INDIAN INSTITUTE OF LEGAL

STUDIES

Subject – Company Law

TOPIC –Directors are the agents of the

company: Analyse it in the light of powers and
duties of directors

Supervised By:Saptarshi Das

Assistant Professor of Law

Submitted by:

NAME: Pritha Sarkar

ROLL NO.: 19 COURSE: B.B.A.LL.B
Semester : VIII

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 ACKNOWLEDGEMENT

With profound gratitude and sense of indebtedness I place on record my sincerest thanks to ,

Prof. Saptarshi Das Indian Institute of Legal Studies, for his/her invaluable guidance, sound

advice and affectionate attitude during the course of my studies.

I have no hesitation in saying that he molded raw clay into whatever I am through his/her

incessant efforts and keen interest shown throughout my academic pursuit. It is due to his/her

patient guidance that I have been able to complete the task.

I would also thank the Indian institute of Legal Studies Library for the wealth of information

therein. I also express my regards to the Library staff for cooperating and making available

the books for this project research paper.

Finally, I thank my beloved parents for supporting me morally and guiding me throughout the

project work.

Date:
________________________________

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 TABLE OF CASES

1) Lee v Lee’s Air Farming Ltd

2) Ram Chand & Sons Sugar Mills v. Kanhayalal
3) Ferguson v. Wilson
4) Shyam Sundar Jalan v. State
5) Fateh Chand Khad v. Hindsons(Patiala) Ltd
6) AlbionSteel v. Wire Co. v. Martin
7) Official liquidator v. P.A.Tendulkar
8) Charitable Corpn. v. Sutton
9) Palai Central Band Ltd. v. Joseph Augusti

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CHAPTERS PAGE NO.

CHAPTER-1
INTRODUCTION.......................................................................................5
1.1. Research Methodology
o Research Methodology.....................................................................5
o Aims and Objectives.........................................................................6
o Research Questions...........................................................................7
o Scope and Limitations.......................................................................7
o Literature Review..............................................................................7
o Sources of Data.................................................................................7
o Chapterisation...................................................................................8
CHAPTER-2
DIRECTOR AS AGENT OF THE COMPANY…………………………9-11
CHAPTER-3
POWERS OF DIRECTORS……………………………………………..12-15
CHAPTER-4
DUTIES OF DIRECTORS………………………………………………16-18
CHAPTER-5
CONCLUSION……………………………………………………………..19
BIBLIOGRAPHY

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 CHAPTER-1

INTRODUCTION

The position that the directors occupy in a corporate enterprise is not easy to explain.1 They
are professional men hired by the company to direct its affairs. Yet they are not the servants
of the company. They are rather the officers of the company. “A director is not a servant of
any master. He cannot be described as a servant of the company or of anyone”2. “A director
is in fact a director or controller of the company’s affairs. He is not a servant”3. A director
may however work as an employee in a different capacity. For example, in Lee v Lee’s Air
Farming Ltd4:

The principal controller and a director of a company was also working as its pilot. Following
his death while acting as a pilot, his widow recovered compensation under the Workmen’s
compensation act5.

The companies act makes no effort to define the position of directors. Sub-section 13 of
section 2 of 1956 act only provided that “director includes any person occupying the position
of a director, by whatever name called”.

In the words of Bowen LJ6: Directors are described sometimes as agents, sometimes as
trustees, and sometimes as managing partner. But each of these expression is used not as
exhaustive of their powers and responsibilities, but as indicating useful points of view from
which they may for the moment and for the particular purpose be considered.

1
Ram Chand & Sons Sugar Mills (P) Ltd v. Kanhayalal Bhargava, AIR 1966 SC 1899: (1966) 2 Comp LJ 224.
2
Moriarty v. Regent’s Garage Co, (1921) 1KB 423.Lush J, 431
3
McCARDIE J at 446, Moriarty v. Regent’s Garage Co, (1921) 1KB 423.
4
1961 AC 12: (1960) 3 WLR 758 (PC)
5
This principle will not apply where no proof of employment apart from being a director is available. Thus in
Parson v. Albert J Parsons Ltd, 1978 IRC 456: noted 1978 JBL 61, a person who was removed from directorship
of a private company was not allowed to recover compensation for unfair dismissal. Though the employment
appeal tribunal had allowed his claim, for the court of appeal disallowed it.
6
In Imperial Hydropathic Hotel Hotel Co Blackpool v. Hapson, (1882)LR 23 Ch D 1: 49 LT 150 (CA). See
also, Albert Judah Judah v Rampada Gupta, AIR 1959 Cal 715

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A director is a manager, controller of the company. He cannot be treated as an employee of
the company. However, a director may work as an employee in another capacity or in a
different position.

