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Liabilities And Duties Of Director: A Comparative Analysis Of British Companies Act 2006 And Indian Companies Act 2013

Aims & Objective:
The following is the study goal for the subject 'Liabilities and Duties of Directors: A Comparative Analysis of the British Companies Act 2006 and the Indian Companies Act 2013':
  1. Research the Companies Act 2013 and the Companies Act 2006.
  2. To understand the roles and liabilities of a company's directors.
  3. To compare and contrast the responsibilities and obligations of a director as defined by the provisions of the British and Indian Companies Acts.

Research Methodology:
  1. Study Subject- The researcher concentrates mostly on bare acts, comments, and case laws.
  2. Data Sources- Primary Sources- Laws, Acts, etc. Secondary sources include the NMIMS Library, journals, books, articles, previous research, and so on.

Background Study:
Both India and the United Kingdom adhere to the common law system. The Indian Companies Act 2013, while not an identical clone, is heavily inspired by the British Companies Act 2006. In this research paper, we will compare the Director's Duties and Liabilities under the Indian Companies Act 2013 with the British Companies Act 2006. Directorships are always open to abuse. It is a perpetual challenge to reconcile personal and corporate interests.

Because they wield enormous influence as a result of their position, they must be controlled not just in the public interest, but also for the protection of those who have invested and are stakeholders. The firm must have a board of directors, according to Section 149 (1) of the Companies Act. Under Section 2 (34) of the Indian Companies Act, 2013, a director is defined as a director appointed to the board of directors.

The most common types of directors are:
  • Executive Directors
  • Whole Time Director
He works full-time and is responsible for the general operation and administration of the organisation.

Tenure of Woman Directors
She is entitled to a re-appointment at the general meeting. However, the tenure of a woman director is liable to retirement by rotation as per Section 152(6) of the Act as applicable to other directors. She can also resign at any time by giving notice to the company.

Woman Director - Companies Act 2013
As per the Companies Act, 2013, it is mandatory to appoint at least one woman director as a board member in certain types of companies. The penalty for non-compliance of provision extends to a fine of Rs.10,000 with a further fine of Rs.1000 per day if the contravention continues.

Criteria
A company, whether a public company or a private concern, will be required to mandatorily appoint at least one woman director if it fulfils any of the following criteria:

It is a listed company whose securities are listed on any stock exchange.

It is a company having paid-up capital of Rupees one hundred crore or more, and a turnover of Rupees three hundred crores or more.

Procedure for Appointment of Woman Director
A Woman Director can be appointed during the time of company registration or after incorporation by the Board Members and the Shareholders.

Managing Director
Subject to Board approval, he serves as the company's chief executive officer and has broad responsibility to administer, supervise, and lead all managerial affairs.

Non - Executive Directors
In other words, he is not a permanent board member or a top executive with any official title.

Independent Directors
He is a non-executive director who has a financial relationship with the company, its promoters, senior management, or affiliate companies, is not related to promoters or senior management, and/or has not been an executive with the company in the three preceding fiscal years, as defined in Section 149 (6) and also in Clause 49 of the listing agreement.

Others
These other sorts of directors are identified based on the purpose of their appointment:

Subscribers to MOA are the first directors until directors are elected at the AGM.

More Directors:
At the board's discretion, additional directors may be nominated to serve until the next AGM.

Alternate Director:
Subject to the company's articles, the board may additionally select an alternate director who will serve while the original director is absent for a minimum of three months.

Rotational Directors:
Due to the Companies Act of 2013, these directors are required to resign at the conclusion of their service.

Nominee Directors:
Certain shareholders designate them in cases of tyranny and mismanagement in the firm. Their obligation, however, is not limited, yet it includes all stockholders in general, not just a select few.

Residential Director:
These are the people who have lived. In the previous year, you must have spent at least 182 days in India.

Directors are forerunners of the organisation they represent. They are invested with many abilities, and with those powers come accountability and duty. Many of these authorities, obligations, and liabilities are enshrined in law. The remainder have been evolved by the result of hundreds of years of deliberation by courts, which have established common law standards and equitable principles still in use today.

Hypothesis:
The similarities between the provisions of the British Companies Act of 2006 and the Indian Companies Act of 2013 outnumber the differences.

Limitations:
The researcher has a one-month time constraint. The Researcher's resources are restricted since he lives in a tiny city. Due to time constraints, the researcher is limiting his investigation to a certain topic.

