of Companies Act, 2013.

2. Director is not an employee

A director is not an employee of the company. An employee of a company may be appointed as a Director, but in that case, he is acting in dual capacity. As an employee, he is responsible to company as the company is its employer. However, as a director, he is responsible to act in good faith as representative of the shareholders.

If a director is performing duties and is working for the company, he will come within purview of an ‘employee’ – Monitron Securities v. Mukundlal Khushalcnand 2001 LLR 339 (Guj HC).

3. Director has some traits of an agent of the company

A principal can act through his agents. Acts of agents can bind the principal. Since company acts only through its directors, the position of director can be compared to that of an agent.

In Rustom Cavasjee Cooper v. UOI AIR 1970 SC 564 = (1970) 1 SCC 248 = 40 Comp Cas 325 = (1970) 1 Comp LJ 244 (SC 11 member bench), it was observed that a director is a mere agent of company for its management.

In Ram Prasad v. CIT AIR 1973 SC 637 = (1972) 42 Comp Cas 544 = 86 ITR 122 (SC), it was observed as follows, ‘A director of a company is not a servant but an agent inasmuch as the company cannot act in its own person but has only to act through directors who qua the company have the relationship of an agent to its principal’.

However, an agent may act and enter into contracts in his own name. A director cannot act in his own name. He has to act and enter into contract in the name of company. An agent may or may not disclose the name of principal.

4. Director has some traits as ‘trustee’

A ‘trustee’ acts in trust for benefit of some one else. The property and management of trust vests in the trustee, but he has no personal interest in the property and management of the trust. The trustee is expected to act in the best interests of the trust and trust property. Similarly, funds and property of the company are in trust of the directors. They are expected to act in good faith and in the best interests of the company as a whole. Whenever personal interests and company interests clash, his personal interests should be secondary to the interests of the company. [Of course, this is not easy in practice]. Like trustee, he is in a fiduciary position vis-à-vis the company.

In Dale & Carrington Investment v. P K Prathapan (2004) 54 SCL 601 = 122 Comp Cas 161 = AIR 2005 SC 1624 = 2004 AIR SCW 5143 (SC), it was observed, ‘Directors of companies have been variously described as agents, trustees or representatives, but one thing is certain that the directors act, on behalf of company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of company. They are agents of the company to the extent they have been authorised to perform certain acts on behalf of the company. In a limited sense, they are also trustees for shareholders of the company. To the extent the powers of directors are delineated in the Memorandum and Articles of Association of the company, they must act within the scope of their authority and must disclose that they are acting on behalf of company. The fiduciary capacity within which directors have to act enjoins upon them a duty to act on behalf of company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to company, even in case of private limited companies’.

In Bajaj Auto Ltd. v. N K Firodia AIR 1971 SC 321 = 1971(2) SCR 40 = (1970) 2 SCC 550 = 41 Comp Cas 1 (SC 3 member bench), it was observed that directors are in fiduciary position towards company and its shareholders. They should act in interest of company. They should not act with oblique motive or collateral purpose.

4.1 Directors must act for benefit of the company and not in personal interest

In Needle Industries (India) Ltd. v. Needle Industries Newey (1981) 51 Comp Cas 742 = (1981) 3 SCR 698 = (1981) 3 SCC 333 = AIR 1981 SC 1298 = (1982) 1 Comp LJ 1 (SC), it was held that directors are in fiduciary position and must exercise their powers for the benefit of company and not for personal aggrandisement. If their act (issue further shares in this case) is solely for benefit of directors, Court will interfere. However, if the action (issue of further shares in this case), is in larger interest of the company, the decision (of issuing further shares in this case) cannot be struck down on the ground that it has incidentally benefited directors in their capacity as shareholders. – .- Interested director – mere sentimental interest or ideological concern or friendship is not enough.

4.2 Normally No fiduciary duty towards individual shareholder, except in special situations

A director’s fiduciary relationship is with the company and not with any individual shareholder/member of the company. He is expected to disclose his interests to company, and not to any individual member.

4.3 Even in case of nominee director, they should act in interest of company and not organisation which nominated him as director

Even in case of nominee director, he is required to act in interest of company and not organisation which nominated him. The case law is discussed under ‘Nominee Director’.