In the view of the Supreme Court a expressed in Ram Chand & Sons Sugar Mills v.
Kanhayalal,7 the position that the directors occupy in a corporate enterprise is not easy to
explain. In reality, the directors are professional men, hired by the company to control,
supervise and manage the affairs of company. They are regarded as the officers of the
company. “A director is not a servant of any master. He cannot be described as a servant of
the company or of anyone”.

The true position of directors seems to be that of agents for the company with powers and
duties of carrying on the whole of its business subject to the restrictions imposed by the
articles and the statutory provisions. But, the directors of a company are not the agents of the
shareholders.8

Justice Subba Rao, explaining the position of directors of a company held that they are
professionals appointed by the company to manage and look after its affairs, but they are not
the servants of the company.9

1.1. Research Methodology

Research Methodology:
This particular project study has used the basic tools and techniques of research that was
considered to be appropriate for an undergraduate level scholars and practitioners. This
research work is based on doctrinal method. Doctrinal method of research emphasises on the
dependency of books, articles, newspapers, various internet resources etc.

Aims and Objectives :

The objective of this project work is:
 To know about the position of the directors of the company under the companies act
2013;

7
A.I.R. 1966 S.C. 1899
8
Gramophone & Typewriter Ltd. v. Stanley, (1908) 2 K.B. 89.
9
Ramchandra & Sons v. Kanhayalal, AIR 1966 SC 1899 (1903)

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  To know the position of directors as agents of the company under the companies act
2013 ;
 To know about the power and duties of the directors under the companies act 2013.

Research Questions:
 What is the position of director of the company?
 What is the position of director as agent of the company?
 What are the powers and duties of the director under companies act ?

Scope and Limitations:

The researcher have limited the scope of this project topic of director as agent of the
company, their power and duties under the companies act 2013 including the judicial decision
under the company law.

Literature Review:
According to Jessel MR, 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.
According to Bowmen LJ, Directors are described sometimes as agents, sometimes as
trustees and sometimes as managing partners. But each of these expressions is used not as
exhaustive of their powers and responsibilities, but as indicating useful points of view from
which they may for the moment and for particular purpose to be considered.

Statement of problem:
The project fails to conduct a primary research through examination, interviews and
surveys. The research limits to book and internet content.

Sources of Data:

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Information and data for the research has been collected through review of literature from
both primary and secondary sources.
Primary Sources: used herein are the statutory enactments and case laws
Secondary Sources: used in the projects are the text books, journals and online database.

Chapterisation:
The whole project work comprises of 5 chapters.
Chapter-1, deals with the introduction along with the research methodology contained in it;
Chapter-2, ; deals with position of director as agents
Chapter-3, deals with the powers of director;
Chapter- 4, deals with the duties of director
Chapter-5, concludes the whole project

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 Chapter-2

Director as agent of the company

It was clearly recognized as early as 1886 in Ferguson v. Wilson10,that directors are in the
eyes of laws, agents of the company. The court said:

The company has no person; it can act only through directors and the principal case is, as
regards those directors, merely the ordinary case of principal and agent.

