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General Duties of a Director towards Company

In discharging the duties of his position, a director must act fairly, without negligence and with the same amount of care that an ordinary man would take if the business of the company was his own.


Directors are regarded as agents of the company, having and exercising such powers as may be conferred upon them by the charter documents of the company. As agents, directors are required to discharge a degree of care, skill and diligence in exercise of their powers and functions on behalf of the company. Directors are treated and considered as trustees of the company and its property (including the funds of the company, intellectual property rights, trade secrets etc.) which is under their control. Directors are required to exercise powers in the company's interest at all times, and situations where their personal interests conflict with their duty to the company. They are personally liable to make good all losses that may arise out of misapplication of funds or misappropriation of assets.


For instance, directors are required to disclose their interests (if any) in any contracts or arrangements entered into or to be entered into by the company and refrain from voting or participating in Board proceedings where an interest exists.However, in case of private companies, the interested director can participate in the Board meetings after disclosing his/her interests in the transaction(s).


Liability arising from duties to minority shareholders


We have covered the obligation to disclose conflicts of interest earlier. Let’s examine the duties of directors towards shareholders in more detail - if the majority shareholders are dissatisfied with the actions of directors, they can at any time galvanize support (only ten percent of shareholders are required to call an extraordinary general meeting) and remove them from office by passing an ordinary resolution.

Q. What can the minority shareholders do if the actions taken by the directors are prejudicial to their interest? Do the directors have duties towards depositors?
Answer: Under the Companies Act (both 1956 and 2013), any group of shareholders who own at least 10 percent of the shares can approach a company court / tribunal claiming that the affairs of the company are being carried out in a manner that is prejudicial to public interest or the interest of the members or is oppressive to its members (Oppression and Mismanagement Claims). The tribunal has wide powers to issue corrective measures, which includes stipulating measures for appointment of directors, removal of directors, recovery of any fraudulent amounts by a manager or director, setting aside of agreements or other necessary measures as it may think fit in such applications. Apart from the reliefs permitted with respect to Oppression and Mismanagement Claims, Section 245 of the Companies Act, 2013 has also specifically permitted class action suits, which will now enable shareholders or depositors to file applications claiming monetary compensation or damages against directors, auditors, expertsconsultants and advisors or other persons for incorrect or misleading statements made to the company or fraudulent or unlawful actions.



C. Liability under other legislations


1.   Labour Laws:


Depending on their operations, companies involved in construction or manufacturing or employing labourers (usually in excess of 20) are expected to comply with various labour legislations for social welfare, which typically require employers to obtain various permissions or licenses, maintain registers, submit forms to labour departments, or make financial contributions for the benefit of labourers. Failure to comply with applicable provisions of such laws can attract penalties.

  • The Building & Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 states that if any of the provisions of this Act are not adhered to (provisions include fixing appropriate work hours, taking adequate safety and on-site protection measures, etc.), and such offence is committed by a company, with the consent or connivance of, or is attributable to any of the directors of the company, then such person shall be deemed to be guilty of that offence. Violations of this Act can attract penalties which include both civil fines and imprisonment.

For instance, directors guilty of contravention of the provisions regarding safety measures under this Act are punishable with imprisonment for up to three months, or with fine up to INR 2,000/- or with both. Where an employer fails to give notice of the commencement of his building or other construction work, he is punishable with imprisonment up to three months, or with fine up to INR 2,000/-, or with both.

  • The Contract Labour (Regulation and Abolition) Act, 1970 has similar provisions. The duties of the company would

include a requirement to register with statutory authorities (and make regular reportings) if a construction site/ establishment employs a certain number of contract labourers, making adequate arrangements to provide certain required amenities such as canteens, rest rooms, clean drinking water and first aid, and the regular payment of wages to the contract labourers. It should be noted herein that in the investee company there would typically be a number of contract labourers used for construction work. Contravention of any of the provisions of this Act or any rules made thereunder may attract imprisonment up to 3 months and a fine of up to INR 1,000/-.

