Role of the Board of Directors in a Company

Introduction

A Company is an artificial, intangible, invisible entity. It has neither a mind, nor a body of its own but exists only in the contemplation of law. On the other hand a living person has a mind along with knowledge and intentions and it also has hands to carry out its intention. Therefore, a corporation must act through living persons[1]. Therefore, it becomes necessary for company to have directors for this job. Directors are appointed to manage the day to day business activities along with meeting the financial and statutory obligations of the company. While carrying out theses duties, they must act lawfully, honestly and make decisions for the benefit of the Company and its members. The term ‘Director’ is defined under Section 2 (34) of the Companies Act, 2013 (hereinafter referred to as the Act) as director appointed by the board of a company. There can be just one director but, on the contrary it is advised that in order to ensure proper functioning there must be more than one director for every company except in one person companies where one director suffices.

‘Board of director’ term is used jointly for the directors. Section 2 (10) of the Act is of utmost significance in this regard which defines the term board of directors as the board of directors or board, in relation to a company, means the collective body of directors of the company.

Position of Directors

Directors are professional men hired by company to direct its affairs. They are officers and face of the company. They are defined sometimes as agents or trustees or managing director of the Company.[2] They control the affairs of the company and alongside may also work as an employee in a different capacity[3]. It was recognised in the case of Ferguson v Wilson[4] that the directors are, in the eyes of law, agents of the Company. The court held that the company has no person, it can act only through directors and the case is, as regards those directors, merely the ordinary case of principal and agent. Therefore, it can be concluded that the general principles of agency govern the relationship between company and director.

Trustees

The Nigerian Corporate Law contains the provision for the directors being trustees. Directors are trustees of the Company’s money, properties and powers and as such must account for all the money over which they exercised control and shall refund any money improperly spent. In RamaswamyIyer v Brahamayya and Co[5], the Madras High Court observed that directors are the trustees for a company with reference to their power of applying funds of the company.

Personal liability

When a tort or some other wrong, whether civil or criminal in nature, is occurred during the course of business of a company, , the question arises that who shall be liable for the same, the company or the director. It has been stated that commercial enterprise or venture cannot be discouraged by subjecting a director with onerous potential liability. If a director is to be made personally accountable, it is necessary to examine the part he played personally in regard to the act complained of[6].

Appointment

The success of a company also depends on the competence and integrity of its directors and the complete Board of Directors. It is therefore, necessary that the management of companies should be in the proper hands[7]. The appointment of directors is thereby strictly regulated by the Act. Section 149 of the Act requires that every public company shall have a minimum of three directors and whereas, every private company must have at least two directors. In case of a one person company, there has to be at least one director. There can be a maximum of fifteen directors in a company. However there is an exception carved out and companies can have more than fifteen directors by passing of a special resolution. Further, according to Section 149 of the Act, only an individual can be a director in a Company. Any individual cannot be appointed as drector unless (S)he has been allotted a director identification number under Section 154[8] of the Act. Every listed public company shall have at least one third independent directors. The Central Government may prescribe such classes of companies to have at least one-woman director. Under the miscellaneous requirements eveery company is to have one director who has stayed in India for more than 182 days in the previous year and also to have one director elected by small shareholders as prescribed[9].

Disqualifications of Board of Directors

The disqualifications for a Director are laid down in Section 164 of the Act. A person is not capable of being appointed as a director on the following grounds-

A person of unsound mind, when the fact has been certified by the court of competent jurisdiction;
an undischarged insolvent;
sentenced to six months or more of imprisonment for offence relating to moral turpitude and five years have not elapsed from the expiry of sentence;
order for removal has been passed against him/her by the tribunal;
(s)he has not paid his/her calls on shares held by him/her in the company;
convicted for any offence under Section 188 of the Act;
he has not complied with the requirement of director identification number under Section 152(3) of the Act.

A person cannot hold office of director in more than twenty companies at the same time[10]. The reason behind this requirement is because a person cannot be expected to have detailed knowledge about many enterprises. Moreover, his capacity to exercise sound judgment can be effected. This provision is added to save companies from mismanagement which could have arisen because of careless and preoccupied directors.

Removal by Shareholders

Section 169 of the Act provides that “a company may, by an ordinary resolution, remove a director before the expiration of his period of office”. This provision does not apply in two scenarios, firstly, when the Director is appointed by the tribunal in pursuance of Section 242 of the Act, secondly when the company has adopted a system of electing two-thirds of its directors by the principle of proportional representation under Section 163 of the Act. A special notice of a resolution to remove a director is required, that means a notice of the intention to remove a director should be given to the company not less than 14 days before the meeting. The said director will have a right to make a representation against the resolution and also the right to be heard at the general meeting.

