DIRECTORS’ DUTIES AND RESPONSIBILITIES By CS Bhumitra V Dholakia
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Definition • “Director” means a director appointed to the Board of a company. • (Section 2(34) of the Companies Act, 2013)
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TODAY’S TOPIC • DIRECTOR’S DUTY AND RESPONSIBILITY. We will travel mainly through Section 166, 149 and schedule IV to the Companies Act, 2013. If time permits we will try to understand the provisions under the corporate laws. www.mrugacsl.com
APPROACH TO THE TOPIC DISCUSSION ON DUTIES AND RESPONSIBILITES OF DIRECTORS SIMPLICITER MEANS NON EXECUTIVE DIRECTORS AND INDEPENDENT DIRECTORS. www.mrugacsl.com
AS A COLLECTIVE BODY • DIRECTORS ARE RESPONSIBLE AS A BODY. ITS COLLECTIVE WISDOM OR COLLECTIVE MADNESS. • INDIVIDUAL DIRECTOR HAS NO AUTHORITY. HENCE HIS RESPONSIBILITY AND DUTY ARE LIMITED. www.mrugacsl.com
SOURCE COMMON LAW STATUTORY—UNDER THE COMPANIES ACT AND OTHER LAWS. MEMORANDUM AND ARTICLES OF ASSOCIATION. www.mrugacsl.com
PRIMARY POSITION TRUSTEE AGENT ORGAN EMPLOYEE www.mrugacsl.com
TRUSTEE…1 TRUSTEE OF COMPANY’S MONEY AND PROPERTY BUT WITHOUT INDIVIDUAL OWNERSHIP. HENCE QUASI TRUSTEE. www.mrugacsl.com
TRUSTEE….2
• DUTIES OF CARE ARE NOT ONEROUS AS THOSE OF TRUSTEES.
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SOCIAL TRUSTEE….3 • MODERN CORPORATION HAS A SOCIAL CHARACTER OF ITS OWN AND IT MUST NOT BE REGARDED AS THE CONCERN PRIMARILY OR ONLY OF THOSE WHO INVESTED MONEY IN IT BUT TO ALL THE STAKEHOLDERS. www.mrugacsl.com
AGENT AGENTS IN THE TRANSACTIONS WHICH THEY ENTER INTO ON BEHALF OF THE COMPANY. TO ACT AS BEST TO PROMOTE THE INTERESTS OF THE CORPORATION WHOSE AFFAIRS THEY ARE CONDUCTING. www.mrugacsl.com
ORGAN UNDER THE ORGANIC THEORY…..1 • Directors are something more than mere agents or trustees. The board is a primary organ of the Company. • When the brain functions the corporation is said to function. www.mrugacsl.com
ORGAN UNDER THE ORGANIC THEORY…..2
• This fiction theory has been assailed by the German jurists but Indian jurists have been recognizing this theory and as a result we have Section 166. www.mrugacsl.com
EMPLOYEE • Apart from formal contract of employment as managing director, whole time director and executive director, some of the responsibilities and duties make them responsible as Officers of the Company. www.mrugacsl.com
SECTION 166 • FOR THE FIRST TIME THE DUTIES OF DIRECTORS HAVE BEEN CODIFIED IN LINE WITH THE GLOBAL TREND AND SECTION 172 OF THE UK’S COMPANIES ACT, 2006 www.mrugacsl.com
166. Duties of directors. •
THESE ARE THE PRIME DUTIES AND APPLIES TO ALL KINDS OF DIRECTORS NAMELY NOMINEE, PROMOTERS, INDEPENDENT, GOVERNMENT AND WORKING DIRECTORS.
