Directors Role, Responsibilities and

Liabilities

Director Directing mind and will of the

Company
Meaning under the Companies Act,1956
Section 2 (13):
Director includes any person occupying the position of
director, by whatever name called.

Qualification

No educational or other qualifications are required in order to

become director of the company whether public or private.
Similarly, the Companies act 1956 does not prescribe any
requirement as to age limit for becoming a director.
The only condition is as per section 253 No body corporate, firms or
associates can become a director. Only Individual can be a Director
of a company because the office of a director is office of
responsibility, accountability and position of trust.
Section 274 negatively stipulates the eligibility requirement for
becoming a director by providing certain disqualifications.

Number of Directors

As per section 252 every public company shall have 3 directors and
every other company shall have at least 2 directors.
Maximum no. of directors in case of private company shall be as
specified by the articles. It could be 7 or 8 or even 20 or 25.Central
Govt. approval not required in case of any increase in number.
The act does not prescribe any maximum number of directors for
public company also but if the maximum no of directors exceed 12,
prior approval of central Govt. would be required.
Thus the approval of central govt will be necessary for the
increase in number of directors , and not for the appointment .

Shadow Director/Deemed Director

Any person in accordance with whose directions

or instructions directors are accustomed to act.
(Section 7)

Legal Position of Directors

As Agents - Directors are the agents of the

Company .Thus , where the directors contract in the
name and on behalf of the company it is the
company which is liable for it and not the Directors
(Subject to exceptions)
As Trustee
- The Directors of the company are
trustees(to a limited extent)for the company with
reference to their power of applying funds of the
company and for misuse of the power they could be
rendered liable as trustees.

Are Directors Employees?

Directors are not the employees of the company as once

elected they enjoy well-defined rights and powers under
the Companies Act,1956 or the Articles of the Company

Even the shareholders who elect them cannot interfere

with their rights and powers except under certain
circumstances

Types of Directors - A Glance

Executive Director

Executive Director means managing

director or whole- time director .

Not defined under the Companies Act, 1956.

Non-Executive Director

Non-executive directors are the directors on the

Board of a company, other than a Managing
Director and whole-time Director or a Director
employed in his professional capacity.

Not defined under the Companies Act, 1956.

Understanding- Managing Director

Meaning under the Companies Act,1956
Section 2(26) Managing Director means a director who, by virtue

of an agreement with the Company or

of a resolution passed by the company in general meeting or

by virtue of its memorandum or articles of association ,

is entrusted with substantial powers of management which would

not otherwise be exercisable by him ,

AND

includes a director occupying the position of managing director by

whatever name called:

Contd...

Understanding- Managing Director

Provided that the power to do administrative acts of routine nature
when so authorised by the Board such as power to affix the common
seal of the company to any document or to draw and endorse any
cheque on the account of the company in any bank or to draw and
endorse any negotiable instrument or to sign any certificate of share
or to direct registration of transfer of any share , shall not be deemed
to be included within the substantial powers of management.
Provided further that a managing director of a company shall
exercise his powers subject to superintendence, control and direction
of the Board of Directors

Understanding- Whole Time Director

Meaning under the Companies Act,1956

Explanation to section 269 whole time director

includes a director in the whole time employment of
the company

Independent Director
As per Clause 49 of Listing Agreement
Independent Director shall mean a non-executive
director of the company who:
a.

apart from receiving directors remuneration, does not have

any material pecuniary relationships or transactions with
the company, its promoters, its directors, its senior
management or its holding company, its subsidiaries and
associates which may affect independence of the director;

b.

is not related to promoters or persons occupying

management positions at the board level or at one level
below the board;

c.

has not been an executive of the company in the

immediately preceding three financial years;

Independent Directorcontd
d.

is not a partner or an executive or was not partner or an

executive during the preceding three years, of any of the
following:

i.

the statutory audit firm or the internal audit firm that is

associated with the company, and

ii.

the legal firm(s) and consulting firm(s) that have a material

association with the company.

e.

is not a material supplier, service provider or customer or a

lessor or lessee of the company, which may affect
independence of the director; and

f.

is not a substantial shareholder of the company i.e. owning

two percent or more of the block of voting shares.

Appointment of Directors

Subscribers- as Directors
Appointment of first Directors
Appointment at general meeting
Appointment by the Board of Directors
Appointment by third parties, and
Appointment by Central Government.