The general principles of agency, therefore, govern the relations of directors with the
company and of person dealing with the company through its directors. Where the directors
contract in the name, and on behalf of the company, it is the company which is liable on it
and not the directors. Thus where the plaintiff supplied certain goods to a company through
its chairman, who promised to issue him a debenture for the price, but never did so and the
company went into liquidation, he was held not liable to the plaintiff11. Similarly, where the
directors allotted certain shares to the plaintiff, they were held not liable when the company,
having exhausted its shares, failed to give effect to the allotment12. Just as notice to an agent
in the course of business amounts to notice to the principal so it is true of directors in relation
to the company13. But notice to a director will amount to notice to the company only if the
directors is, like an agent, bound in the course of his duty to receive the notice and
communicate it to the company. It was held in Hampshire land Co, re,14 that where one
person is an officer of two companies, his personal knowledge is not necessarily the
knowledge of both the companies unless he is under a duty to receive the notice and to
communicate it to the other15.Like agents, they have to disclose their personal interest, if any,
10
1866 LR 2 Ch App 77: 36 LJ Ch 67: 15 LT 230
11
Elkington & Co v Hurter, (1892) Ch 452: 66 LT 764. Kuriakose v PKV Group Industries, (2002) 111 Comp
Cas 826: (2002) 1 KLJ 630: (2002) 2 KLT 342, a director was held to be not personally liable in a suit against a
private chit fund company.Attacment of the property of the mananging director was heldto be not permissible.
12
Ferguson v Wison, (1866) LR 2 Ch App 77: 36 LJ Ch 67: 15LT 230. See also, Belvedere Fish Guano Co v.
Rainham Chemical Works, 1921 AC 465, 488; Hrushikesh Panda v Indramani Swain, (1988) 63 Comp Cas 368
(Ori), a director held not personally liable for the debts of the company.
13
See, for example, S.229, Indian contract act, 1872 and TR Pratt (Bombay) Ltd v. MT ltd, AIR 1938 PC 159,
common directors of three companies in a group were supposed to know that the assets of one company were
mortgaged for the loan to another.
14
(1896) 2 Ch 743
15
Followed in Sree Meenakshi Mills Ltd v Ratilal Tribhowandas Thakar, AIR 1941 Bom 108: ILR 19441 Bom
273. Receipt of money by directors from agents known to them for investment in the company when nthose

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in any transaction of the company. It should, however, be remembered that they are agents of
an institution and not of its individual members except when that the relationship arises due
to the special facts of a case16.

For a loan taken by a company, the directors, who had not given any personal guarantee to
the creditor, could not be made liable merely because they were directors.17

The articles of association empowered the managing director to represent the company in
legal proceedings. It was held that a further authorization that was not necessary to enable
him to file a complaint for dishonor of a cheque under section 138, Negotiable instruments
act.18

Section 184 of the companies act, 2013 contains those duties of a director which an ordinary
agent is bound to perform for his principal. The relationship between principal and agent
being fiduciary in nature, the latter has to take care that there is no clash between his personal
interest and that of the principal’s interest. Therefore, directors can do nothing which may
promote their personal interest to the detriment of the company’s interest.19

In Shyam Sundar Jalan v. State, 20the court was required to decide whether for the purpose
of the provisions of Income tax, the position of directors will be that of a company’s agent or
as a chief officer of the company. The court held that it will depend on the evidence available
in the case concerned. However, it is well settled that the director will not be an agent of
Company’s shareholder.

agents knew that it was misapplied trust money.

16
See, for example, Allen v Hyatt, (1914) 30 TLR 444. It is a matter of evidence in each case whether a director
can be regarded as a principal officer or agent for income tax purposes, Shyam Sundar Jalan v state, (1977) 47
Comp Cas 61 (Cal). Directors who issued duplicate share certificates against those which were lying under
pledge with the company were held personally liable to the deceived person.

17
Indian Overseas Bank v RM Mktg (P) Ltd, AIR 2002 Del 344:(2001) 107 Comp Cas 606

18
Sarathi Leasing Finance Ltd v B Narayana Shetty, ILR 2006 KAR 1929: (2006) 3 Kant LJ 397: (2006) 131
Comp Cas 798.

19
Radenadan India Ltd v. International Trade Exports Centre Ltd., AIR 2006 SC 3456
20
(1977) 47 Comp. Cas. 61

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 CHAPTER-3

POWERS OF DIRECTORS

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Section 149 of the Companies Act, 2013 empowers the directors with the general power
vested in the Board. The Board of directors is entitled to exercise all the powers and do all
required actions which a company is authorised to exercise. But, such action is subject to
certain restrictions.

The powers of directors are co-extensive with the powers of the company itself. The director
once appointed, they have almost total power over the operations of the company.

There are two limitations on the exercise of the power of directors which are as follows.

1. The board of directors are not competent to do the acts which the shareholders are
required to do in general meetings.
2. The powers of directors are to be exercised in accordance with the memorandum
and articles.

The individual directors have powers only as prescribed by memorandum and articles.

The intervention of shareholders in exceptional cases

In following exceptional situations the general meeting is competent to act in matters

delegated to the Board:

1. When directors have acted mala fide.

2. When directors have due to some valid reason become incompetent to act.
3. The shareholders can intervene when directors are unwilling to act or there is a
situation of deadlock.
4. The general meetings of shareholders have residuary powers of a company.