5. Directors cannot enter into pooling arrangement

‘Pooling agreement’ means an agreement among persons to vote in a particular way or vote for a specified person. Such agreements among shareholders are valid and enforceable, as member’s right to vote is a proprietary right. Right to vote may be guided and effectuated by a contract. However, a pooling agreement cannot be used to supersede the statutory right given to Board of Directors to manage the company. Pooling arrangement cannot be between directors regarding their powers as directors. The reason is that a shareholder is dealing in his own property. He is entitled to consider his own interest. However, directors are fiduciaries of the company and the shareholders. It is their duty to do what they consider best in the interests of company. They cannot abdicate their independent judgment by entering into pooling arrangements – Rolta India Ltd. v. Venire Industries Ltd. (2000) 24 SCL 13 = 2000 Comp LJ 161 = 100 Comp Cas 19 (Bom HC DB).

6. Corporate Opportunity cannot be diverted for personal gains

During running a business, many opportunities of business come to the company. If such ‘corporate opportunities’ come, the director should use them for benefit of the company. He should exhibit undivided loyalty to the company which he serves. He should not utilise the corporate opportunities for his personal gains – may be by diverting the opportunity to a company in which he is substantially financially interested. If he does so, he will be misusing his position as a director. If he uses corporate opportunity for personal gains, the company can recover the gains from the director.

This principle has been incorporated in Indian Trust Act. Section 88 of Indian Trusts Act, 1882 states that where a trustee, executor, partner, agent, director of a company, legal advisor or other person bound in fiduciary character to protect interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, he must hold for the benefit of such other person the advantage so gained.

In Chennuru Gavararaju Chetty v. Chennuru Sitaramamurthy Chetty AIR 1959 SC 190, it was held that if the case is to be brought in first part of section 88, it has to be shown that the defendants had a fiduciary character and were duty bound to protect interest of other partners (directors in case of company). To come in second part of section 88, it has to be shown that funds or goodwill of the firm (company in this case directors) were used to obtain the pecuniary advantage. It was also observed that there is no absolute rule of law that obtaining benefit by one partner (renewal of lease in this case) must necessarily ensure for the benefit of other partners (directors in case of company).

In Liz Investment P Ltd. v. Far Pavilions Tours (2005) 64 SCL 439 (CLB), it was held that diversion of corporate opportunity is oppression.

7. Specific duties of a director

Some specific duties have been cast under Companies Act. These are discussed elsewhere, but some of them are summarised here.

• • Duty to give consent and declaration that he is not disqualified as director – section 152 of Companies Act, 2013
  • Notice to Board every year regarding his interest in other firms/companies – section 184 of Companies Act, 2013 [corresponding to section 299(2) of the 1956 Act].
  • Related party transactions – section 188 of Companies Act, 2013
  • Not to indulge in forward dealing [section 194] and insider trading [section 195 of Companies Act, 2013]

8. Rights of director and limitations

An individual director has following rights—

• • Right to inspect books of account and other books and papers of the company and copies of financial information if the records are placed at other place in India – inspection to be during business hours – section 128(3) of Companies Act, 2013
  • Right to receive notices of Board meetings – section 173(3) of Companies Act, 2013
  • Right to receive remuneration including sitting fees – section 197 of Companies Act, 2013
  • Right to be heard at the general meeting if notice for his removal has been received. He can also make a representation in writing, which company is expected to send to every member, except in certain cases – section 169 of Companies Act, 2013
  • Right to record his dissent to any proposed resolution in Board meeting – section 118(4) of Companies Act, 2013
  • Right to participate and vote at board meetings, unless he is interested in a particular resolution
  • Right to claim travel, hotel and other expenses for attending the Board and committee meetings and also in connection with business of the company
  • Right to summon Board meetings
  • Right to compensation for loss of office in situations specified in 191 of Companies Act, 2013.

Can a director inspect minutes of board meeting and other registers? – There seems no doubt that a director has right to inspect all records and registers of company, including minutes of Board meetings.

In Air Asiatic Ltd. Re Thomas George v. KCG George (1995) 3 Comp LJ 491 (CLB), it was held that a director has right to inspect all statutory registers.

As per Secretarial Standard SS-5 on Minutes issued by ICSI (which is presently recommendatory in nature), directors are entitled to inspect of minutes of all meetings.

8.1 Individual director/officer cannot institute suit on behalf of company but company can ratify such action

The company must act through Board and technically, individual director has no authority to file a suit. However, he can be authorised to do so by giving him powers by Board Resolution and/or power of attorney.

Pleading can be signed by director/secretary/principal officer – Though suit can be filed only by person authorised by Board, as per order 29 rule 1 of CPC, any pleading may be signed and verified on behalf of corporation by the secretary or by any director or other principal officer of the corporation who is able to depose of facts of the case. [The term ‘corporation’ includes a company registered under Companies Act. – Hakam Singh v. Gammon India Ltd. (1971) 1 SCC 286].

