Duties and Liabilities of Directors

Sec 166 of Co. Act, 2013 provides provision for Duties of

Directors.

The Duties of Directors can be explained under following

heads :-

(1) Duty towards Co.

(2) Duty of Care
(3) Duty to attend meetings
(4) Duty not to delegate power
(5) Duty to disclose personal interest
(6) Duty to act honestly and in good faith
(7) Duty towards Individual members
(8) Duty towards 3rd parties

(1) Duty towards Co. :- Directors are accountable for their

acts done by them on behalf of Co.

Directors are subject to :-

 Statutory duties (i.e. duties imposed under Co. law
or any other law for time being in force)
 Fiduciary duties towards Co. (Eg :- Duty to act in
goof faith, Duty to act honestly, Duty to act as quasi
trustee, etc.)

(2) Duty of care :- (i.e. duty to perform with utmost care,

skill and attention)
Director stands in fiduciary relation with Co.
+
is required to perform its duties with skill/ due diligence
that a reasonable person is expected to exercise in
normal course of business
[Note :- If director acts within his powers + bonafide + with
due diligence + for benefit of Co. but despite of its bonafide
efforts Co. suffers a loss. In such case the director cannot be
held liable to for mistakes or for error of judgment even if it
caused loss to Co.)

[CASE :- Re City Equitable Fire Insurance Co. (1925)

Facts :- In this case the Co. collapsed due to huge loss caused
due to :-
 Bad investments
 Bad debts
 Misappropriation caused by fraudulent acts of a
Director
Judgment :- at first the lower court convicted Director for his
fraud/negligence.
But In appeal :- The Director was acquitted because of an
exception clause in Articles of Co. which stated that director
shall be held liable only for gross negligence.]

[Case 2 :- Jorchester Finance Co. Ltd. v/s Stebbing (1989)

Facts :- this case relates to negligence on part of 2 executive
directors who signed blank cheques that caused loss to
society. The blank cheques enabled the executive directors
to fill amt. that they pleased in those cheques.
Held :- 2 Non executive directors are liable coz the duty to
take care extends to all the directors uniformally whether
executive / non executive. ]

[Case 3:- In India Harish Chandra Maganlal v/s Union of

India (1990)

High Court of Bombay pointed that law makes no difference

between whole time Director and part time director in
matters of liability arising out of negligence / breach of duty
because anyways in case of part time directors they get
easily relieved if they prove that they had no active role in
management of Co.]
(3) Duty to attend meetings :-
A director is ought to attend all meeting.
However a director is not bound to attend all meetings
BUT if such director habitually abstain / not attend
meetings then he is liable for the acts of his co-directors.

Eg :- u/s 167(1)(b) :- If a director absent himself from 3

consecutive meetings of Board for a continuous period of
12 months. Then he is liable to vacate his office.

(4) Duty not to delegate power :- Delegation means

transfer
Delegation of power means transferring powers to
another.

Normal rule is “Delegates Non protest delegate” :-

This rule/ principle is enshrined in the fact that a
Director of a Co. is a delegate of co. as it acts on behalf of
Co. Being a Delegate the director of Co. is not allowed to
further delegate his powers.

Exception to the rule of “Delegates Non protest

delegate” :- (i.e. circumstances where the Director may
delegate its powers ) :- are as follows :-
 If Co. Act, 2013 permits such delegation
 If Articles of co. permit such delegation
 If delegation is necessary in ordinary course of
business

[Leading Case :- Dovey v/s Cory (1901) :-

facts :- In this case bank suffered heavy losses on a/c of
fraudulent balance sheets and advances of money to
customers of Bank on improper security.
These frauds were caused due to Manager and Chairman f
Co. who manipulated the a/c’s and showed profit while in
actual there was no profit.
 At meeting Cory ( a Director) ensured the correctness of
a/c and on assurance of a manager/ chairman assented
to payment of dividend (which was in actual paid out of
capital)
The question that arose in this case was that whether
Cory was innocent or liable for negligence

Judgment :- the House of Lords released Cory from

liability on ground that he acted on representation of
people for whom he had no ground for suspicion.]