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SECTION 166(1) • Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company. www.mrugacsl.com
SECTION 166(1) HOW TO TAKE CARE..1 • Directors should study and familiarize himself with the provisions of the Articles of Association of the Company. • Items to be considered by the Board periodically as required by the Articles of Association. www.mrugacsl.com
SECTION 166(1) HOW TO TAKE CARE…2 • Reference of Articles to be stated in the resolutions for the matters namely appointment and resignation of directors, issue, transfer and forfeiture of shares, quorum, voting and conduct of meetings of the board, committee and shareholders etc. www.mrugacsl.com
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SECTION 166(2)PART • 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. www.mrugacsl.com
SECTION 166(2)PART • A director of a company shall act in good faith in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. www.mrugacsl.com
SECTION 166(2) HOW TO TAKE CARE…1. • Director to ensure that various policies are in place:– • Remuneration policies-directors, working directors, KMPs and all employees. • Dividend Policy www.mrugacsl.com
SECTION 166(2) HOW TO TAKE CARE…2
• CSR Policy—even though it may not be applicable. • Human Resources Policy • Corporate Business Policy • Vigil Mechanism www.mrugacsl.com
SECTION 166(2) HOW TO TAKE CARE…3 Director to ensure that – • Business Agenda gets the prominence over the regulatory or declaratory agenda. • Compliance report of all the laws applicable to the Company. www.mrugacsl.com
SECTION 166(2) HOW TO TAKE CARE…4 • Report on compliance of various codesnamely for prohibition of insider trading, code of conduct for directors, KMPs and senior management is circulated to all the directors with the Board Note. . www.mrugacsl.com
SECTION 166(2) HOW TO TAKE CARE…5 • Directors to attend sales meet, annual get together and get the pulse of the business environment and human relationship. • Directors to obtain periodicals or house journal published by the company. www.mrugacsl.com
SECTION 166(2) HOW TO TAKE CARE…6 • Directors to get copies of clarifications or response furnished by the Company to the Stock exchanges or press on any important market news. www.mrugacsl.com
SECTION 166(2) HOW TO TAKE CARE…7
• The “Board Process” is duly documented and annual compliance report thereof be obtained from Internal Auditors or Secretarial Auditors. www.mrugacsl.com
SECTION 166 (3) •
A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
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SECTION 166(3) HOW TO TAKE CARE…1 • Director to insist detailed background note on each agenda. • Director to go through the note carefully and should endeavor to understand its implications. www.mrugacsl.com
SECTION 166(3) HOW TO TAKE CARE…2 • Director to ensure recording of his/her concern or dissent or different • Quitting the Board is not panacea to be relieved from the past onerous responsibilities. www.mrugacsl.com
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SECTION 166(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. www.mrugacsl.com
SECTION 166(4) HOW TO TAKE CARE…1 • Timely disclosures of relatives, directorships, partnership, business position and other interest such as HUFs, Trustees, Business organizations etc. should be made and to be recorded in the minutes/registers. www.mrugacsl.com
SECTION 166(4) HOW TO TAKE CARE…2 • Director to ensure that there should be a certificate duly signed by Company Secretary and Chief Financial Officer stating that all related party transactions based on declarations made by Directors are considered at the board meeting. www.mrugacsl.com
SECTION 166(4) HOW TO TAKE CARE…3
• Director to ensure that approvals from the audit committee, board and shareholders obtained wherever applicable. www.mrugacsl.com
SECTION 166(4) HOW TO TAKE CARE…4 • If you are a Director of Listed Company then please ensure that items specified under Annexure X to the Listing Agreement (clause 49) are circulated, tabled and discussed at the Board Meeting either item-wise or under one Agenda. www.mrugacsl.com
SECTION 166(5) • He 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. www.mrugacsl.com
SECTION 166(6)
• A director of a company shall not assign his office and any assignment so made shall be void. www.mrugacsl.com
SECTION 166(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. www.mrugacsl.com
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DUTIES UNDER VARIOUS SECTIONS..1
• Duties to disclose correct information under sections 26 (issue of prospectus), and 42 (issue of letter of offer). www.mrugacsl.com
DUTIES UNDER VARIOUS SECTIONS..2 • Duty to attend meetings at least once in a year. (Section 167(1)(b).) • This duty is supplemental to the obligations cast under Section 166.
