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This article has been written by Deyasini Chakrabarti from KIIT School of law, Bhubaneswar, Odisha. This article mainly focuses on the delegation of power by the Board of Directors – its basic meaning, concepts, and its present prevalence in India along with case references. It also focuses on the present status of the delegation of power by the Board of Directors in the United States and the United Kingdom as well.

Introduction

We are familiar with the term “leader”. Thus, in every group, association, or team, we need a leading person, in order to guide the teams and make things work in a more structured and transparent way. A company is also a kind of group and association. Therefore, if we focus on the meaning of the term company, then a company means an artificial person which is recognized by law with a distinctive name, a common seal, a common capital and it also has a perpetual succession. Thus, in order to control and coordinate such works among all the members of an association, the leaders in any of such groups play the most important role in it. In a company, such leaders are known as the Directors, and together such a group of leaders is known as the Board of Directors. 

Board of Directors – Meaning

In a simple language, the word Directors in a company is an embodiment of task, intellect, representation, control, and coordination among the members of the company. Neither just they look upon the administration of the company but also they are concerned about the implementation and executive work of the company. As per Section 2(10) of the Companies Act, 2013, it defines “Board of Directors” or a “Board” as a collective body of Directors of the company. Thus, in simple terms, an institution of individuals working for the betterment of the company as a whole constitutes the Board of Directors. 

Duties of Directors 

In general, nothing can simplify the huge work pressure on the Directors. But still, the Companies Act, 2013, provides us with some of the statutory provisions that help us in understanding the duties of the Directors. Section 166 of the Companies Act, 2013 highlights some of such duties stated as follows:

  1. Subject to the provisions of the Companies Act, the Director of a company is bound to act as per the articles of association. 
  2. The Director of the company should always act in good faith in order to promote the objective for the benefit of the company as a whole. He should also act in the best interest of the company, its employees, the shareholders, the communities, and for the protection of the environment. 
  3. He should also exercise his duties with due and reasonable care, skill, and diligence and should also exercise independent judgment. 
  4. A director of a company should not be included in a situation in which he may have a direct or indirect interest that conflicts, or maybe in conflict with all probabilities with the interest of the company.
  5. He shall also not achieve or attempt to achieve any undue profit or advantage either to himself or to his relatives, partners, or associates and if such Director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that of the gain to the company.
  6. A Director of a company shall not assign his office and so made shall be void. 
  7. If the Director of the company acts contrary to any of the provisions of Section 166, he shall be punishable with a fine which shall not be less than one lakh rupees but it may also extend to five lakh rupees. 

Thus, as per Section 166 (6) of the Companies Act 2013, the director cannot assign or delegate his office to any other, and if he does so it becomes void. Thus, here again the question arises as to what constitutes the delegatory power of a Director. 

Powers of the Board 

Section 179 of the Companies Act, 2013, deals with the powers of the Board.

  1. Firstly, it entitles all the Directors to such powers and to do all such things as the company is authorized to do. However, while exercising such power and doing such an act or a thing, the Board should follow all the provisions of this Act, and should also act as it is mentioned in the memorandum and articles of association. They should also comply with the regulations made by the company in the General Meeting. Further, the Board shall not exercise or do any act, which is directed or required to be done by the company in the General Meeting. 
  2. Secondly, regulations which are made by the company in a General Meeting shall not invalidate any prior act of the Board, which would otherwise have been valid if the regulation was not passed or made.
  3. Thirdly, the Board of Directors of the company shall exercise powers on behalf of the company as being decided by the resolution passed by the Board. These would include:
  • To make calls on the shareholders informing them about the money which is being unpaid on their shares. 
  • As mentioned under Section 68, to authorize an individual to buy-back the shares.
  • In the matter of issuing securities, including debentures, whether in or outside India.
  • To borrow money.
  • To invest the funds of the company.
  • In the matter of granting loans or issuing guarantees or providing security in respect of loans.
  • To approve the Board’s report and the financial statement. 
  • To diversify the business of the company.
  • To approve amalgamation, merger, and acquisition.
  • In the matter of taking over a company or acquiring a controlling or substantial stake in another company.
  • Any other matter which is to be prescribed.

However, the Board has the power to delegate in cases such as borrowing monies, in investing the funds of the company or to grant loans or give a guarantee or provide security in respect of the loans, and on such conditions as may be specified, to any committee of Directors, the Managing Directors, the Manager or any other principal officer of the company. Similarly, in such other cases of a branch office of the company, such functions are delegated to the principal officer of the branch office. 

Thus, the above-stated provision introduces the concept of delegation of power by the Board of Directors.

Conflict of law with the delegation

The principle which is followed in India is “delegatus non potest delegare”. This principle had been laid down in the landmark judgement of A.K Roy & Anr. v. State of Punjab. It is a Latin maxim and it means that a delegate cannot further delegate. Thus, here comes the concept of Agency theory as well. As per the agency theory, the shareholders and the Directors of the company have an agent-principal relationship. The shareholders had delegated their duties and responsibilities to the Directors which bind them to act in good faith in the interest of the company as well as for the betterment of the organization as a whole. Thus, to judge the validity of delegation of power by the Board of Directors, it involves matters of both practical and theoretical aspects. However, the functions of the Board are the major and most important functions that are to be executed for the healthy life of the company. Thus, in case any of the delegated functions had been wrongly performed, then the first and foremost question which arises is as to who would be liable for the same? Will it be the Director or will it be the person on whom the function was delegated by the power of the Director?