Restrictions on powers under the statutory provision

The Companies Act 2013 also lays the manner in which the powers of the company is to be
exercised. There certain powers which can be exercised only when its resolution has been
passed at the Board’s meetings. Those powers such as the power:

1. To make calls.
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 2. To borrow money.
3. To issue funds of the company.
4. To grant loans or give guarantees.
5. To approve financial statements.
6. To diversify the business of the company.
7. To apply for amalgamation, merger or reconstruction.
8. To take over a company or to acquire a controlling interest in another company.

The shareholders in a general meeting may impose restrictions on the exercise of these
powers.

Powers to be exercised with general meeting approval

Section 180 of the Companies Act 2013 states certain powers which can be exercised by the
Board only when it is approved in the general meeting:

1. To sale, lease or otherwise dispose of the whole or any part of the company’s
undertakings or where the company owns more than one undertaking, of the whole
or substantially the whole of any such undertakings.
2. To invest otherwise in trust securities the amount of compensation received by it
as a result of any merger or amalgamation.
3. To borrow money for the purpose of the company
4. To remit or give time for the payment of, any debt due from the directors.

When the director has breached the restrictions imposed under the sections, the title of lessee
or purchaser is affected unless he has acted in good faith along with due care and diligence.
This section does not apply to the companies whose ordinary business involves the selling of
property or to put a property on lease.

Power to constitute an Audit committee

The board of directors are empowered under section 177 to constitute an audit committee. It
needs to be constituted of at least three directors, including independent directors. In the
committee, the independent directors need to be in the majority. The chairperson and

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members of the audit committee should be persons with the ability to read and understand the
financial statements.

The audit committee is required to act in accordance with the terms of reference specified by
the Board in writing.

Power to constitute Nomination and Remuneration Committees and Stakeholders

Relationship Committee

The Board of directors can constitute the Nomination and Remuneration Committee and

Stakeholders Relationship Committee under section 178. The Nomination and Remuneration
Committee should be consisting of three or more non-executive directors out of which one
half are required to be independent directors.

The Board can also constitute the Stakeholders Relationship Committee, where the board of
directors consist of more than one thousand shareholders, debenture holders or any other
security holders. The grievances of the shareholders are required to be considered and
resolved by this committee.

Power to make a contribution to charitable or other funds

The Board of directors of the company is empowered under section 181 to contribute to the
bona fide charitable and other funds. When the aggregate amount of contribution, in any case,
exceeds the 5% of the average net profit of the company for the immediately preceding
financial years, then the prior permission of the company in a general meeting is required.

Power to make a political contribution

Under section 182 of the Companies Act 2013, the companies can make a political
contribution. The company making a political contribution should be other than a government
company or a company which has been in existence for less than three years.

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Also, the amount of contribution should not exceed 7.5% of the company’s net profit in the
three immediately preceding financial years. The contribution needs to be sanctioned by a
resolution passed by the Board of Directors.

Power to contribute to National Defence Fund

The Board of Directors is empowered to make contributions to the National Defence Fund or
any other fund approved by the Central Government for the purpose of National defence
under section 183 of the Companies Act 2013. The amount of contribution can be the amount
as may be thought fit. This total amount of contribution made should be disclosed in the
profit and loss account during the financial year which it relates to.21

Powers under rule 8: Rule 8 of the companies rules 2014, provides that, the following
powers shall be exercised only by the means of resolution passed at the meeting of the board
namely:

 To appoint or remove managerial personnel

 To take note of the disclosure of the director’s interest and shareholding
 To accept or renew or review the terms and condition of public deposits
 To appoint internal and secretarial auditor

Other powers

In addition to the items referred above, there are various other matters, as illustrated below in
the routine working of the company which are considered by the board at board meetings

 Issuance of shares
 Allotment of shares and debentures
 Appointment of directors and managing directors
 Merger and acquisition of companies
 Capitalisation of reserves and issuance of bond shares

21
Anubhav Pandey,Duties of director under the Indian Companies Act 2013, ipleaders, ( April 10, 2020, 9:30
AM), https://blog.ipleaders.in/directors-duties/

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 CHAPTER-4

DUTIES OF DIRECTOR

Duties of the Directors

A. Fiduciary duties: As fiduciaries, the directors must:
(a) Exercise their powers honestly and bona fide for the benefit of the company as a whole;
and
(b) Not to place themselves in a position in which there is a conflict between their duties to
the company and their personal interests. They must not make any secret profit out of their
position. If they do, they have to account for it to the company.
In the case Fateh Chand Khad v. Hindsons(Patiala) Ltd, 22the court explained that the term
“to act honestly” includes the duty not to utilise the position and knowledge possessed by him
to the detriment of the company’s interest.
In AlbionSteel v. Wire Co. v. Martin, 23where a director sold certain goods to his company at
the market price out of his own personal stock and earned profit as he had obtained the goods
earlier at lower rates. It was held that that the director is required to account for his profit.
However, if there is an incidental increase in the market rates, the director would not be
accountable for personal profits. 24

