Fiduciary Duties and Liabilities of Directors

Introduction

A newly appointed director of a company has wide essential responsibilities, and as such, it is essential that any newly chosen director is conscious of his obligations and liabilities. This presentation spotlights the responsibilities elaborated for new directors and also gives information as to how to prevent being in the break of these responsibilities[1]. Fiduciary means bond of trust towards its obligated people. Directors are obligated by law to act in a bona fide manner for the better functioning of the organisation after it has taken involvement in the business registering process. This comprises an obligation to work appropriately but not make underground advantages. These are fiduciary duties.

The article will discuss the duties and liabilities of directors in a company.

Evolution of the duties of a Director

In the past, when Companies Act of 1956 was enforced, and the functions and management of directors were only stated in a concise manner in Section 291[2].  All judgements in connection with the duty of a director were pronounced on principles of common law and equity. These duties are in relation with directors and, they unswervingly replicate the functions involved of the directors.  Some other terms of directors are managers or councils of the organization. The Indian Companies Act provides the right to include any person occupying the position of director by whatever name they selected for.

Who is a Director

Director is anybody inhabiting the part of director irrespective of his name within the corporation. This could comprise an individual who is not selected to the broad that is appointed director. Section 285 provides that the sections of a director are lawful regardless of any imperfection in his or her selection and must hence unavoidably apply to a de facto director[3].

Features of Fiduciary Duty:

The directors have two types of fiduciary duties to perform. The first one starts with their loyalty towards the country, government and corporation acting in good faith and honestly and having proper manners to do so.  The next one is the duty of caring for employee’s stakeholders and other creditors in a certain level acting in a very competitive and thorough manner. He has to be obedient and manage all the policies by fulfilling goals made by the corporation. He has to maintain all his transactions and perform according to the constitution of the corporation.

The directors are expected to maintain the confidentiality of the company even after resigning, which shall be done with the interest of the stakeholders. Director of the company has the foremost duty to work for the benefit of the company and not any self-interest. So, in case of any liability, the director is accountable, and he has a legal obligation to see and cross-check with the work of the company.

Illustration

Let us say that if a director buys shares inside the company at a maximum which he has traded at a profit, he must justify for such profit[4] or if a director of one company enters into a contract with any other company and if any benefit has happened, then it is the fiduciary duty of the director to return the profit to the company. A director may retain an individual gain if the corporation authorizes, but the permission must be given by the associates in a general conference and not by the board of control and a resolution in the general meeting may be condensed unacceptable as damaging to the minority if the director concerned controls the voting in the general meeting.

The directors have an obligation of not having any competition in terms of profit, and the director might take advantage of a corporate chance on his own explanation if his corporation took the same scheme and forbade it in good faith. Directors must use their authority for proper resolutions that benefit the corporation and not to increase their own goods.

According to section 76 of the Indian Companies Act[5] a director’s responsibility of maintenance and ability towards the company has been increased and now strains a better quality than previous one[6]. The directors while making any kind of decisions on his personal capacity should consider the points of employees as well, he should ensure that employees working have their sayings in the meetings, and their way of working is also being encouraged.

Liabilities of Directors

The Directors have to ensure that they do not mess with the reputation of the Company for any kind of personal benefits because that will give rise to liability of the director. The director has the duty to avoid any kind of conflict that has been raised due to any kind of transactional struggles. If a conflict is revealed, the company’s Articles of Association may allow the board of directors to support it as long as it is authorized in the appropriate method.

If any damage or forfeiture has been suffered by a shareholder, creditor, or the company, through any manner, then they can act against the director personally, but mostly it has been observed that in order to save the company, all liabilities are imposed upon the director who has failed to perform his fiduciary duty.

This could further lead to the elimination of the director, and it happens when more than half of the stakeholders give their votes in favour of the elimination while this can be temporary or permanent depending upon the decision of the Committee. The court could also issue an interim injunction with the purpose of stumbling any continuing movements in the responsibilities of the director. It works to decrease the possible for additional economic loss and prevent unalterable damage to the corporation. There are situations that arise where the stakeholders of corporations in personal capacity file suits against the directors for non-performance.