Also Read Shadow Director under the Companies Act, 2013

Removal by Tribunal (Section 242(2)(h))

When, on an application to the tribunal for prevention of oppression or mismanagement, the tribunal finds that the relief must be granted, it may terminate the agreement of company with the director or managing director or other managerial person. This amounts to termination by the tribunal. When the service of a director is terminated by the tribunal, (s)he cannot serve any company in a managerial position for a period of five years. Furthermore, in case of removal by the tribunal, the director cannot sue the company for damages or compensation for loss of office.

Powers of Directors

Section 179 of the Act declares that the directors are entitled to exercise all powers and do all such acts as the company is authorised to exercise and do, subject to the provisions of this Act. The effect of this Section is that the powers of the directors become co-extensive with that of the company itself while the restrictions could be provided through memorandum or articles or regulations made by the company in the general meeting[11]. There are two specific limitations on their powers:

The board is not competent to do what the Act, memorandum and articles require to be done by the shareholders.
The exercise of powers by the directors is subject to the Act, memorandum and articles.

There can be a clash of interest and overlapping of powers between the shareholders and the directors of a company but they are not authorised to usurp each other’s powers. For instance, the powers of management are vested in the directors and they alone can exercise these powers.

This principle has been largely followed by the courts in India. In the case of Suburban Bank (P) Ltd v Thariath[12], by the articles of the company, the management was vested in the hands of the directors. Whereas, the shareholders by a resolution pressed the directors to forego a debt. The court held that the directors were entitled to enforce the payment of the debt.

Intervention by Shareholders

A fact that cannot be overlooked is that the company is an institution which is owned and controlled by its shareholders. The shareholders are the ultimate and final authority within the corporate enterprise. Proviso to Section 179(1) of the Act provides that the directors cannot function against the articles of the company. The inherent, residuary and ultimate powers in regards to a company are held by the shareholders through a general meeting. Therefore, the shareholder can replace the existing management with a new one which would be more responsive to theirs and company’s interests. This aspect of the relationship between the directors and the shareholders has been highlighted in the case of LIC v Escorts Ltd[13]. In the following exceptional situations, the shareholders are authorised to act even in a matter which is under an expressed authority of the board of directors:

Mala-fide: When any fraudulent and mala fide act is being done by the board, it is apparent that the board will not itself redress it. Therefore, in such a situation, the majority of the directors may bring up a legal action against the wrong doers.[14]

Board incompetent: When all the directors become incompetent to act as directors, due to any valid reason, the majority of the shareholder may act as the directors. One such situation can be if all the directors are interested in a transaction of the company.

Deadlock: If there is a deadlock in a company that is when the directors are unwilling to act, the shareholders may be allowed to intervene. The leading case in this front is Barron v Potter[15] where the number of director was two. In case of a dispute between the two, a deadlock was created. It was held that the company had the inherent power to appoint an additional director.

Residuary power: When a power is not specifically granted to any set of members of the company, it shall be assumed that it resides with the shareholders which can be exercised by them in the general meetings.[16]

Restrictions on Power

The power of the board of directors is restricted on multiple levels:

Powers exercisable by the resolution at board meetings

The Act lays down a manner in which certain powers of the company are to be exercised. Section 179 of the Act is important in this regards because it provides that the following powers of a company can only be exercised through a resolution passed at a board meeting. These are power to:

make calls;
authorise buy-back;
issue securities including debenture;.
borrow money;
invest funds of the company;
grant loans or give guarantees or provide securities in respect of loans;
approve financial statements and board’s report;
diversify business of the company;
approve mergers and amalgamations;
take over a company or to acquire a substantial interest in another company;
Any other matter as may be prescribed by the articles.

Powers exercisable with general meeting approval

Section 180 of the Act further imposes important restrictions on the powers of the board of directors of a public company. The following are the powers that can be exercised by the board only with the consent of the company in a general meeting:

sale, lease or otherwise disposal of whole or substantially the whole of the undertaking of the company;
to invest in trust securities any amount that is received as a compensation for merger or amalgamation;
to borrow money, where the total borrowed money exceeds the paid up share capital and free reserves;
to remit or give time for repayment of any debt from a director.

Duties of Directors

The power granted to the directors is huge. Therefore, is will always be susceptible to abuse. The directors can capitalise their strategic position in a company to serve their own interests. Therefore, the law struggles to impose certain duties on the directors which materially reduce the chances of abuse.

Also Read Brown versus La Trinidad, (1887) 37 Ch. D. 1

Section 166 of the Act provides the statutory duties of the directors. The duties are summed up in the following points-

subject to provisions of this Act, the directors must act in accordance with the articles of the company;
director shall act in good faith and to promote the objects of the company and benefit of its members as a whole;
director shall exercise his powers with due and reasonable care, skill and diligence and shall exercise independent judgment;
director must avoid such situations where he may have direct or indirect conflict of interests with the company;
(s)he shall not attempt to gain any undue advantage for himself/herself. If (s)he is found to be doing so, (s)he shall be liable to pay an amount equal to that gain to the company;
director cannot assign his office to someone else, if he does so, the assignment shall be held void.

