In this blogpost, Sneha Bhawani, Student, Jindal Global Law School, Haryana writes about the duties of the directors towards the creditors of the company.

The duties bestowed upon the board of directors are in nature of guidelines. It must be noted that the directors must discharge their duties as a trustee, an administrator and as an agent of the company. These duties bind the director in a fiduciary relationship, based on utmost trust, with the company. A fiduciary has the highest standard of care towards his principle (in this context, company) and therefore he must not unjustly enrich by putting his personal interests before duty.

Statutory Duties of the director

The duties of the directors have been codified in Section 166 of the Companies Act, 2013 (hereinafter referred as the “Act”). This section provides the following:

• Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.
• A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
• (3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
• (4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
• (5) A director of a company shall not achieve or attempt to achieve any undue gain 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 gain to the company. This specific provision is of much importance as it enumerates remedy against the directors.
• (6) A director of a company shall not assign his office and any assignment so made shall be void.
• (7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees

Section 184 of the Act provides that a director is mandated to disclose his concern or interest in any company or bodies or institutions or corporate, firms, or any other association of individuals. This provision suggests that it is the primary responsibility of directors to maintain transparency in order to avoid any conflict of interests or misuse of power entrusted on them.

Other duties

Apart from the statutory duties of directors, reference must be made to certain case laws. It was held in Harinagar Sugar Mills Ltd. v Shyam Sunder Jhunjhunwala and Ors. (1962) 2SCR339 that “the action of the  directors must be set aside if the same was done oppressively, capriciously, corruptly or in some other way mala-fide”. In the case of Bajaj Auto Ltd. v N.K. Firodia and Anr (1971)2SCR40 the Apex Court applied the bona-fide test of the directors and for the benefit of the company as a whole; the reasons assigned by the directors were analysed from there angles that are enumerated below:

• whether thedirectors acted in the interest of the company
• whether the directors acted on a wrong principle
• Whether the directors acted on a wrong principle; and, (iii) whether they acted with an oblique motive or for a collateral purpose.

It is vital to make reference to National Textile Workers’ Union and Ors. v P.R. Ramakrishnan and Ors. In this case the Supreme Court of India re-iterated that the Memorandum of Association contains certain conditions some of which are basic to its existence of the company although they may be alterable by a prescribed procedure. The Articles of Association contain the terms relating to the internal regulation which may be altered by the members by passing resolution. These two constitutional documents of a company conform to the Act. Any action of the company which is beyond these two documents is considered ultra vires in order to protect the interest of the investors and creditors.

The directors owe a duty not to disadvantage the creditors especially when winding up proceedings [voluntary winding up by the company (Section 272(a) or by creditors (Section 272(b) of the Act] of the company are commenced. The directors must act in good faith as there are detailed provisions in the Act which protect the interests of the creditors during the winding-up proceeding. As for instance, Section 293(2) of the Act provides that any creditor or contributory may, subject to the control of the Tribunal, inspect any such books, personally or through his agent; Section 292 (1) of the Act provides that the company liquidator shall have regard to resolution of creditors when there is  administration and distribution of the company’s assets; Section 292(2) of the Act provides any directions given by the creditors or contributories at any general meeting shall, in case of conflict, be deemed to override any directions given by the advisory committee. Thus, it is evident that the intention of the legislature and judiciary is to protect the interests of the creditors from any manipulation. Also, since the director has being a fiduciary of the company and all its stakeholders under no circumstances may be permitted to prejudice the interest of creditors under the guise that there is no direct statutory codification for the same.