B. Duties of care, skill and diligence: Directors should carry out their duties with reasonable
care and exercise such degree of skill and diligence as is reasonably expected of persons of
their knowledge and status. He is not bound to bring any special qualifications to his office.
According to Romer,J., in Re, City Equitable Fire Insurance Co., 25a director need not to
exhibit in the performance of his duties a greater degree of skill than what may reasonably be
expected from a person of his knowledge and experience. A director of a life insurance
company, for instance, does not guarantee that he has the skill of an accuracy or of a
physician.
In the Indian context, the Supreme court in Official liquidator v. P.A.Tendulkar, 26observed:
“ A director….cannot shut his eyes to what must be obvious to everyone who examines the
affair of the company even superficially. If he does so, he would be liable for dereliction of
22
A.I.R. 1956 Pepsu 89.
23
(1875) 1 Ch. D. 580
24
Hirsche v. Simons, (1894) A.C. 654.
25
(1925) Ch. 407.
26
(1973) 43 Comp Cas 38 SC

16
duties…. even he is not shown to be guilty of fraud, it is enough if his negligence is of such a
character as to enable frauds to be committed thereby causing loss to the company.”

C. Standard of care: The standard of care, skill and diligence depends upon the nature of the
company’s business and circumstances of the case. They are various standards of the care
depending upon:
(a) The type and nature of work
(b) Division of powers between directors and other officers
(c) General usages and customs in that type of business; and
(d) Whether directors work gratuitously or remuneratively

D. Duty to disclose interest:  It is a statutory disclosure as provided under section 188 of the
companies act,1956. It imposes a duty on the particular director to make disclosure, if he
himself or his relative, is a partner or has any interest in a firm. He shall not enter into any
contract with the company except with the consent of the board of directors of the company.
E. Duty to attend board meetings: The Act only says that the office of a director is
automatically vacated if he fails to attend three consecutive meetings of the board or all
meetings for a period of 3 months, whichever is longer. Moreover, a director’s habitual
absence may become evidence of negligence.
In Charitable Corpn. v. Sutton, 27it was held that “if some persons (directors) are guilty of
gross non-attendance, and leave the management entirely to others they may be guilty, of
breach of trust”.

F. Duty not to delegate: A director should not delegate his functions to another person. But
delegation of functions may be made to the extent to which it is authorized by the Act or the
constitution of the company.28
In Palai Central Band Ltd. v. Joseph Augusti, 29the Kerala High court,rejected the director’s
plea that they relied on the efficiency and competency of their staff and auditors, who always
certified the accounts as true.

27
(1742) 26 ER 642.
28
Powers and duties of director of a company, freebcomnotes,( April 10, 2020, 9.40 AM),
https://freebcomnotes.blogspot.com/2017/03/powers-and-duties-of-directors-of.html
29
(1966) 1 Comp. L.J. 360

17
 CHAPTER-5

CONCLUSION

A director is an agent of the company for the conduct of the business of the company.
Directors of the company have fiduciary relationship with the company as well as the
shareholders when he acts as an agent or officers of the company.

18
The director as the Companies act 2013, indicates, that they hold an important position in the
administration and management of a company. It must be noted that the director actually
works in different capacities at different times to ensure that the company is run in a legal and
an efficient manner. The act places immense responsibility on the shoulders of the director.
Directors are bound to use their fair and reasonable diligence while discharging their duties
and they shall act honestly, and with such care as may be reasonably expected from, having
regard to their knowledge and experience.

Therefore it can be concluded that the companies act should be suitably be amended to
introduce such in built checks and balances that the office of a director does not become an
absolute which practically is the case.

BIBLIOGRAPHY

 BOOKS
Avatar Singh, Company law, 285, (17th ed. 2018)
Dr. S.C.Tripathi, Company law, 302,(2nd ed. 2019)
 WEBSITES

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https://blog.ipleaders.in/directors-duties/, ( April 10, 2020, 9:30 AM)
https://freebcomnotes.blogspot.com/2017/03/powers-and-duties-of-directors-of.html,
( April 10, 2020, 9.40 AM)

20