Foundation of the delegation of powers by the Board of Directors In India 

Before the Companies Act of 1956, in India, there were no independent powers that were assigned to the Directors in order to delegate the same. To be more precise the Directors could not delegate without the authority from the stockholders. But with the recent changes and amendments, the position of the Board of Directors has considerably changed, as much as the Directors now have all the powers of the company, except those which were reserved for the general meetings or for the corporate enactments.

Since, there had been no expressed provision for the same, the Board being the head of the institution is entitled to exercise all such powers as the company is empowered to exercise. Delegation of such powers by the Directors as may be required for the managerial personnel shall still require stockholder’s authorization. Although, there had been no judicial pronouncement or otherwise as to the non-functionality of the maxim “ delegatus non- potest delegare” against the Directors in India, however, it is submitted that it is no more warranted. Therefore, we cannot disagree with the fact that the main power lies with the stockholders, in order to circumscribe the Director’s power of delegation by imposing restrictions or requiring certain functions and duties will be discharged by the Directors themselves. In the present scenario, now we should say that the Directors in India rather possess an inherent power of delegation which is no more dependent upon the authority of the stakeholders. 

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The Director’s power to delegate in the United States and the United Kingdom 

In the United States, the power to delegate duties and functions does not depend upon the authorization of the stockholders. Rather it could be stated that the general power of the management is being received or derived directly from the state by the act of incorporation. 

Directors there are believed to possess “original and undelegated powers” and “like private principles they may delegate their own appointment and performance of any acts which they themselves can only perform. However, such corporation statutes and enactments had given them the approval to delegate their powers and duties to the committees. Thus, here the power to delegate is considered as an inherent power of the management. Therefore, they are strictly not bound by the maxim “delegatus non potest delegare”. However, committees and individuals come under the grip of such maxim and as a result of which they cannot sub-delegate their authority to any other for the performance of their task. 

In the United Kingdom, the situation is different from that of the United States. Here the Directors don’t get their authority or power from the state by an act of incorporation, rather they derive it from the stockholders under the Articles of Association, which is mostly accessible to the stockholders and can be easily amended by themselves. Thus the power of delegation is strictly limited or restricted by the terms of the Articles of Association. However, as there is no express provision or precedents, the Directors don’t have any discretion to delegate their power to others or substitute themselves with others. However, in practice, it is usual that they would insert a clause in the Article which empowers the Directors to delegate their powers and duties to any other committee consisting of members of their body or to the Managing Directors or to the Directors, as they may think fit. Thus, we find that the power of the Directors to delegate their work and duties is mostly similar in India and England. Thus, there arises very little difference among them. However, when compared with the United States a slight difference arises in terms of power which the Directors can delegate. 

Delegable and non-delegable powers and functions in India 

The laws in India and England remain similar to each other. The entire power of delegation rests on the authorization of the articles of association. The Act of 1956, has in this regard given farther detailings than the English law, or, maybe, even the American law, in light of the fact that it renders explicitly a couple of significant and fundamental powers which are non-delegable and exercisable just by the Board and, likewise, recommends the way and the limits subject to which certain different powers might be assigned by the Board. Hence, the ability to make approaches to the shareholders in regard to cash unpaid on their offers and the ability to give debentures can’t be designated by the Board by any stretch of the imagination. While the ability to get cash in any case than on debentures, the ability to contribute the assets of the organization, and the capacity to make advances might be appointed to any board of executives, managing director, managing operator, secretaries, and treasurers, administrator or some other principal official of the organization.

However, in any case, such a designation can be made by the board just by resolution that is passed in the meeting of the Board and subject to specific limitations determined under the Act. There are some statutory restrictions that are imposed in India on the Director’s power to delegate. Thus, it could be interpreted that they are not allowed to use unnecessary power of delegation just to reduce their workload in return. As a result, if such unfettered discretion of delegation of power is being used by the Directors then more than contributing to the constructive portion of the company it would rather be destructive for the company. Unfettered delegating powers would also amount to malpractice and also abuse of power as well. This would gradually stigmatize, jeopardize, and slow down the efficient functioning of the corporate organization. However, in India, certain fundamental and vital powers and functions are being prevented from the hands of such delegation. If such practices are allowed then it would, unfortunately, act in the complete avoidance of the statutory provisions of the Companies Act. Thus, it appears to be more healthy for the corporate growth in India that all the vital powers, duties, and functions are being performed by the Directors themselves. 