  • The Industrial Disputes Act, 1947 ("ID Act") provides the machinery for the settlement and investigation of disputes of the workers of an industrial establishment/ undertaking (subject to specific facts and circumstances, a construction site may qualify as an 'industrial establishment or undertaking').  The ID Act also prescribes a punishment for certain actions, which are considered offences under the act. If such offence is committed by a company, any person including a manager or a director who was in charge of the affairs of the company at the time when the offence was committed may be held liable. Penalties for any offence under the ID Act can range from fines up to INR 5,000, or in some cases, imprisonment up to the extent of one year, or a combination of both, depending on the nature of the non-compliance.
  • Other welfare legislations can also apply to the establishment such as the Payment of Bonus Act, 1965, the Equal Remuneration Act, 1976, the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 ("EPF Act"), the Employees State Insurance Act, 1948, etc. Under these legislations, every person who at the time of commission of a violation was responsible for and in charge of the conduct of the business of the company is liable and may be punished with imprisonment and/or fine accordingly.

The director of a company that fails to make contributions on behalf of employees to the provident fund established under the EPF Act can be punished with a minimum penalty of imprisonment for 6 months and fine of INR 5,000 which may extend to 3 years and INR 10,000 respectively.


2. Liability under Environmental Laws


Depending on their operations, companies, especially those involved in construction or manufacturing in India are expected to comply with various Indian environmental legislations that aim to prevent and contain environmental pollution. The primary laws that may apply are the Air (Prevention & Control of Pollution) Act, 1981 and the Water (Prevention & Control of Pollution) Act, 1974 and several rules and regulations framed there under.


Punishment for various offences under Environmental Laws can be imprisonment up to 6 years and/or fine, depending on the nature of the offence and degree of non-compliance. –For instance, failure to renew an existing license is considered a relatively minor non-compliance that may be punishable with a late fine if not renewed within the specified extended time limit provided in the respective legislations. However, discharge or emission of any environmental pollutants in excess of the prescribed standards is considered a serious offence that may attract criminal prosecution, especially if the non-compliance leads to loss of life or property.


3. Liability under Tax Laws:


Contravention of tax laws in India can lead to imprisonment and/or fines, the magnitude of which can vary according to the nature of the offence. Few examples are mentioned below –

  • Failure to deduct tax at source is punishable with imposition of fine to the extent of the amount of tax failed to be deducted.
  • A wilful attempt to evade tax may be punishable with imprisonment that may extend up to 7 years with fine under the Income Tax Act.
  • Making a false statement in any verification required under the Income Tax Act will be punishable with imprisonment which may extend to 7 years or with fine.

In case of offences committed by companies, in addition to the company, every person including a director, manager, secretary or other person who was in charge of the company for the conduct of its business can be held liable, unless such person can show that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.


Under some of the statutes such as the Income Tax Act, 1961, and the Central Sales Tax Act, 1956 if the tax cannot be recovered from a private company under liquidation, then the persons who were directors for the period of non-payment of taxes can be held jointly and severally liable for the payment of such tax. If such directors can prove that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on their part in relation to the affairs of the company then they cannot be held liable.


4. Liability under exchange control laws:


The Foreign Exchange Management Act, 1999 ("FEMA") and the rules and regulations made pursuant to the FEMA regulate cross-border transactions between Indian companies on the one hand and non-resident entities on the other. Where a company contravenes the provisions of FEMA, every person who was in charge of, or was responsible for the conduct of the company at such time, can be held personally liable for the contravention. However, if such person proves that he had exercised due diligence in undertaking the activities of the company, he shall not be held responsible for such contraventions. Note that there cannot be any imprisonment for violation of FEMA.


5. Liability under Negotiable Instruments Act:

This is a rather common source of trouble for directors of a company. The Negotiable Instruments Act, 1881 ("NI Act") makes the director of a company liable to be punished by imprisonment and fine if the company’s cheques are dishonored by the bank on account of insufficiency of funds etc, and it can be proved that the offence was committed with the consent or connivance of, or is attributable to, any neglect on the part of the said director.  The NI Act provides for criminal liability of responsible directors and the penalty may comprise of imprisonment up to 2 years or a fine that is twice the amount of the cheque dishonoured or both. Liability under the NI Act attaches to a director in the following circumstances:

  • such director was ‘in charge of’ and responsible for the company for the conduct of the business of the company at the time of the commission of the offence, or
  • where such director was not in charge of the business of the company, but the offence was committed with his consent or connivance, or due to any neglect on his part.

Non-executive directors, who are not involved in the management of the funds and issuance of the cheques of the company, are typically not held liable under the NI Act.