Duties Of The Director

General duties applicable worldwide

The duty of good faith- The directors must act in the best interests of the company, which includes the interests of current and future members, given the going concern concept. They should not use company opportunity for personal gain, resulting in hidden gains. The directors' good faith would necessitate that all of their efforts be oriented toward the advantage of the firm.[1] The utmost good faith is anticipated in the performance of their tasks.[2]

It has been claimed that men in total control of a company's operations must not take the company's interests for granted since they are obligated to safeguard them. Recently, the Delaware Supreme Court declined to hypothesis the nature of the obligation of good faith, stating that negligent behaviour differs from ill faith action because statute provisions distinguish between the two. If the behaviour is completely disregarding obligations and responsibilities, it is considered poor faith. Failure to act in good faith alone does not create fiduciary responsibility since it is a subset of the duty of loyalty.[3]

Duty of care

Because of his prestigious position, the director should exercise extreme caution and due diligence while working in the best interests of the organisation. However, nothing more than what a normally wise guy would have done should be expected of him. All directors have the same responsibility of care.[4] In nature, such care does not have to be outstanding. The level of attention and expertise required will vary according to the nature of the firm.[5] However, when responsibility has been incurred while acting in good faith, courts have granted relief. They are not accountable for minor mistakes in judgement.[6]

Duty not to delegate

Because directors already have delegated authority as representatives of the company, they cannot delegate any more. The rule that "delegates cannot delegate" limits them. Delegation is often discouraged since shareholders rely on directors' talents and judgement, but there are a few cases when it is permitted under company law and the articles of association. There will be a presumption that the company's actions are above board if there is no unusual behaviour after the delegation correctly administered.[7]

Duty to act honestly

Directors are in a position of trust and are thus responsible for acting in an ethical manner. As trustees, directors have an obligation to act ethically.[8] They must suffer consequences for failing to do their obligations if it results in fraud and losses.[9]

Section 166 of the Indian Companies Act 2013 specifies a number of important details, such as: How the Director Must Act
Subsection (1) of the statute states that a director must follow the company's articles of incorporation. Although this does not need any precise stipulation of obligations, it is a desirable feature.

Acting In Good Faith and in Best Interest
In accordance with clause (2) below, all director's actions must be made in good faith. Much subjectivity exists here, yet it should also be seen from the standpoint of an ordinary cautious guy. It has also been maintained that all directors' efforts must be geared toward the advantage of the firm,[10]

In this context, the words "members" and "shareholders" have been used interchangeably. "Members are those individuals who agree in writing to become members and have their names registered in the register of members or have their names entered as beneficial owners".[11] Just when someone is a member, they do not automatically become a shareholder.

The Companies Act of 2006, Section 172 provides that a director "shall act in the manner he judges, in good faith, would be most likely to promote the success of the business for the benefit of its members as a whole." In many ways, this is analogous to the duty that employees now have under common law to act in the best interests of their organisation"best interests."

Acting with Care, Skill & Independent Judgement
Section 166, subsection (3), states that the director must exert necessary and reasonable care in carrying out his obligations. Although there is a considerable deal of subjectivity involved here, the touchstone might be what a reasonable person would do in certain circumstances. Furthermore, exercising autonomous judgement implies that there should be no outside influence; he should have entire freedom to make his decision.

Section 174 of English law provides for it. By requiring directors to act with the care, skill, and diligence of a reasonably diligent person who possesses both the general knowledge, skill, and experience expected of a director and the general knowledge, skill, and experience the director actually possesses, the duty of skill as well as care codifies existing negligence law.

In other words, directors would be held to the same standard as the "reasonable director," or someone with the skills, education, and experience necessary to do the job. In addition, a director with advanced qualifications in a particular field (say, accounting) will also be held to the same standards like a reasonable director with similar skills.

No Conflict of Interest

As stated in subsection (4), a director's duty is to eliminate any conflicts of interest. That's why a director shouldn't put himself in a position where his own interests are at odds with those of the company interests of the firm may occur. Whenever such a circumstance happens, the company's interests should take priority over his personal interests.

Section 175 of English law currently imposes large-scale statutory mandate for avoiding bias. An independent director's duties include avoiding any situation in that he or she has or could have an interest that conflicts with, or even appears to conflict with, the interests of the company. A director who makes use of any asset, resource, or opportunity is solely subject to this duty (whether or not the company could take advantage of that property, information or opportunity).

No Undue Gain or Advantage
Subsection 5 specifies that no individual shall benefit financially from the company's operations, nor should it go to directors' family, partners, or acquaintances. This provision also allows for disgorgement of profits, with the goal of preventing any damage to the corporation.

This regulation is somewhat permissive under the Companies Act of 2006. It does not ban directors from receiving personal benefits, but it does impose an obligation to declare them. Each director is required to disclose to the board of directors the "nature and extent" of the any interest he or she has in any arrangement or transaction to which the firm is or may be a party. The first portion, s.177, applies to statements made well before transaction and arrangement is entered into, whereas the second section, s.182, applies to disclosures made after the company has engaged in the transaction and arrangement.