Delegable and non-delegable powers and functions in the United States and the United Kingdom

In the United States, a differentiation between the clerical or schedule matters and the optional ones including the activity of judgment also includes a matter of prudence and reasonableness that can be taken by the people in charge of the company only. However, it is not easy to draw a clear distinction between the clerical or important executive managerial work. However, to the extent that the lead of the clerical business matters is concerned, it is all around perceived that the Board can generally delegate it. Regardless of whether the by-laws or the stockholders by a resolution have explicitly indicated that the officials approved to play out the specific clerical act , the ability to give the power to do a similar demonstration or follow up on others willingly appears to dwell there in the Board. However, considering the discretionary powers, the Directors may delegate their work only up to the extent as it is convenient for the business or the company as a whole. However, in the case of Sherman & Ellis v. Indiana Mutual Casualty Co. (1930) 41 F. (2d) 588, 590, it had been held that this delegation can be varied, even with a slight change in circumstances.

For instance, on one hand, the power could be delegated whereas on the other hand it cannot be delegated. Similarly in the case of State ex rel. National Mutual Insurance Co. v. Conn , it had been held that an administration contract under which an insurance agency indicated to appoint its general administration and all the forces and elements of the governing body to one Brookhart for a time of twenty years was held to be unlawful. Therefore, it is a matter of utmost importance that a particular power that is being specifically assigned to the Director cannot be delegated. Besides, certain significant forces, for example, the ability to proclaim profits, the ability to receive, correct or repeal by-laws (when that force lives in the governing body), the ability to make appraisal and calls and capacity to give stock is, generally speaking, held not delegable even to an official committee, which is for all intents and purposes a small Board. Delegation of powers to the executive committee, however, it might be in broad terms, is, for the most part, is restricted or limited to the standard business matter.

In England, then again it seems, by all accounts, the legitimacy of delegation appears to be not as frequent as that of the United States, if by any means, tested on the ground that the assignment added up to give up or surrender of the executives’ obligation to oversee. As already mentioned that the Directors cannot delegate without authorization from the articles of association, precisely to the extent that the authorization can be given only to the officers or to the committees.

There are certain confusion or disputes that arise on the adjudication upon the legitimacy of the designation of obligations by the chiefs, nearly all turn on the genuine development of the Director’s resolution, the administrative understanding of the articles of association, incompatibility of which the powers have been delegated. In this manner, unmistakably in England, the legitimacy of the delegation of powers and repeal or confinement thereof, every once in a while, would depend upon the changing circumstances that will arise. It would also rely on the development of the administration’s understanding should be made in compliance with the articles of association. Another perspective concerning the assignment whose merits are mentioned here, at any rate in passing, is that where the articles engage the Directors to delegate their power to committees of their body or the individual executive officials, English courts rush to assume appointed expert for the outsiders managing bonafide with such panels or the officials regardless of whether no capacity to do the act has, actually, been given to them.

Case studies In India 

As already mentioned, the principle that is being followed in India for the betterment of corporate growth in India is “delegata potestas non potest delegari” which means a work that is already being delegated to an individual or a group of individuals cannot be delegated further. Thus, the shareholders had delegated their responsibilities by appointing Directors for the company who look for the overall benefit of the shareholders as well as the company. Such a choice is being based on skill, intellect, integrity, trust, confidence, good faith, and the increasing qualification of the Directors. Thus, here not just the agency theory plays an important role, but the resource dependency theory also plays an important role. Here the resource doesn’t depend upon the tangible financial terms but upon the intangible expensive human assets, which includes the intellect, knowledge, qualifications, management skills, etc. 

Some of the cases of the delegation of powers by the Board of Directors are as follows:

  • In Re City Equitable Fire Insurance Co, (1925) 1 Ch 407, it was held that Directors just can simply delegate all their power and remove the workload on others and shift all the burdens of responsibilities on the one to whom they had delegated. This case also highlights the scope of wilful default or neglect of the Directors. Provided, it further holds the moral grounds on which the Director should act and the required skill and diligence which a Director is bound to act upon. 
  • In the case of Bhagwati Prasad v. Shiroman Sugar Mills Ltd, (1949) All. 195, it was held that articles of association empowers or authorises the Directors with the power to delegate, as they may deem fit. Therefore, the resolution passed by such a committee forfeiting the shares does not stand invalid. 

Conclusion

“Delegation” in simple terms means an act of assigning the responsibility to another for the easy and fast completion of work with a greater output. There had always been the concept of delegated legislation in administrative law. Thus, when we talk about delegation, it also brings in the notion of a hierarchy of power as well. Delegation can never be allotted to the people of the same ranking. Rather one who is in a superior position can only delegate to another person who is below the ranking of the professional superiority. Similarly in a hierarchy, delegation can never be allowed from an individual at the junior position to his superior as well. Thus, in a company, a Director being the head of the institution or guardian of the institution should not delegate his unique, vital, and fundamental powers and functions to anyone else. Though with the changing time, it’s difficult for the human to keep pace with technology, as a result sometimes a single individual Director may not be able to meet all the corners of multi-tasking, thus during that time the delegation plays an important role. Thus with the various amendments in the law, we are trying to meet the dynamic needs of the company, shareholders, economy, business, and society as a whole.

Reference 

  1. https://shodhganga.inflibnet.ac.in/bitstream/10603/129434/11/11_chapter%204.pdf.
  2. https://www.companylawclub.co.uk/directors-powers#Table.

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