8.2 Summons to company in civil matters can be served on a director

It may be interesting to note that though a director cannot file a suit on behalf of company without express authority, summons in name of company can be served on a director. As per rule 2 of order 9 of Code of Civil Procedure, in case of suit against a corporation, summons can be served (a) On secretary, director or other principal officer of the corporation or (b) By leaving it or by sending by post to registered office of the corporation. – – Validity of this provision has been upheld in Jute & Gunny Brokers v. UOI (1962) 32 Comp Cas 845 (SC).

8.3 Director can file suit for defamation if imputations against company

In John Thomas v. Dr. K Jagadeesan (2002) 48 CLA 227 (SC), defamatory imputations were made in a newspaper against a company and it was alleged that company is engaging in nefarious activities. It was felt that a director can be aggrieved by such allegations and can file suit for defamation under section 499 of IPC.

9. Legal liability of a director

Many sections under Companies Act provide penalty by way of imprisonment, fine or otherwise to ‘Officer who is in default’. The definition of ‘officer who is in default’ relieves non-executive directors of their responsibility in most of the cases. In case of nominee directors of financial institutions, they are protected and enjoy immunity from liability vide section 30A of IDBI Act, section 27 of SFC Act, etc.

Director can also be held personally liable under provisions of various other Acts.

Director cannot do illegal acts – A director cannot do any illegal act like paying bribes, and company can recover the amount from such a director.

9.1 Passing Off defence

Though a person responsible to company for its affairs is deemed to be guilty, he can escape the punishment by proving that he had handed over the responsibility to another person. This is ‘passing off’ of defence or third party procedure. – J K Industries Ltd. v Chief Inspector of Factories 1996(6) SCC 665 = 1996 LLR 961 = 1996 II CLR 832 (SC).

In Pepsico India Holdings P Ltd. v. Food Inspector (2011) 1 SCC 176 (SC 3 member bench), one Manager was named under section 17(2) of Food Adulteration Act, 1954 as person responsible for ensuring prevention of adulteration. It was held that other directors cannot be prosecuted in absence of specific allegation of a director in the management of a company to make him liable.

Such person can be appointed only with his consent. He will be ‘Officer who is in default’ as per section 2(60)(iv) of Companies Act, 2013.

If such person has been appointed, return shall be filed with ROC in form GNL.3.

The GNL.3 form filed by company (other than OPC and small company) shall be pre-certified by practising CA, CMA or CS. (form filed by OPC or small company is not required to be certified by practicing CA, CMA or CS) – Rule 8(12)(a) of the Companies (Registration Offices and Fees) Rules, 2014.

It may be noted that even if such person is appointed and authorized, MD, KMP etc. do not cease to be ‘Officer in default’.

9.2 Estate of director liable after death of director

Cause of action against a deceased director for misfeasance would survive after his death and recourse can be had to estate of the deceased director through the legal representatives of the deceased – Official Liquidator v. Parthsarathi Sinha AIR 1983 SC 188.

In M R Lakshmi Narayanan v. Syndicate Bank (2001) CLA-BL Supp 58 (Mad HC), it was held that if a deceased director had given personal guarantee for liability of company, his legal representatives are liable only to the extent of assets of deceased in their hands.

9.3 Director of Government Company is not a public servant

Even if director of a Government company is appointed in name of President, he is not a ‘public servant’ and sanction for his prosecution from Government is not required. – Medehel Chemicals v. Dr. D C Mallik (1998) 94 Comp Cas 259 (Mad).

9.4 Summons to director not a matter of course

Summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set into motion as a matter of course. – – The order of Magistrate must reflect that he has applied his mind to facts of the case and the law applicable thereto. It is not that the magistrate is a silent spectator at the time of recording of preliminary evidence before summoning the accused. – – Accused can approach High Court u/s 482 of CrPC or Article 227 of Constitution to have the proceedings quashed when the complaint does not make out any case against him. – Pepsi Foods v. Special Judicial Magistrate AIR 1998 SC 128 = (1998) 5 SCC 749 – quoted with approval in M.A.A. Annamalai v. State of Karnataka (2010) 8 SCC 524.

9.5 Magistrate can dispense with attendance of director even at first instance

Personal attendance of accused can be dispensed with at the discretion of Magistrate. He can allow an accused to make even the first appearance through counsel in a summons case. When magistrate is satisfied that accused is residing or carrying on business at far distance, Magistrate can exercise his discretion by taking necessary precautions. – Bhaskar Industries v. Bhiwani Denim 2001 AIR SCW 3413.