[Case 2 :- D.Doss v/s C.P.Connel (1933)

Facts :- In this case an undischarged insolvent was
appointed as an advisory director of co. . He
misappropriated a part of security mone received from
Co.’s employees.
Judgment :- The co. directors in this case were not held
liable as they had no reason to suspect integrity/ honesty
of Directors.]

(5) Duty to disclose personal interest :- The relation

between Co. and Directors s that f a Principal and agent
Both stand in fiduciary relation.
Thus, this places a Duty on Directors :-
 To ensure its personal interest do not clash with the
interest of Co.
 To disclose any profit/gain received in connection
with sale/ purchase of any Co. property or by
selling its his own property to Co.

Disclosure whom made ? :- u/s 184 Every director wh is

interested in any transaction of Co. must disclose it to BOD
(at its meeting)

Time for Disclosure :- must be made at the 1st meeting of

BOD held immediately after director became interested.
 [Case :- M/S Raj Cylinders & Containers v/s Hindustan
General Industries Ltd. (1998)

Facts :- In this case the defendant Co. entered into contract

with Plaintiff Co. to sell machineries on no profit no loss
basis
The Directors of Defendant Co. wanted to purchase shares
from Directors of Plaintiff Co. and hence for this reason they
agreed for “ No profit No loss contract”
Judgment :- Court held :- the transaction was done between
Directors of 2 Co.’s on individual basis.
Court observed where Directors are personally interested in
deal the Contract is detrimental of Co. & hence not binding
on Co. ]

(6) Duty to act honestly and in good faith :-

The expression good faith means “duty to :-
 disclose all material facts
+
 not to suppress any material facts for selfish ends
Directors being agents + Trustees of co. must act in goof
faith.
[Case :- In this case the Directors managed to get railway
contract in their own name instead of Co. name.
Held :- Directors cannot get any benefit under the contract
and must give it to Co.] the Directors

(7) Directors duties to Individual members :- Directors

owe duty to Co. and not towards Individual members .
Case :- Percival v/s Wright

(8) Directors duty towards 3rd (other) persons :- Directors

are not liable for any contract entered by Third parties
with Co. In any such transaction Co. is only liable unless
such director is guilty of :-
 fraud, or
 deceit, or
  for commission of tort, or
 omission
which caused damage to 3rd party under the said
transaction. In this case the Director is personally liable

When Directors are not liable?

(1) Directors not liable to Individual members :- As
stated Directors are agents of Co. hence not liable to
individual members of Co.
(2) Directors not liable to 3rd parties :- For any contact
entered between Co. and 3rd party the Co. is alwys
liable incase of breach. Directors are liable only if they
are guilty for :-
 commission of any fraud/ deceit /tort, or
 any omission that caused loss to 3rd party
(3) Ultra vires contract :- Directors are not liable for any
ultravires contract entered by Co. because such contracts are
void ab initio.

Pesonal liability of Directors :- (i.e. exceptions or

circumstances where Directors are personally liable )

(1) Criminal Liability of Directors :- Any act of Director

that constitutes an offence under I.P.C., the Director may
be held criminally liable.
[Case :- UP.Pollution Control Board v/s Modi Distillery
(1988)
Facts :- In this case the Director + Managing Director +
chairman of Industrial unit were prosecuted for willful
default in furnishing details regarding anti pollution
measures adopted by the unit
HELD :- where an offence has been committed by Co. then
every person who at time of commission of offence was in
charge / responsible to Co. for conduct shall be liable.

(2) Omission of material facts in Prospectus :- (i.e. where

they issued Prospectus not containing particulars
required by Act).
(3) For Misrepresentation in Prospectus
(4) In case of Irregular allotment of securities
(5) Failed to allot or repay within time limit :-
(i.e. :-
 Where Co. is unable to allot shares within 30 days
from 1st issue of Prospectus , or
 has failed to repay application money within 15
days.

