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Rights, Liabilities And Duties of Directors Under Indian Companies Act, 2013

A corporation is an artificial person which is intangible and invisible. For making any decision and to have knowledge and intention, a living person has a mind and hands by which he carries out his actions. But a corporate body being an artificial person has none of these. So it needs to act through a living person. The company's business is entrusted in the hands of directors.

The supreme executive authority controlling the management and affairs of a company vests in the team of directors of the company, collectively known as its Board of Directors. At the core of the corporate governance, practice is the Board of Directors which oversees how the management serves and protects the long-term interests of all the stakeholders of the Company.

The concept of a board of directors was founded on the idea that a group of trustworthy and respectable individuals should look after the interests of the many shareholders who are not personally involved in the company's management. Since the board of directors is entrusted with the duty of acting in the best interests of the company.

Director's Rights, Duties, And Liabilities

Directors must have a vision in order to frame policies that will result in high results. They must set the company's targets in order to reach high levels of success. They must have the authority to carry out the company's goals. Then there are the director's roles and duties. Directors also have some protections that they can use to defend themselves and the company's interests.

Directors' rights, roles, powers, and obligations are defined by the Companies Act and the company's articles of association. Section 291 of the Act states that the board of directors has the authority to exercise all of the powers and perform all of the actions and things that the corporation is allowed to do, subject to the Act's provisions.

Rights Of Directors

  • Rights that can only be exercised by passing resolutions at a Board meeting (Section 292
  • Power to make calls on shareholders for money unpaid on their shares that have not been paid.
  • The authority to issue debentures
  • Ability to borrow money in a way other than by debentures
  • The authority to invest the company's funds
  • Having the ability to make loans
    • Certain limitations on the Board's general powers can be enforced, and in those situations, the Board must obtain shareholder approval at General Meetings. Restrictions are dealt with in parts 293, 294AA, and so on.
    • Such rights, such as Section 294AA (appointment of sole selling agents) and Section 295 (Loans to Directors), can only be exercised with the consent of the shareholders and the Central Government.

Section 180 of the Companies Act 2013 states that the Board can only exercise those powers if they are authorized by the general meeting:

  • To sell, lease, or otherwise dispose of the company's undertakings in whole or in part
  • To invest in trust securities otherwise.
  • To take out a loan for the company's needs.
  • To allow the director time to repay any debt or to refrain from doing so
  • Unless the director acted in good faith and with due care and diligence, the title of lessee or purchaser is compromised when the director violates the restrictions which are imposed under the sections.
  • Provided, this section does not extend to companies whose primary activity is the sale or leasing of real estate.

Right to form an Audit Committee

Section 177 gives the board of directors the authority to form an audit committee. It must have at least three directors, one of whom must be an independent director. Independent directors must comprise the majority of the committee. The audit committee's chairperson and members should be capable of reading and comprehending financial statements.

The audit committee must function in compliance with the written terms of reference adopted by the Board.

Right to form Nomination and Remuneration Committees, as well as a Stakeholder Relationship Committee

  • Section 178 allows the Board of Directors to form the Nomination and Remuneration Committee and the Stakeholders Relationship Committee. Three or more non-executive directors should make up the Nomination and Remuneration Committee, with one-half of them to be independent directors.
  • The Stakeholders Relationship Committee may be formed by the Board of Directors if there are more than 1,000 shareholders, debenture holders, or other security holders on the board of directors. This committee is responsible for considering and resolving shareholder complaints.

Rights that can be exercised at a Board meeting or by passing a resolution by publication in accordance with u/s 289 provisions

  • Section 224(6) gives the board of directors the authority to select the company's first auditor within 30 days of the company's incorporation
  • Section 224(6) gives the Auditor the authority to fill a casual vacancy in his or her office if the vacancy is not caused by resignation.
  • Additional Directors can be appointed if the Articles allow [Section 260].
  • Other rights granted by the articles include revocation of securities, payment of interim dividends, preliminary expenditures, use of a foreign seal, capitalization of earnings, and the issuance of bonus shares.
  • Individual directors who act without being empowered by the Board may be ratified by the Board by passing an effective resolution of retrospective effect if the Board deems it necessary.

Right to contribute to charitable or other funds

The company's Board of Directors is authorized to donate to bona fide charitable and other funds under section 181. When the total amount of contribution, in any event, exceeds 5% of the company's average net profit for the immediately preceding financial years, the company must first give approval in a general meeting.

Right of making a political contribution
  • Companies may make a political donation under section 182 of the Companies Act 2013. An organization that makes a political donation should not be a government entity or one that has been in operation for less than three years.
  • In addition, the contribution total does not exceed 7.5 percent of the company's net profit in the three previous financial years.

Right to contribute to the National Defence Fund

Under section 183 of the Companies Act 2013, the Board of Directors has the authority to make contributions to the National Defence Fund or any other fund authorized by the Central Government for the purpose of national defence. The donation sum may be whatever you think is appropriate. This cumulative amount of contribution should be included in the profit and loss account for the financial year in effect.

Rights of Directors can also be categorized into individual rights and collective rights

  • Individual Rights
    Individual privileges include the right to review books of accounts (Section 209(4))
    • The right to receive notices of board meetings (Section 285)
    • The right to engage in proceedings and cast votes in favor or against proposals (Section 300)
    • The right to receive draught circular resolutions (Under Section 289), and the right to inspect minutes of board meetings.
  • Collective Rights
    • Right to refuse to transfer shares:
      Under Section 111 of the Act, directors of private and deemed public companies have the right to refuse to register a transfer of shares to anyone they don't want to.
    • Right to elect a Chairman:
      The directors have the right to elect a chairman for board meetings under Regulation 76(1).
    • Right to appoint a Managing Director:
      The Board of Directors has the authority to appoint the company's managing director/manager (as specified in the Act).

