This article is written by Shreesh Chadha.

The Companies Act 2013 does not define a “director” per se, except as – “a person that occupies the position of a director”[1] which does little to explain the responsibilities of a director. A better definition for this purpose would be-

“ Directors have sometimes been called trustees, or commercial trustees, and sometimes they have been called managing partners, it does not matter what you call them so long as you understand what their true position is, which is that they are really commercial men managing a trading concern  for the benefit of themselves and of all other shareholders in it.” [2]

AS AN AGENT

It is also hereby established that the role, and responsibilities of a director are equated with those of an Agent in the eyes of the law.

“The company has no person: it can only act through directors and the case is, as regards those directors, merely the ordinary case of principal and agent.”[3]

Therefore, as Agents, directors are not liable to anyone, as they are representing the company in it’s transactions, and is such a case, the company is liable.[4]

AS A TRUSTEE

However, a director is also a trustee of the company. It is established that-

“The directors of a company are trustees for the company, and with reference to their power of applying funds of the company and for the misuse of the power they could be rendered liable as trustees, and on their death, their legal representatives.”[5]

However, as regards to their liabilities as trustees, the principle was laid down stating that the directors are trustees of a company only and not of individual shareholders.[6]

Therefore, the above left a lacuna as to the need of disclosure of personal profits from activities such as amalgamation of companies to individual shareholders where their shares were involved. It was later cured as it was established that the directors are trustees of any profit for the benefit of the shareholders. The same has been enshrined in the Companies Act, 2013 as disclosing any profit from amalgamation and other such profits that could have been covered under the earlier Act,1956 .[7] Therefore, in their actions involving the shareholders, the directors are also liable to them as trustees.

This concept of duty of directors towards shareholders, when their interest is involved has cemented its presence through Reliance Natural Resources Limited vs. Reliance Industries Limited[8]. In this case, the relevant factum for our purpose is that a segregation between Reliance Industries Limited ( hereinafter RIL) was decided by way of Memorandum Of Understanding (hereinafter MoU) which was to be included in the company scheme of RIL. Mr. Anil Ambani, the to-be benefactor of the KG Basin Crude Oil Reserve wanted this move to be done without the consent of the shareholders. The Board of Directors of RIL objected to the same, stating that the MoU cannot be binding, as the consent of the shareholders was not given. The Hon’ble Supreme Court held the MoU to not be binding, as the most interested party in such an event would be the shareholders. They upheld the apprehension of the Board of Directors of not having the consent of the owners of the company, the shareholders.

There was an argument afforded by the Appellant of “Doctrine of Identification” which essentially meant that the actions of one or two persons can be attributed as being actions of the rest of the company, in this case the assent of Mukesh Ambani, to be attributed to the whole of RIL, including the shareholders. However, the Hon’ble Supreme Court rejected the same in the case of companies such as RIL which have over 2 million shareholders and held the happening of such a doctrine as holding the shares and preferences of only a group of shareholders ( the Ambani family) over the rest, which is not permissible, as was rightly objected to by the board of Directors, thereby accepting the superiority of the shareholders consideration in the actions of the Directors in the running of a company.

PROVISIONS UNDER THE COMPANIES ACT, 2013

There has been a shift in the duties imposed on Directors as well. In the Companies Act, 1956, there were no specific provisions for laying down the duties of the Director, and their scope could only be viewed with respect to the general power of the Board of Directors.[9]

However, with the advent of S. 166 of Companies Act,2013 the duties of directors has been listed. Even though in principle such provisions of case, good faith, diligence etc. were held to be applicable to directors in the past, S. 166 brought with it a wind of certainty and enforceability. Under the earlier system, Directors of a Company were liable to the company and its shareholders as agents and trustees respectively. However, the new Act,2013 the directors are also to be held liable as “officers” of a company. There is a scheme of “officers in default” which exists to make sure that some liability can be attached to someone when the company is in contravention of the Companies Act, 2013. The scope of such scheme is very wide and includes all whole-time directors, Key Managerial Personnel (hereinafter KMP), persons acting on behalf or on advice from the Board of Directors or KMP, or any director who is aware of any default in terms of the provisions of the Companies Act,2013. However, the Companies Act,2013 even in regards of treating directors as officers of the company is advanced as it makes a distinction between Whole Time Directors, Independent Directors and Non-Executive Directors. It holds Independent Directors and Non-Executive Directors (not KMP) to be liable only is an act or illegality was happening with their knowledge or with their consent.

Therefore, the approach to duties of a director is more dynamic under Companies Act, 2013. Another shift that can be seen in this duty cast upon directors is actually derived from the UK Companies Act, 2006[10]. It is a more general duty that exists even towards non shareholders.

“It is a means of enhancing shareholder value over a long term”.[11]

The above essentially implies to the corporate governance and the fiduciary responsibilities that can be shown as adhered to, to increase the extent of enriching shareholders over a long period of time. This was applied through S. 166 (2), Companies Act,2013 which imposes a duty on the directors to treat even non-shareholders as means to an end. Not only does it encompass members of the company, but also employees and the entire community at large.

The object of S. 166 (2) lies in the good faith principle, which has been defined as-

“The good faith would require that all the endeavours of the directors must be directed to the benefit of the company.” [12]

So much so, that under the Companies Act,2013 it has been interpreted by the Hon’ble High Court of Delhi at a more advanced level, it has been held that even if a director is doing something to promote the objects of the company, in the best interests of the company, its employees and shareholders, there should be no personal interest in the same activity, and if there is then the provisions of S. 166 (7), Companies Act,2013 which is a penal provision will be attracted.[13]

In conclusion, the duty cast upon directors has evolved since the advent of the new Act, 2013 to not only the caretakers, or gatekeepers of the company affairs, but also the representatives and those held accountable in all regards to all involved in the company.

[1] S. 2 (13), Companies Act, 2013

[2] Cola Mining Co,re, (1878) 10 Ch D 450,451-52: 40 LT 287

[3] Ferguson v. Wilson (1866) LR 2 Ch App : 36 LJ Ch 67

[4] Kuriakose V. PKV Group Industries (2002) 111 Comp Cas 826: (2002) 1 KLJ 630

[5] Ramaswamy Iyer v. Brahmayya & Co. (1966) 1 Comp LJ 107

[6] Percival v. Wright (1902) 2 Ch 421

[7] S. 30-32, Companies Act, 2013

[8]  CIVIL APPEAL NO. 4273 OF 2010 (Arising out of S.L.P. (C) Nos. 14997 of 2009)

[9] S. 291, Companies Act, 1956.

[10] Mihir Naniwadekar, Umakanth Varottil “The Stakeholder Approach Towards Directors’ Duties

Under Indian Company Law: A Comparative Analysis” NUS Working Paper 2016/006 ,NUS Centre for Law & Business Working Paper 16/03 (August,2016)

[11] Ibid.

[12] Bank of Poona Ltd v. Narayandas , AIR 1961 Bom 252 at 253

[13] Rajeev Saumitra vs Neetu Singh & Ors CS(OS) No.2528/2015