Any contravention of the provisions of this section shall be punishable with fine which shall not be less than Rs 1 Lac but may extend up to Rs 5 Lac.

Fiduciary Obligation

Section 166 (2) of the Act imposes the duty on directors to act in good faith. It includes things like breach of trust[17]. A director must not make any personal profits.[18] (S)he should not exploit the business to advance his/her own corporate opportunities[19]. (S)he must not indulge in exploitation of any unpublished or confidential information belonging to the company.

Managing Director

Section 197 of the Act provides for a managing or a whole time director or manager. The term is defined in Section 2 (54) of the Act to mean a person who is entrusted with substantial powers of management which would not otherwise be exercisable by him/her. Such powers may be conferred by the virtue of an agreement with the company or by the board through a resolution of the Company or the board by virtue of memorandum and articles. It includes a director occupying the position of managing director by whatever name (s)he may be. The company shall not employ more than one managing director at a time. A person shall not be appointed in this position for more than five years at a time. The reappointment shall not be made earlier than one year before the expiry of his term. The person shall not be of less than twenty years of age or has attained the age of seventy years. The director must not be an undischarged insolvent. (S)he must not have been convicted by a court of an offence and sentenced for a period of more than six months. The remuneration payable to the managing director shall be approved by a resolution at the general meeting of the company. A return in the prescribed form shall be filed within sixty days of such appointment with the registrar.

The maximum managerial remuneration payable to the directors collectively shall not exceed eleven per cent of the net profits of the company for that financial year. The remuneration to one managing director shall not exceed five per cent of the net profits. (S)he is an employee of the company having a preferential position over other directors but not to the extent so as to entitle him to the preferential payment to himself/herself. (S)he can be removed in the same manner in which (s)he was appointed. If (s)he is removed prematurely, (s)he is entitled to receive compensation for the same. Where the termination is brought about by alteration of the articles in a manner inconsistent with the terms of appointment, damages will have to be paid. Where the appointment is defective within his/her knowledge, no remuneration or compensation was payable, but if the company has accepted his work, it must pay him reasonable remuneration on the principle of quantum meruit[20].

Managing director is an employee of the company[21]. The remuneration payable to him in the capacity of managing director shall be taxable under the head salary as per the provisions of the Income Tax Act, 1961. Further, a company may be required to restate its financial statement due to fraud or non-compliance of any requirement under the Act. Section 199 of the Act provides for a provision for recovery of any remuneration received by a present or past managing director or any other officer in excess of what would have been payable to him as per restatement of the financial statements.

Conclusion

Board of directors is a collective body of individuals who manage the day to day affairs of the company. Their position in the company is a very powerful. Therefore, it becomes necessary to control their ambit, by imposing restrictions and liabilities on the board. The Act provides for a complete package in this regard because the law for the directorship in a company is complete, viable and fool proof. Therefore, it assures a proper management of affairs of the company by the board of directors in the favour of the company.

References :

[1]Lennard’s Carrying Co Ltd v. Asiatic Petroleum Co Ltd, 1915 AC 705.

[2]Coal Mining Co, Re, (1878) 10 Ch D 450.

[3] Moriarty v. Regent’s Garage Co, (1921) 1 KB 423.

[4](1866) LR 2 Ch App 77.

[5](1966) 1 Comp LJ 107.

[6] C Evans & Sons Ltd v. Spritebrand Ltd, 1985 BCLC 105.

[7] Indian States Bank Ltd v. Sardar Singh, AIR 1934 All 855.

[8]Section 152(3) of the Act.

[9]Section 151 of the Act.

[10]Section 165 of the Act.

[11]Pulbrook v. Richmond Consolidated Mining Co, (1878) LR 9 Ch D 610.

[12](1967) 2 Comp LJ 182.

[13](1986) 1 SCC 264.

[14] Marshal’s Value Gear Co Ltd v. Manning , Wardle & Co Ltd, (1909) 1 Ch 267: 100 LT 65.

[15](1914) 1 Ch 895.

[16]Bamford v. Bamford, 1970 Ch 212.

[17] Boston Deep Sea Fishing & Ice Co v. Ansell, (1888) 39cCh D 339.

[18]Hirsche v. Simons, 1894 AC 654.

[19]Cook v. Deeks, (1916) 1 AC 554.

[20]Craven – Ellis v. Canons Ltd, (1919) 56 SLR 625 (HL).

[21] He may be associated with the company in more than one ways. ESIC v. Haryana Biological (P) Ltd, (2011) 163 Comp Cas 202.