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DUTIES UNDER VARIOUS SECTIONS..3 • Duty to repay excess remuneration. {197(9)} • It is the internal circular of the Ministry of Corporate Affairs based on recommendation from professional bodies that no approval be granted for waiver of excess remuneration. www.mrugacsl.com
DUTIES UNDER VARIOUS SECTIONS..4 • Not to enter into non cash transactions with the Company or its holding, subsidiary or associate company for sale or purchase of any assets for consideration other than cash without prior approval of the shareholders. (Section 192) www.mrugacsl.com
DUTIES UNDER VARIOUS SECTIONS..5 • Not to enter in a Forward contract or any contract of speculative nature giving rise to have right over the shares at a specified price and time of a specified number/amount of relevant shares. {Section 194} www.mrugacsl.com
DUTIES UNDER VARIOUS SECTIONS..6
• Not to enter into Insider Trading and misuse the price sensitive information to gain direct or indirect benefit. (Section 195). www.mrugacsl.com
DUTIES UNDER VARIOUS SECTIONS..7 • Not to hold office of directorship more than 20 companies and public companies only 10. Alternate Directorship is included in such limit. Listing Agreement prescribes 7 public limited companies for director simpliciter. 3 companies for working director. www.mrugacsl.com
DUTIES UNDER VARIOUS SECTIONS..9
• Duty not to exceed Authority then that granted to him by Memorandum of Association, Articles of Association, Members, Board or Statute. www.mrugacsl.com
DUTIES UNDER VARIOUS SECTIONS..8 • Independent directors should be conversant with the provisions of Section 149, Schedule IV to the Companies Act, 2013 and Clause 49 of the Listing Agreement. www.mrugacsl.com
Important duties under Schedule IV
• Director to report concerns about unethical behaviour, actual or suspected fraud or violation of the company‘s code of conduct or ethics policy; www.mrugacsl.com
Important duties under Schedule IV
• acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees; www.mrugacsl.com
Important duties under Schedule IV • not to disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law www.mrugacsl.com
Duties under the other Acts..1 • Section 11 (2) of the Equal Remuneration Act makes any Director responsible for the offence committed by the Company if it is attributable to the negligence of said director even when he is not managing director or whole time director. www.mrugacsl.com
Duties under the other Acts..2 • Section 25 (2) of the Contract Labour (Regulation and Abolition) Act, 1970 makes any Director responsible for the offence committed by the Company if it is attributable to the negligence of the said director even when he is not managing director or whole time director. www.mrugacsl.com
Duties under the other Acts..3 • Section 22C (2) of the Minimum Wages Act, makes any Director responsible for the offence committed by the Company if it is attributable to the negligence of the said director even when he is not managing director or whole time director.
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Duties under the other Acts..4 • Section 32 of the Industrial Disputes Act, makes any Director responsible for the offence committed by the Company if it is attributable to the negligence of the said director even when he is not managing director or whole time director.
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Duties under the other Acts..5 • Section 42 (2) of the Foreign Management Act, makes any Director responsible for the offence committed by the Company if it is attributable to the negligence of the said director even when he is not managing director or whole time director.
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Duties under the other Acts..6 • Section 141 of the Negotiable Instrument Act cast an obligation on the Director to ensure that there should not be any negligence on his part in dishonor of the cheques. www.mrugacsl.com
Duties under the other Acts..7 • Directors to ensure that the Company has delegated the responsibility of compliance of Environment Laws to a proper and fit person and periodical compliance is placed at the board meeting. www.mrugacsl.com
Duties under the other Acts..8 • Directors to ensure that the Company appoints a whole time director as its “Occupier” under the Factories Act with proper authorities and responsibilities. www.mrugacsl.com
Important observations of the courts…1 • The Director must be loyal to the company in fact and in appearance. There must never be a clash between his interests and the interests of the company. A director would not be liable for mere errors of judgement or imprudent action. ((1966)36 comp cas 371) www.mrugacsl.com
Important observations of the courts…2 • Director is liable for non-payment of wages under the Payment of Wages Act, 1936 if following two things are established (1) He was the employer or (2) He was a person who had been named as Manager of the factory. {(1997)1 LLJ 656 (SC)} www.mrugacsl.com
Important observations of the courts…3 Indian Income Tax and Sale Tax Laws provide that if a private limited company makes a default in payment of tax then in that event directors will be responsible to pay the arrears of tax. (Section 179 of the Income Tax Act) www.mrugacsl.com
CONCLUSION • Ultimately Directorship by a nonpromoter is based on the Trust with utmost integrity, honest and transparency and deviation by promoter director puts non-promoter director in difficulty. Utmost care should be taken while accepting the directorship. www.mrugacsl.com
*** THANK YOU VERY MUCH AND SAFE JOURNEY OF DIRECTORSHIP TO ALL OF YOU. *** BY –CS BHUMITRA V. DHOLAKIA
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