COMPANY LAW

PRESENTATION ON-DUTIES AND LIABILITY OF THE DIRECTORS

SUBMITTED BY:- MADHU JANA

DEPARTMENT OF LAWALIAH UNIVERSITY

KOLKATA

DEFINITION OF THE DIRECTOR

DIFFERENCE

COMPANIES ACT 1956

• According to 1956 act the

maximum limit of directors in a

company was 12

• Approval of central government

was necessary.

• A company can become a director

for only 15 companies

• The amount to be deposited

along with the notice of

nomination to any person to the

office of directors was Rs.500.

COMPANIES ACT 2013• According to new companies act, 2013 the maximum limit of directors in a company has been increases from 12 to 15.Further to that can be made by passing the special resolution.

• Approval of central government has been dispensed off.

• A company can become a director for only 20 companies instead of 15.Out of this 20 companies he cannot be directors of more than 10 public company.

• The amount to be deposited along with the notice of nomination to any person to the office of directors has been increased from Rs.500 to Rs. 100000 or such higher amount as may be prescribed.

APPOINTMENT OF DIRECTORS(Section 152of the companies act 2013)

DUTIES OF DIRECTORS (Section 166 of the companies act 2013)

DUTIES OF DIRECTORS

General duties

• Acting within their authority as directors

• Acting in a way which promotes the interest of the new company formation

• Exercising reasonable care, skill and diligence

Fiduciary duties

Directors have a duty in law to act in good faith for the best interest of the company after it has taken part in the company registration process.

This includes a duty to:• Act properly• Not make secret profits • Avoid conflicts of interest.

THE DIRECTORS FIDUCIARY DUTYduty to act in the best interest of the company- means directors have to act

in the best interest of :• Members/ shareholders• Creditors• Other companies within the group of companies• Employees s 19(1)(c), customers, suppliers• The community?• Fawziah Holdings Sdn Bhd v Metramac Corp Sdn Bhd [2006] 1 CLJ 996, 1010• “the sooner directors realize that the companies Act applies to private

companies whether family or not, the better it is. A company is not a mere puppet of the directors, and the people interested in the proper and lawful conduct of the company are not just the directors and the shareholders. All sorts of people have a legitimate and proper interest in the well being and preservation of the assets and properties of a company, like creditors and persons having dealings with the company”

DIRECTORS DUTIES• THE MAIN FUNCTION of directors duties is to ensure the

loyalty of directors to their company. • Directors and other corporate offices are said to be in a

fiduciary relationship with the company that they serve• To whom are the duties owed? Percival v Wright (1902)

: to the company the directors acquired shares from the shareholders

without disclosing to them that the directors were negotiating to sell the shares to a third party at a higher price. Swinfen-Eady J held that the directors were under no obligation to disclose to the shareholders the existence of the negotiations. The only duty which was imposed upon the directors was to the company.

Constitutional and Contractual Duties

Directors have a duty to act in accordance with any constitutional or contractual agreements.

Examples of these include: • Memorandum of Association• Articles of Association• Shareholder Agreements• Employment Agreements• Service Agreements• Staff Handbooks• Board Resolutions

THE DIRECTORS FIDUCIARY DUTY • the test: Chatterbridge Corp Ltd v Llyods Bank

Ltd [1970] Ch 62, 74-whether an honest and intelligent man in the position of the director of the company concerned, could, in the whole of the existing circumstances have reasonably believed that the transactions were for the benefit of the company.

• 132(1) “a director of a company shall at all times exercise his powers for a proper purpose and in good faith in the best interest of the company”.

Duty to avoid conflicts of interest

• Directors have a duty to avoid conflicts of interest after they register a company.

• Where one may arise they will need to disclose this to non-conflicted directors and allow them to make the decision regarding the relevant transaction.

Duty not to accept benefits from third parties

Directors must not accept benefits from third parties for being a director.

However they will not be in breach of this duty if the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Management duties

• It is the duty of the directors to manage the company with care as soon as company formation has taken place.

• This generally means that all decisions and actions made after setting up a company should be taken that benefit the company.

WHAT DUTIES ARE OWED TO THE COMPANY

• The duties of directors can be examined under the following categories. Directors owe duty to :

• Act bona fide in the interests of the company as a whole;

• Use powers for their proper purposes;• Avoid conflict of interests; and• Exercise care, skill and diligence

Duty to act bona fide in the interest of the company

• In Re Smith and Fawcett Ltd (1942) Ch 304: where a director is required to act bona fide in the interest of a company, he must act according to what he considers, not what a court may consider, is in the interest of the company.

• * the directors are the ones to determine what is best for the company.• In Intraco Ltd v Multi-Pak Singapore Pte Ltd [1955] 1 SLR 313, the court

held that the proper test in determining whether the directors have acted bona fide was whether an honest and intelligent man in the position of the director in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.

• the court held that the word “honestly” does not mean that a director would only be in breach of duty if he had acted fraudulently. It means to act bona fide in the interest of the company. (the directors should only act to promote or advance the interests of the company).

Liabilities of Director

• Companies Act, 2013 cast a criminal liability and civil liability on “officer who is in default” which includes Executive Director .

• Definition of Officer in default is as follows:• “officer who is in default”, for the purpose of any provision

in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—

• (i) whole-time director;• (ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified; iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default; (v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

(vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer;

Directors with unlimited liability (Sec- 322-323)A limited company may make the liability of any or all of its directors unlimited.