Duties Of Directors

Major corporate failures in recent years, such as Kingfisher, Sahara, and Satyam, have repeatedly shown the ineffectiveness of the Company Act 1956 in enforcing corporate governance. Every time, it is the Directors who are responsible for failing to meet Shareholder expectations and, on occasion, betraying stakeholder sentiments under the guise of charisma, thereby exploiting corporate mechanisms for personal gain. Companies Act 2013 was passed almost 50 years after the last amendment to address this challenge. It is founded on the principles of board accountability, shareholder protection, self-regulation, and transparency by disclosures.

The 2013 amendment has ensured a number of successful steps by specifically specifying the Directors' liabilities and duties, as well as the penalties that would be imposed if they are not followed.

Section 166 of the 2013 Act enumerates the duties of directors, which apply to all categories of directors, including independent directors.

The following are two broad categories of duties and responsibilities:
  1. The roles, liabilities, and obligations that foster corporate governance through directors' sincere efforts inefficient management and quick resolution of critical corporate issues, as well as sincere and mature decision-making to avoid unnecessary risks to the corporate organization and its shareholders.
  2. Putting the company's and its stakeholders' interests ahead of personal ones.

The Duties Of The Directors Are Stipulated As Follows In Section 166 Of The 2013 Act:

  • A director must behave in compliance with the company's Articles of Association
  • A director must act in the best interests of the company's stakeholders and promote the company's objectives in good faith.
  • A director must exercise impartial judgment in carrying out his responsibilities with due consideration, ability, and diligence.
  • A director should always be mindful of potential conflicts of interest and strive to prevent them in the best interests of the company
  • Before authorizing related party transactions, the Director must ensure that proper deliberations have to be taken place and that the transactions are in the company's best interests.
  • To ensure that the company's vigilance system and users are not harmed as a result of such use.
  • Confidentiality of confidential proprietary knowledge, business secrets, inventions, and unpublished prices must be maintained and should not be revealed until the board has authorized it or the legislation requires it
  • A Company's Director can not appoint his or her office, and any such assignment is invalid.
  • If a company director violates the provisions of this section, he or she will be fined not less than one lakh rupees but not more than five lakh rupees.
  • The Companies Act of 2013 also assigns different roles to Independent Directors in order to ensure the Board's independence and fairness. An Independent Director is a member of the Board of Directors who does not hold any stock in the company and has no financial ties to it other than the fees it earns for serving on the board. According to the Companies Act of 2013, Schedule IV
  • Protecting and promoting the interests of all stakeholders, especially minorities shareholders.
  • In the event of a conflict of interest among the stakeholders, acting as a mediator.
  • Assistance in delivering an independent and fair decision to the Board of Directors.
  • Adequate attention is paid to transactions between related parties.
  • Any unethical activity, code of ethics breach, or alleged fraud in the company should be reported honestly and impartially.

Liabilities Of Directors

For any and all acts prejudicial to the company's interests, the directors may be held jointly or collectively liable. Despite the fact that the Director and the Company are distinct bodies, the Director can be held responsible on behalf of the Company in the following situations:
  • Directors who fail to make the necessary disclosures under the SEBI (Acquisition of Shares & Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading) Regulations, 1992 can face legal action from SEBI.
  • Refunding of share application or excess in share application fee
  • To pay for qualification shares
  • Civil Liability for Prospectus Misrepresentation
Tax Liability:
Unless a Director or a Former Director can show that the non-recovery or non-payment of taxes is due to gross negligence or violation of duty, any present or past Director (during the defaulter's time period) will be liable to pay the tax deficit as well as any penalties.

The Following Are Some Criminal Liabilities Associated With A Director's Actions:

  • Bounced or dishonored checks: Under the Negotiable Instruments Act of 1881, a Director's signature on a dishonored check may result in criminal charges, in addition to the company's income tax violations under the 1961 Income Tax Act.
  • Also, under the Employees Provident Funds and Miscellaneous Provisions Act, 1952, and the Factories Act, 1948.
  • Derivative action is characterized as an action taken by one or more shareholders of a corporation in which the company is the plaintiff and relief is sought on its behalf. It must, however, be presented in a representative manner.
  • A shareholder can bring an action against the company and its directors for matters that are in violation of the company's Memorandum or Articles and that no majority shareholder can sanction.
  • Directors and the corporation could be held liable if the majority of shareholders engage in "fraud on the minority," or discriminatory conduct. As a result, this is an extremely valuable clause for Directors to be aware of and strive to take advantage of as much as possible.
  • The Companies Act requires a corporation to purchase insurance to cover itself against losses caused by its directors. A director may also purchase insurance to compensate for losses incurred due to liability to the company, with the premium charged by the company.

The board of directors is the company's heart and soul, and they are the key to its success. Since greater power comes with greater responsibility, the company management should be in the hands of responsible people who can use their power in the right way.

The organization is governed by a board of directors, who make all of the company's decisions together in an organizing meeting. Despite the fact that a substantial number of incidents of company mismanagement have been observed. The directors are the first to be held responsible in this case.

The above analysis may be enough to convince someone to become a Director, but it is not difficult to follow whether the Directors are acting in the best interests of the stakeholders. To prevent any serious consequences against them or the company, the Board of Directors must be more prepared than ever before. They should attend as many board meetings as possible and have a thorough understanding of the company's operations. Before attending a board meeting, they must be well-prepared and alert.

Written by: Adv. Vishal Kumar
Ph. No:+91 8826-466-744

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