10. Compliance Certificates from executive directors

It is not possible for non-executive directors to go into all details about management of affairs of the company. Hence, it is a practice that executive directors submit a certificate of compliance at the Board meeting. These certificates are in nature of comfort letters and evidence that the directors did take all possible care to ensure compliance with all laws.

11. Liability under Companies Act on ‘officer in default’

A director is ‘officer’ of the company as he is specified in the definition of ‘officer who is in default’

11.1 When a director will be officer in default

A ‘director’ can be ‘officer who is in default’ only when no person or director is specified by Board of Directors and no return in that behalf is filed, or when there is no MD/WD/Manager.

In Smt G Vijayalakshmi v. SEBI (2000) 25 SCL 183 = 100 Comp Cas 726 = (2000) 4 Comp LJ 132 (AP HC), it was held that criminal liability of an ordinary director would arise only in respect of company which has no MD or WD or Manager and where particular directors are not been specified to be liable to the company – same view in Vijay Kumar Gupta v. ROC (2004) 50 SCL 171 (HP HC). In Robinton Noria v. NCC Finance (2000) 28 SCL 178 (AP HC), it was observed, ‘When there is a managing director to a company and also executive director and secretary, it is difficult to conceive that an ordinary director will be in charge of and responsible to the company.

In Saumil Dilip Mehta v. State of Maharashtra (2002) 5 CLJ 183 = 113 Comp Cas 443 = 138 STC 258 = 39 SCL 102 (Bom HC DB), it was held that once a director resigns by sending letter to Chairman or Secretary, he is not liable for any acts of company after submitting his resignation, even if form 32 is not filed with ROC, as filing form 32 is not his responsibility. It is responsibility of Secretary.

An ordinary director cannot be said to be ‘officer in default’, if company has Managing Director, whole-time director or Manager – Kalpesh Dagli v. State of Gujarat (2013) 117 SCL 498 = 29 taxmann.com 383 (Guj HC).

Normal practice is to charge one or more persons/directors with responsibility under various Acts. Such persons are asked to submit a written certificate in every Board meeting to the effect that he has complied with all the laws and there is no default.

It can be seen that an ordinary director (non-executive director) will be ‘officer in default’ in very rare cases.

11.2 Personal liability of directors for offenses under the Act

Following sections make directors personally responsible. However, they are liable only if they had taken active part in the violation.—

• • Civil liability for mis-statement in prospectus – section 35 of Companies Act, 2013 – No liability if he had reasonable belief that the statement was true or if he took reasonable care to withdraw his consent as soon as he became aware of untrue statement
  • Contravening provision of section 195 of Companies Act, 2013 regarding taking loan from company – section 185(2) of Companies Act, 2013
  • Failure to disclose his interest in contract or arrangement – section 184 of Companies Act, 2013
  • A director can be held liable during winding up proceedings in case of frauds. The provisions are mainly contained in sections 338 to 342 of Companies Act, 2013.

It can be seen that a non-executive director will be liable only if he is personally involved in the offence – not merely because he is a director of the company.

In Sunil Bharti Mittal v. Central Bureau of Investigation (2015) 4 SCC 609 (SC 3 member bench), it has been held that director can be held vicariously liable only if (a) there is sufficient incriminating evidence against him coupled with criminal intent or (b) statutory regime attracts doctrine of vicarious liability.

Delay in refund of application money if minimum subscription not received – If minimum subscription is not received within specified period, application money shall be repaid within 15 days from closure of issue. If not so repaid within such period, directors of the company who are officers in default shall be jointly and severally liable to repay the money with interest @ 15% per annum. Application money to be refunded shall be credited only to the bank account from which subscription was remitted – Rule 11 of Companies (Prospectus and Allotment of Securities) Rules, 2014.

11.3 Departmental guidelines for Prosecution of director

Ministry of Corporate Affairs has issued Master Circular No. 1/2011 dated 29-7-2011 (earlier circular No. 8/2011 dated 25-3-2011) to Regional Directors, ROC and Official Liquidators giving guidelines on prosecution of directors. The clarifications are as follows –

All directors should not be arrayed in prosecution. Differentiation should be made in ‘officer in default’ and other directors.

Extra care should be taken while initiating penal action against nominee directors of Government, PSU, BIFR, banks and Public Financial Institutions and independent directors appointed as per SEBI requirements. Action should be taken against them only if offense was with their consent or connivance or where he did not act diligently.