Under Section 177, If a director has a conflict of interest and knows about it before an agreement is made, they must declare it. On the other hand, if a director learns of their interest (or the interest develops) after the company has entered into the arrangement, the director is obligated to make the disclosure as soon as possible under Section 182.

Either clause allows for declarations to be made at a board meeting, in writing, or by general notice. The director is responsible for revising any declaration that has become inaccurate or incomplete (although if a company has already entered into a transaction or arrangement this may not be necessary).

There is no violation of these duties if the director is unaware of their interest or even the transaction and agreement that the company is a party. It is also not necessary for a director to disclose an interest if he or she is unaware of the possible conflict or if the interest does not appear to constitute a conflict of interest under the circumstances.

No Assignment
Subsection (6) makes it illegal to transfer the rights transferring the workplace to another individual. His position is not one he can delegate, and if he tries to, he will fail null and invalid.

Contravention
The last paragraph (7) establishes the penalties for directors who violate the segment. A fine of one hundred thousand rupees (or its equivalent) shall be imposed on such a director, but not less than five lakh rupees. Although this is a violation of the law, it does not warrant a leave of absence under Section 167 of the Companies Act of 2013.

Liabilities Of The Director

Duties are accompanied with liabilities. Responsibilities may also be statutory liabilities as defined by particular legislation, or they might be generic duties that apply to everyone universally. They might be:
  • Liability to the Company
     
A director's responsibility might arise in the following ways:
Breach of fiduciary duty:
The directors are required to apply their authority in the best interests of the firm since they hold the office of trust as well as power. There is a violation of fiduciary obligation if there is dishonesty in executing this duty. There is always the risk of a conflict of interest, but if one arises, the concerned director should make full disclosure and attempt to gain the trust of stakeholders at the general meeting.

If this is not the case, it will be considered a violation of fiduciary responsibility, and he will be held accountable for indemnification to the business.[12] It has been decided that directors, as trustees, must handle the firm and its assets the same way they treat their own personal property and interests.[13]

Ultra Vires Act:
The rights of directors have restrictions imposed on them by the Companies Act, the Memorandum, and the Articles of Association. When they do anything that is supra vires, they are responsible for it on their own. If however the actions were intra - vires, the shareholders can approve them in a general meeting; else, if a company loses money because of the directors' ultra - vires actions, the company can sue the directors for damages.[14]

Negligence:
The Directors are performing their duty to the business as long as they exhibit reasonable care and diligence. However, if they fail to take such care and precaution, they are regarded negligent in their behaviour and are personally accountable for the resulting losses. However, a lapse in judgement will not be considered negligence.[15]

"Business relies on ongoing operations, which will be impossible if people question the actions of trust holders or office holders at every turn."[16]

Mala fide Acts:
The directors have a fiduciary duty toward the company's assets. Because they are in a position of trust, any misuse of their authority might result in legal repercussions of trust and may be obliged to reimburse the losses caused as a result of their failure to be transparent about any money they make as a result of their job duties on a frequent basis. If the misbehavior is not purposeful, the director may also be held accountable.

Liability to third parties
Most of Directors, in their capacity as representatives of the company, are generally immune from personal liability for any actions taken or agreements made on the company's behalf. Their behaviour binds the company to outside interests. Whenever an agent is responsible in a principal-agency concept, as a general rule.

The board of directors would be responsible for their actions. Only in unusual circumstances, like when they contract in their individual capacity, when the identity of the principal is concealed, or if the transaction is made before incorporation, will they be personally liable. When a corporation's rights are not adequately protected by a contract, and the firm is unable to negotiate an adequate remedy, the company may be subject to approved afterwards.

Positioning Directors duty in International Paradigm
Different nations have taken different ways to tackling the problem of Directors' roles and obligations. In the United Kingdom, directors have complete control over their firms. Directors are believed to have contractual powers in this context, allowing them to engage into any lucrative contract that they see suitable for the firm. As a result, they function as agents, but in the United States, directors are neither " agents " of the company nor of the shareholders. They have a fiduciary relationship, which requires them to govern the company.

Directors owe their corporations obligations of care and loyalty. They also owe total allegiance and the highest good faith. The primary distinction between US and UK law is that in the latter, the responsibility is due to the business as a whole rather than the stockholders privately.

However, closer inspection indicates that directors owe a primary duty to their shareholders in the UK, notwithstanding the fact that the technique of interpretation has led to this discrepancy. This duty is owed to shareholders collectively, not to specific investors. The relevant section of their 2006 Companies Act, Section 170, makes this quite obvious.