(6) Director liability in case of winding up :- Where

Co. is being wound up Directors may be liable for
those debts of Co. which Co. incurred through
fraudulent transactions by directors on behalf of Co.
(7) Director liability towards 3rd parties:-
 In case of breach of Implied warranty of
Authority
 Acts which though intra vires are outside the
scope of Directors authority
 Where Director act in their own name instead
of Co. name

POWERS OF DIRECTORS

The Co. Act, 2013 provides for :-

 Powers of Directors u/s 179
 Restriction on powers of Directors u/s 180
Sources governing / deriving power :- The BOD derive
their powers from 2 sources viz. :-
 Articles of Co. and
 Co. Act, 2013

Powers of DIRECTORS. :- The powers of Directors can be

divided into 3 heads :-
(1) General Powers
(2) Powers exercised by BOD
(3) Powers with consent of shareholders in General
meetings

(1) General Powers :- u/ Sec 179 Directors exercise all

powers as authorized by Co.

(i.e. Power exercised by Directors = Power exercised by Co.)

However the exercise of such powers is subject to following

2 conditions :-

(a) the Directors are not authorized to do any act which

the Co. is authorized to do only at general meeting.

(b) The general powers of Directors must not be

contrary to MOA/AOA /Regulations of general
meeting

[Case :- Automatic Self Cleaning Filter Syndicate Co. v/s

Cunningham (1906)

Facts :- The Co. had power under MOA :- to sell its

undertaking to another Co. having similar objects.
The Articles of Co. contained provision by which Director of
Co. were empowered to sell/ otherwise deal with property
of Co.

The shareholders passed a simple resolution to sell Co.

assets on certain terms + required directors to carry out
sale.

The directors refused to sell

The shareholders claimed that they were Principal &
Directors were agents hence they were bound to decision of
shareholders.
Judgment :- Court rejected plea of shareholders and held
that Directors are agents of Co. and not of shareholders.]

(2) Powers exercised by BOD :- The BOD may exercise

following powers on behalf of Co. by means of resolution
passed at its meetings :-

(a) Under SEC 179(3) :-

 To make calls against shares
 To issue debentures
 To borrow money
 To invest funds of Co.
 To make loans
 The power to issue debentures
 The power to borrow money otherwise than on
debentures
  The power to invest funds of the co.
[Note :- The Board in respect of above mentioned powers
may pass resolution at BOD meeting. They may also delegate
the powers to any committee of Directors, or Managing
Director, or Manager or Principal officer of Co.]

(b) Additional/ other powers exercisable through its

meetings :-
 Power to accord sanction for certain contracts in which
particular directors are interested (Sec 188)
 Power to appoint/ employ a person as managing
director if he is already managing director / manager
of another Co. (Sec203)
 Power to invest in any shares/ debentures of any other
body corporate upto 10% of subscribed capital of such
body corporate :- Provided :-
The aggregate of the Investment made by the Co. in all
other body corporate does not exceed 30% of
subscribed capital of Investing co.
+
the aggregate of Investments made in all body
corporates in same groups does not exceed 20% of
subscribed capital of Investing Co.
  Power to make declaration of solvency to make windng
up of Co. as a member’s voluntary winding up (Sec
305)
 Power to receive notice of disclosure of Interest of
directors (Sec 184)
(3) Power of Directors with consent of shareholders :-
there are certain powers which the Directors may exercise
with consent of Co./ shareholders by special resolution.
These powers also form a restriction on the powers of the
directors as they cannot be exercised without consent of
shareholders. These powers include the following:-

(a) Sale or Lease of Co. undertaking

(b) Extension of Time for payment of debt due by
Director
(c) Investment of money received against compulsory
acquisition of Co. assets.
(d) Borrowing money beyond paid up capital.

[Important point to note :- u/s 176 defect in appointment

of Director does not invalidate actions taken. (i.e. if a
director appointment is subsequently noticed to be invalid fr
any reason then any act done by such individual while
holding office is valid despite of defective / invalid
appointment )
However after the notice of defect any act done thereafter is
invalid.]