If director has resigned, the details should be checked with form 32. If a director endorses copy of his resignation to ROC, the ROC should verify whether he has actually resigned.

For defaults under sections 209(5), 209(6), 211 and 212 of Companies Act, Managing Director, Manager or Secretary shall be normally ‘officer in default’.

Prosecution against MLA/MP should be only with prior authorisation of Central Government.

There should be proper application of mind by Registrar of Companies.

Further directions in respect of Prosecutions filed or internal adjudication proceedings initiated against Independent Directors, non-promoters and non-KMP non-executive directors – MCA, vide circular No. 1/2020 dated 2-3-2020 has clarified as follows:

Ordinarily, a whole-time director [WTD] and a key managerial personnel [KMP] are associated with the day-to-day functioning of the company and accordingly such WTDs and KMPs would be liable for defaults committed by a company. In absence of a KMP, such director or directors who have expressly given their consent for incurring liability in terms of the e-form GNL-3 filed with the Registrar would be liable. Where the consent for incurring liability for any of the provisions dealing with maintenance, filing or distribution of accounts or records is submitted in e-form GNL-3 by a person under the immediate authority of the Board or any KMP, the liability of such person will arise. However, in certain cases, the penal provisions in the Act hold a specific director, or officer, or any other person accountable for the default, in such cases, action should be initiated only against such director, or officer, or person, as the case may be, such as disclosure of interest by directors under section 184 of the Companies Act, 2013.

Section 149(12) of Companies Act, 2013 is a non obstante clause which provides that the liability of an independent director (ID) or a non-executive director (NED) not being promoter or key managerial personnel would be only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. In view of the express provisions of section 149(12), IDs and NEDs (non-promoter and non-KMP), should not be arrayed in any criminal or civil proceedings under the Act, unless the abovementioned criteria is met.

Typically, apart from IDs, non- promoter and non-KMP, NEDs, would exist in the following cases:

(a) Directors nominated by the Government on the public sector undertakings;

(b) Directors nominated by Public Sector Financial Institutions, Financial Institutions or Banks having participation in equity of a company, or otherwise;

(c) Directors appointed in pursuance to any statutory or regulatory requirement such as directors appointed by the NCLT.

The nature of default is also crucial for arraigning officers of the company for defaults committed under the Act. All instances of filing of information/records with the registry, maintenance of statutory registers or minutes of the meetings, or compliance with the orders issued by the statutory authorities, including the NCLT under the Act are not the responsibility of the IDs or the NEDs, unless any specific requirement is provided in the Act or in such orders, as the case may be. The responsibility of the NEDs, ordinarily arise in such cases, where there are no WTDs and KMPs.

At the time of serving notices to the company, during inquiry, inspection, investigation, or adjudication proceedings, necessary documents may be sought so as to ascertain the involvement of the concerned officers of the company. In case, lapses are attributable to the decisions taken by the Board or its Committees, all care must be taken to ensure that civil or criminal proceedings are not unnecessarily initiated against the IDs or the NEDs, unless sufficient evidence exists to the contrary.

The records available in the office of the Registrar, including e-forms DIR-11 or DIR-12, along with copies of the annual returns or financial statements should also be examined so as to ascertain whether a particular director or the KMP was serving in the company as on the date of default.

In case of any doubts, with regard to the liability of any person, for any proceedings required to be initiated by the Registrar, guidance may be sought from the Ministry of Corporate Affairs through the office of Director General of Corporate Affairs. Consequently any such proceedings must be initiated after receiving due sanction from the Ministry.

12. Personal liability of Director for company’s dues

Company is a separate legal entity and Managing Director of a private company cannot be made personally liable for recovery of dues against company. Personal property of MD cannot be attached to recover dues of company – Kuriakose v. PKV Group Industries (2002) 111 Comp Cas 826 = 40 SCL 676 (Ker HC DB). – same view in H S Sidana v. Rajesh Enterprises (1993) 77 Comp Cas 251 (P&H HC) * Kundan Singh v. Moga Transport (1987) 62 Comp Cas 600 (P&H HC) * Ramachandran v. State of Kerala (1984) 55 Comp Cas 590 (Ker HC).

Individual director is not personally liable for payment of wages under Payment of Wages Act – P C Agarwala v. Payment of Wages Inspector 2005 LLR 1073 = 63 SCL 109 (SC)

Dive Deeper:
Meaning of a Director – Appointment, Qualifications, Legal Position, etc.
Appointment and Qualifications of Directors under the Companies Act