COMPANY DIRECTORS-LEGAL STATUS

COMPANY DIRECTORS-LEGAL STATUS

blog

Nov 18

2019

Posted by: CS Shilpi Thapar

A company is an artificial person created by law. It functions through human agents who are collectively called Board of Directors. They are termed as Trustees of the assets of the company who sees that company business is carried on in accordance with the Memorandum and Articles of Association of the company. They decides policies of the company keeping in view the main objects for which the company was formed.

 Only an Individual is eligible for appointment as a Director of the company. There are various types of directors:

 1.Executive Directors i.e Managing Director, Whole time director or Executive Director

2. Non Executive Director

  •        Nominee Director
  •        Institutional Nominee 
  •        Promotional Institutional Nominee
  •         Lending Institutional Nominee
  •         Holding company nominee
  •         Collaborator Nominee
  •         Government Nominee u/s. 48B
  •          Debenture holder Nominee
  •          Independent Director
  •           Others

   The individual cannot be a director for more than 15 public limited companies.

   The Directors of the company are custodians of the interest of the stakeholders which includes:

 (i)            Employees

(ii)          Shareholders

(iii)         Creditors

(iv)         Customers

(v)          Society

 The directors must exercise their powers for the benefits of the company as they are in a fiduciary relationship position vis-à-vis the company. Even courts have been very zealous in seeing that fiduciary relationship of the directors with the company are not abused. The position has further changed  in the era of corporate governance to the extent that the directors have to protect the interests of not only shareholders but also stakeholders. Directors are required to exercise ordinary care and skill, loyalty and obedience for managing affairs of the company.

 Now, important issue is what are the job requirements in terms of knowledge and skill for a director?

        1.  Wide range of management skills

        2. Earlier training and executive experience

        3. Ability and capacity to learn and apply new skills in his higher scale

        4. Attention to principles

        5.  Decisiveness

        6. Proven record of effective  board membership in other companies

This would clearly define the accountabilities of directors such as to contribute impartially to the deliberations of the board, to acquire adequate knowledge of the company’s business to provide positive support in developing company’s policies, objectives and to do planning for performing board assignments and supporting company long term plans.

The Board of directors have general powers as well as specific powers. Some of the powers are conferred by the Articles of Association of the company and certain powers could be exercised only by passing unanimous resolutions or only with consent of the company in general body meeting of shareholders. Section 291,292,293,293B and 294 of The Companies Act,1956 deal with power of Board of Directors.

If directors exceeded the powers of the company as enshrined in the Memorandum and Articles, or directors were not authorized by the Articles to act on behalf of the company or an individual director may have acted within the powers conferred on the board but without any authority to do so having been delegated to him by board in such circumstances, the action taken is ultra vires the company, it is altogether void even if consented by all the shareholders.

Just as it is important for a director to be aware of his duties, responsibilities, it is also necessary for him to recognize the legal position regarding his liabilities for breach of law concerning company. The best part is that there is no personal liability for any director, unless he has voluntary accepted personal liability in relation to any matter affecting the company.

The directors are liable under various statutory acts viz:

  1. The Companies Act,1956
  2. Air(Prevention and control of Pollution Act)1981
  3. Apprentice Act,1961
  4. Consumer Protection Act,1986
  5. Contract Labour (Regulation & Abolition) Act,1970
  6. Customs Act,1962
  7. Depositories Act,1996
  8. Employees Provident Funds & Miscellaneous Provision Act,1952
  9. Employees State Insurance Act,1948
  10. Environment Protection Act,1986
  11. Equal Remuneration Act,1976
  12. Essential Commodities Act,1976
  13. Essential Commodities (Spl. Provisions) Act,1981
  14. Central Excise Act,1944
  15. Foreign Exchange Management Act,2000
  16. Industrial Dispute Act,1947
  17. Industrial Employment (Standing Order) Act,1946
  18. Industrial (Development & Regulation) Act,1957
  19. Minimum Wages Act,1948
  20. Negotiable Instrument Act,1881
  21. Payment of Bonus Act,1965
  22. Payment of Gratuity Act,1972
  23. Payment of Wages Act,1936
  24. Securities Contracts( Regulation) Act,1956
  25. Securities Exchange and Board of India,1992
  26. Indian Stamp Act,1899
  27. Trade and Merchandise Marks Act,1958
  28. Urban Land (ceiling and regulation) Act,1976
  29. Water (Prevention and Control of Pollution) Act,1974

 Under The Companies Act,1956, director is termed as “officer in default” and are principally liable for various statutory offences. Under other statutory acts, penalties ranges from Rs. 1000 to Rs. 2 lacs and imprisonment varies from 3 months to 3 years depending upon the intensity of offence committed.

 To conclude, it is inevitable to state that time has come for directors to understand their responsibilities well and to equip themselves with proper skills in better way and to discharge their duties with utmost care and caution. They should not completely rely on professionals in matters where they need to sign and should be sure about it. They should also indemnify themselves by taking professional insurance coverage  to protect themselves from unexpected professional liabilities in future. Proper training should be taken from reputed institutes to discharge their duties effectively, to regularly update themselves with legal statutory requirements , best practices in corporate governance and current business thinking.

 (References: The Companies Act,1956-Bare Act, ICSI Publication- Are you a company director)

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