D.   Measures for Exclusion of Liability/ Mitigation of Risk

1. Circumstances when a director may be exonerated: The principle underlying most Indian legislations is that the liability for contravention of applicable laws will affix on the person who has been specifically charged with the responsibility, or to whom the responsibility has been delegated. In some instances, a director may avoid personal liability if it can be demonstrated that director was not the designated person responsible for ensuring such compliance and the contravention/ offence was committed without the director's knowledge, consent or connivance, or that he acted honestly, reasonably, and having regard to all the circumstances of the case, he ought fairly to be excused.


2. Can a company indemnify its director?: Indian law prohibits a company from indemnifying its directors against any liability which by virtue of any rule of law would attach to him in respect of any negligence, default, misfeasance, breach of duty or breach of trust of which he may be guilty in relation to the company. However, an indemnity will be enforceable if it is in respect of a liability incurred by a director in defending any proceedings in which judgment is given in his favour, or where he is excused.


3.D&O Policy: A company may obtain a Directors and Officers Liability insurance policy (D&O Policy) to insure the directors of the company against any personal liability which may be incurred by them, in the course of performing their duties as directors of the company. A D&O Policy will typically not insure against deliberate, dishonest or fraudulent acts of a director.


Inspite of the possibility of mitigating the liability (as discussed below), it is seen that in some cases, a petitioner/ complainant would make the directors of the company parties to the proceedings. This would entail that the director will have to participate/ appear in court proceedings (even if only to establish the lack of such director's liability) and there is a nuisance value attached to such proceedings.


Investors typically try to ensure that their nominee directors are appointed as non-executive nominee directors of the investee company. They may require such position to be explicitly recorded in the corporate records of the company, such as:

  • the minutes of the meeting as well as the text of the resolutions passed at the Board and/or the general meeting of the company for appointing the investor director;
  • the register of directors maintained by the company; and
  • the relevant forms (Form No DIR-8) and documents filed by the Company with the relevant registrar of companies in connection with the appointment of the director.

Delegation: Delegation of administrative functions of the Board, to identified directors (typically managing or executive directors) and/or officers of the company is an important tool for mitigating the personal liability of non-executive nominee directors. Most administrative functions of the Company can be delegated by the Board. However, unless the articles specifically authorize the Board, it is not permitted to delegate their powers that involve the exercise of judgment and discretion. The Board is also not permitted to delegate powers that have been specially conferred on it by the shareholders or under law. However, the duty of the Board or where the responsibility is vested with a specific director or committee of directors, such director or such committee, is to exercise reasonable and adequate supervisory powers over such delegated duties.


The extent of delegation permissible is contingent on the requirements of the business in which the company is engaged and the provisions of the articles of association. The larger the business carried on by the company, the more numerous and more important the matters that would be left by the directors to the officers of the company.

Action points to protect innocent directors from potential liability

Even though the statutes discussed above impose personal liability on, inter alia, the directors of the company, such liability can be mitigated if it can be demonstrated that a director has no executive/ administrative role in the company, is not responsible for the day to day management and/ or was not responsible for compliance with the statutory provisions which were not complied with. In some instances, a director may avoid personal liability if it can be demonstrated that the director has exercised due diligence in ensuring compliance with the requirements of applicable laws and the contravention/ offence was committed without his knowledge, consent or connivance.


However, such a director will also need to make judicious use of information available to him through the board process and act diligently to be able to claim benefit of this exception. If a non-executive director has knowledge of a particular violation of law and ignores to take reasonable steps to mitigate the same and if his actions convey acquiescence to the violations he can be held liable.


i) Record-keeping measures: The records of the company and the minutes of meetings of the Board/ shareholders of the company should clearly record the nature and extent of delegation of responsibilities and duties by the Board, to specific directors and/or officers, executives of the company and the names of such directors, executives and officers should also be recorded


ii) Measures for identification and allocation of responsibility: It should be ensured that administrative functions (such as maintaining statutory books and registers, filing all documents and returns with relevant governmental agencies, including the registrar of companies, etc.) and the day to day management of the company are properly delegated to identifiable directors/officers of the company.


Further, all compliances with environmental, labour and all other laws having penal consequences should also be delegated to identified directors/ officers of the company. It should also be ensured that the extent of powers delegated to directors/officers is in accordance with the provisions of its articles of association.


It should be ensured that all governmental and regulatory filings, to the extent practical, identify the directors, officers and/or executives who are responsible for the day to day administration of the company and complying with the requirements of applicable laws.

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