Appointment by the company

[Section 255 to 257 , 263 , 264]
Appointment

of subsequent directors is made at every

annual general meeting of the company.
Section

255 provides that not less than two third of the

total number of directors of a public company or a private
company must be appointed by the company in general
meeting.
These

directors must be subject to the retirement by

rotation.

APPOINTMENT BY THIRD
PARTIES [Section 255]
Section

255 permits that one third of the total number

of directors of a public company or a private company
which is subsidiary of a public company to be
appointed by parties other than share holders on a
non-rotational basis.
The

articles may give right to debenture holders ,

financial corporations or banking companies who have
advanced loans to the company to nominate directors
on the board of company.
The

number of directors so nominated should not

exceed one third of the total strength of the board.
They

are not liable to retire by rotation.

APPOINTMENT BY SMALL
SHAREHOLDERS
[ Section 252 ]
A small shareholders means a shareholder holding shares
nominal value of Rs.20,000 or less he may be a holder of
equity share or preference share or both.

APPOINTMENT BY CENTRAL
GOVERNMENT
The

central government has the power under

section 408 to appoint directors on an order passed
by the tribunal (earlier company law board) to
effectively safeguard the interest of the company or
its shareholders or the public interest to prevent
mismanagement.
Such

directors shall hold office for a period not

exceeding three years on any one occasion.

Appointment by the Board of Directors

Appointment by the Board of Directors

Additional Directors
(Section 260)

Filing up the Casual Vacancy

(Section 262)

Alternate Directors
(Section 313)

Additional Directors
Section 260
Nothing in section 255, 258 or 259 shall affect any power
conferred on the Board of directors by the articles to appoint
additional directors:
Provided that such additional directors shall hold office only up
to the date of the next ensuing annual general meeting of the
company:
Provided further that the number of the directors and additional
directors together shall not exceed the maximum strength fixed
for the Board by the articles.

Filling of casual vacancies among directors

Section 262
(1) In the case of a public company or a private company

which is a subsidiary of a public company, if the office of any

director appointed by the company in general meeting is
vacated before his term of office will expire in the normal
course, the resulting casual vacancy may, in default of and
subject to any regulations in the articles of the company, be
filled by the Board of directors at a meeting of the Board.
(2) Any person so appointed shall hold office only up to the
date up to which the director in whose place he is appointed
would have held office if it had not been vacated as aforesaid.

Alternate Directors
Section 313
(1) The Board of directors of a company may, if so authorized by its
articles or by a resolution passed by the company in general meeting,
appoint an alternate director to act for a director (hereinafter in this
section called the original director) during his absence for a period of
not less than three months from the State in which meetings of the Board
are ordinarily held.
(2) An alternate director appointed under sub-section (1) shall not hold
office as such for a period longer than that permissible to the original
director in whose place he has been appointed and shall vacate office if
and when the original returns to the State in which meetings of the Board
are ordinarily held.
(3) If the term of office of the original director is determined before he so
returns to the State aforesaid, any provision for the automatic reappointment of retiring directors in default of another appointment shall
apply to the original and not to the alternate director.

Powers of the Board of Directors

General Powers of the Board under section 291

Powers entrusted under the Companies Act, 1956

Powers entrusted to Directors under the Companies

Act,1956:
Certain powers of the Board of Directors which can be exercised

only at a meeting:

Power to make calls on unpaid shares Section 292(1)(a)

Power to issue Debentures and borrow moneys otherwise than on

Debentures Section 292(1) (b) & (c).

Power to invest the funds of the Company Section 292(1)(d)

Power to grant loans Section 292(1)(e)

Power to authorize the buyback of shares Section 292(1)(aa)

CONTD..

Certain powers of the Board of Directors which can

be exercised only at a meeting .. Contd..

The power of filling vacancies in the Board (Section 262)

Power to make political contributions (Section 293-A)

Sanctioning or giving consent to contracts of or with any

director (Section 297(4))

Receiving of notice of disclosure of interest (Section 299)

Receiving notice of disclosure of share holdings of directors

only at a meeting of the Board (Section 308)

Contd

Certain powers of the Board of Directors which can be

exercised only at a meeting .. Contd..