However, in regards to the duty of loyalty, the board members have acted in good faith and in the best interests of the company. Although this decision has been upheld and adopted generally, it has been challenged in subsequent cases where it was determined that a director may have a stronger obligation to an individual shareholder in situations when the shareholder has relied solely on the director's instructions. "[17]

When it comes to business decisions, the United States follows the "business judgement rule," which emphasises process above results. In contrast, the United Kingdom applies a "objective test" to assess whether a transaction is in poor or good faith. In America, directors are held accountable for commercial choices based on merely partial irrationality.

Finally, UK law requires directors to operate in such a way that there is no conflict of interest and no personal profit may be gained as a result of their position. When there is a breach of the duty of loyalty, the defence of business judgement rule is ineffectual. They are better recognised in the United States as "The no-conflict rule" and "The no-profit rule," respectively.

Conclusion
A director's responsibility is not a novel notion. Countries such as the United Kingdom have been doing so for a long time. Singapore has completed codification. The director's duties to the company are laid forth in Section 170 of the English Companies Act. This sort of precision is missing from the Indian Act, and as a result, there is still misunderstanding as to whether the directors' primary responsibility is to the business or the shareholders.

Companies, although being a distinct legal existence, are incapable of operating on their own by definition. This is where directors, who act as corporate parents, please intervene. The individual in this role is expected to act counter to their natural inclinations (against their own self-interest, or contra naturam suam) and to prioritise the needs of the company and its shareholders above everything else.

Several questions arise from this potential conflict of interest, each of which has different answers. This fact underscores the critical need of investigating directors' duties and potential legal exposure under both American and British law. Executive duties are derived to a large part from the law of office and trusts under custom - based law regulations and even - handed standards (i.e., a collection of binding and nonbinding ties between trustees and the Organization's leadership). The legislation stipulates that executives must show talent, diligence, and persistence. However, according to trust law, heads of state have a special duty as trustees.

In the current setup, directors not only serve as specialists in the transactions they carry out in the organization's interest, but they also serve as trustees of the cash and property of the company. If a company executive has misused company funds or made a claim that violates the company's rules, they may be held personally accountable as trustees for breach of trust.

A director's duties are those of a person, and it is anticipated that he will accomplish them with the wisdom, talent, and perseverance befitting a person of his position. Consequently, a single executive may serve in a variety of capacities, including those of expert, representative (if so designated on the rolls), officer, and trustee. As a result, a broad interpretation is required to include all aspects of this task.

Bibliography
Books:
  • Singh, Avtar, Company Law, Eastern Book Company, 17th edition, New Delhi, 2018
  • Kapoor, Dr. G.K., & Dhamija, Dr. Sanjay, Company Law - A Comprehensive Text Book on Companies Act 2013 (University Edition), 22 edition, Taxmann, New Delhi, 2019
  • Companies Act with Rules - As Amended by Companies (Amdt.) Ordinance 2018, 2019 edition, Taxmann
  • Davies, Paul & Worthington, Sarah, Gower: Principles of Modern Company Law, 10th edition, Sweet & Maxwell, 2016

End-Notes:
  1. Bank of Poona Ltd v. Narayandas. AIR 1961 Bom 252 at 253
  2. Turner Morrison & Co v Shalimar Tar Products (1980) 50 Comp Cas 296 Cal.
  3. Stone v. Ritter 911 A.2d 362 (Del.2006)
  4. Jorchester Finance Co Ltd v. Stebbing 1989 BCLC 498 Ch D
  5. In re city fire insurance, City Equitable Insurance Co. (1925) Ch 407
  6. Lagunas nitrate co. vs lagunas nitrate syndicate [ 1899] 2Ch 392 (p.428, C.A.)
  7. Ganesan v. Brahamaya & Co (1946) Comp LJ 262 Mad
  8. York and North Midland Railway Coy Hudson (1853) 61 Beav 485: 22 LJ Ch 529
  9. Official Liquidator v. P.A. Tendulkar (1973) 43 Com cases 382
  10. Turner Morrison & Co v. Shalimar Tar Products 1980 50 CompCas 296 Cal.
  11. Section 2 (55) of the Companies Act 2013
  12. P. K. Nedungandi v. Malayalee Bank Lid AIR (1971) SC 829
  13. Fleming Spinning and Weaving Co Ltd v. Naik 9 Bom. 374
  14. Aggarwal V.S The Company Directors (1983)
  15. Re Brazil Rubber plantations and Estates Ltd, (1911) 1 Ch.425
  16. Dovey v. Cory [1901] AC 477
  17. Coleman v Myers (1977) 2 NZLR 225 [2] : Peskin v Anderson [2001] BCLC 372 [3]

Award Winning Article Is Written By: Mr.Mohit Mandloi, School Of Law, Indore Campus B.A. LLB (Hons.) Fifth Semester
Awarded certificate of Excellence
Authentication No: SP225968654672-16-0922

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