Judicial Interpretation

Even the judiciary with time and situation has explained about the fiduciary duties of directors. Like in the case of Percival v Wright[7] the court pronounced that “the directors share the two relationships towards the company that is one of an agent and other of a trustee.” As the director acts as an agent on behalf of the company and secondly, he acts as a trustee, as many depend upon its act. All the decision taken by the director will always impact one or the other. So, all the decisions to be taken with utmost care so that nobody suffers any loss.

This is further explained in the case, Globe Motors Ltd. vs Mehta Teja Singh[8], where the court held that the duties of directors and trustee are vis-à-vis almost the same and thus utmost care should be taken by the directors while taking any decision for the company.

In another case Rajeev Saumitra v Neetu Singh & Ors[9] where the court opined that if the director put herself in such a situation that her personal interest conflicts with the duties owned towards the company, then her duties, will be of fiduciary duties of shareholder.

In another case Dale and Carrington v Prathapan & Ors[10] where the issue is about the control and management of the company. In this case, the Managing Director was given additional equity shares which raised the opposition from the shareholders. The court has to decide whether extending the additional equity shares is in the bonafide interest of the company or not.

The court held that even if the director got profit due to this, but his motive for taking additional equity shares is in favour of the company than it is not an issue but if it proves the improper motive of the director than the director is liable. The court further explained with the phrase ‘proper purpose rule’ as in what is the purpose of doing a certain act. Thus, if the allotment is malaise and not in the interest of the company than the liability rises on the director.

Conclusion

Responsibility is an important factor in deciding the efficiency of the Director. The directors are the individuals who handle the corporations or business on their terms, but they are subjected to the interest of the Corporation.  The duty is not merely of care, but also, they have to subject themselves to the duty of loyalty towards the Corporations. Directors are also obligated to the shareholders, creditors, employees, and others. The limit of an obligation of a director would be contingent on the nature of his presidency. They have no authority to put them in a place in which their individual welfare or responsibility to other individuals are liable to fight with the responsibilities to the company.

A director is not under any kind of obligation of giving constant attention for management of his company; instead, his responsibilities being of a recurrent nature to be done at review board conferences or group meetings. Thus, the fiduciary duty of the director helps him to grow the company.

References:

[1]Philip Newman, Memorandum and Articles of Association Explained, Published in Company Records on 10th March 2019 available at https://www.informdirect.co.uk/company-records/memorandum-and-articles-of-association-explained/    (last accessed on 13/09/2020 at 2:02 pm)

[2].The Companies Act, 2013; Section 291

[3] McCann FitzGerald, A Director by Another Name : The De facto Director, Lexology, last updated on 5th November 2019; available at https://www.lexology.com/library/detail.aspx?g=2d02a1df-6505-4ddc-a9be-6f658db9fbf9  (last accessed on  13/09/2020 at 3:11 pm)

[4] Facts on Saving and Investing Campaign, Investor Education, available at https://www.sec.gov/pdf/quizansr.pdf  (last accessed on 13/09/2020 at 4:51 pm)

[5]The Companies Act, 2013; Section 13

[6]Adam Barone, what are some examples of Fiduciary Duty, Investopedia, Last Updated on 11th September 2019 available at https://www.investopedia.com/ask/answers/042915/what-are-some-examples-fiduciary-duty.asp  (last accessed on 13/09/2020 at 6:31pm)

[7] Pericval v Wright [1902 (2) Ch. 421]

[8] Globe Motors Ltd. vs Mehta Teja Singh (1984 55 Comp Cas 445 Delhi)

[9] Decided on January 27, 2016 by the Delhi High Court in I.A. NO. 17545 OF 2015 and CS (OS) NO. 2528 OF 2015.

[10]Dale and Carrington v. Prathapan & Ors. (2005 )1SCC 212