Unanimous consent of all directors present at Board meeting

necessary for appointing as managing director or manager,
a person who is already managing director or manager of
another company - Sections 316(2) and 386(2)

Sanction by unanimous consent of all the directors present

at a Board meeting necessary for making investments in
companies, loans etc. - Section 372A

Declaration of solvency- Section 488(1)

Approval of text of advertisement for inviting public depositsSection 58A read with rule 4(4) of the Companies
(Acceptance of Deposits) Rules, 1975.

Duties of Directors Statutory

To file return of allotments (Section 75)

Not to issue irredeemable preference shares or shares

redeemable after 20 years (Section 80)

To convene statutory, Annual General Meeting (AGM) and also

extraordinary general meetings [Sections 165, 166 & 169]

To prepare and place at the AGM along with the balance sheet
and profit and loss account a report on the companys affairs
including the report of the Board of Directors (Sections 173, 210
and 217).

To authenticate and approve annual financial statement (section

215).
CONTD.

Duties of Directors Statutory

Duty to attend board meetings

To appoint first auditor of the company (Section 224)

To appoint cost auditor of the company (Section 233B)

To disclose interest (Section 299-300)

To disclose receipt from transfer of property (Section 319)

To disclose receipt of compensation from transferee of shares

(Section 320)

To make a declaration of solvency in the case of a Members

voluntary winding up (section 488).
CONTD

Duties of Directors General

Duty of good faith

Duty of care

Directors must act in the best interest of the

company and should not make any secret
profits.
Director must display such care in

performance of work assigned to him

which a man of ordinary prudence would
take in his own case
Duty not to delegate - Director being an agent is bound by the
maxim delegatus non potest delegate
subject to certain exceptions.

Liabilities of Directors

Liability to the company

Liability to third parties

Liabilities for breach of statutory duties

Liability for acts of co-directors

Criminal liability.

Liabilities to the company

Breach of fiduciary duty- where a director acts dishonestly to the

interests of the company, he will be held liable for breach of
fiduciary duty.

Ultra vires acts- Directors are supposed to act within the

parameters of the provisions o the Companies Act, Memorandum
and Articles of association, since these lay down the activities to the
limits of the company and consequently to the powers of the Board
of Directors. Where the directors act ultra vires, they are liable to
indemnify the company for any loss/damage suffered due to such
act.

CONTD...
.

Liabilities to the company CONTD..

Negligence
- Where the Directors fail to exercise
reasonable care, skill and diligence, they shall be deemed
to have acted negligently in discharge of their duties and
consequently shall be liable for any loss or damage
resulting there from.

Misfeasance Directors can also be held liable for their

acts of misfeasance ,i.e., misconduct or wilful misuse of
powers .

Liability to third parties

Liability under the provision of Companies Act, 1956

Mis-statement in Prospectus (section 62 and 63)

Irregular allotment (section 71)

Unlimited liability (section 322 and section 323)

Fraudulent trading (section 542)

Liability for breach of warranty of authority

The directors may be proceeded against for any loss sustained by
any third party where they transact any business which is ultra
vires the company or the articles of association of the company.

Liability for breach of statutory duty

The Companies Act, 1956 imposes numerous

statutory duties on the directors under various sections
of the Act. Default in compliance of these duties attract
penal consequences .

Liabilities for acts of co-directors

A director is the agent of the company (except for

matters to the dealt with by the company in the general
meeting) and not the agent of the other members of
the Board. So nothing done by the Board can impose
liability on a director who did not participate in the
boards action or did not know about it. To incur liability
he must either be a party to a wrongful act or must
consent to it.

Criminal Liability
Apart from civil liability director of a company may also incur criminal
liability under common law as well as Companies Act and other
statutes. Some of them (fine or /and imprisonment) are as follows:

Filing of untrue prospectus or statement in lieu of prospectus

[Section 44(4)]
Failure to repay deposits (Section 58A)
Failure to repay excess application money [Section 93]
Fraudulently renewing a share certificate or issuing a duplicate
share certificate [section 84(3)]
Undischarged insolvent acting as director [section 202(1)]
Default in distributing dividends [section 207]
Failure to supply information to auditors [section 221(4)]
Failure to disclose interest [section 299 (4)]
Failure to disclose shareholding [section 308(3)]
Acting as director or manager after removal by the Company Law
Board [Section 407 (2)

Thank you