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Comparative Analysis of Directors’s Duties and Liabilities in Indian Companies

Article by Tanushri Sharma

“A company is a legal entity that is created by law, and it is not a physical or tangible entity.” “It lacks both consciousness and a physical form.” A living being possesses a cognitive faculty capable of acquiring knowledge and forming intentions, as well as physical appendages to execute those intentions. However, a company lacks these abilities and must rely on the actions of individuals. Therefore, the company’s operations must be entrusted to human representatives, specifically referred to as Directors, who collectively form the Board of Directors. According to “Section 2(34) of the Companies Act, 2013”, ‘A director means a director appointed to the Board of a company.’ Additionally, “Section 2(10) of the Companies Act, 2013”, states ‘Board of Directors or Board, about a company, means the collective body of the directors of the company.’

The directors of companies are obligated to fulfil certain obligations and bear liabilities as stipulated Under “Section 166 of the Companies Act, 2013”, including the following:

  1. Acting with utmost integrity and good faith is essential for a company director, aiming to promote the company’s objectives.
  2. A director is obligated to prioritize the best interests of the company, taking into consideration the well-being of its employees, shareholders, the community, and the preservation of the environment. This duty extends beyond mere profit considerations to encompass broader societal and environmental concerns.
  3. Adherence to Powers the Memorandum of Association (MOA) outlines a company’s permissible actions, while the Articles of Association (AOA) specify the powers granted to its directors. Directors must ensure compliance with the boundaries set by both documents.
  4. Executing his duties with diligence, care, and skill is imperative for a director, who must exercise independent judgment in making decisions. This entails a responsibility to carry out his role carefully and thoughtfully, avoiding negligence and ensuring that his actions are in the best interest of the company.
  5. A director must steer clear of situations where there is a direct or potential conflict of interest with the company. It is paramount to avoid any circumstances that may compromise objectivity or create conflicting loyalties between personal interests and those of the company.
  6. Maintain Confidentiality Directors, with access to critical information about a company’s operations and finances, must keep such information confidential. Sharing this information is only permissible if it benefits the company.
  7. Directors are strictly prohibited from seeking or obtaining any undue gain or advantage for themselves, their relatives, partners, or associates. This prohibition extends to preventing any actions that might give rise to suspicions of favouritism or impropriety.
  8. Regular Meeting Attendance Directors are expected to attend as many board meetings as possible. Any director absent for more than three meetings in a calendar year will face automatic termination from the board.
  9. The director is expressly prohibited from transferring or assigning his office to another person. This provision safeguards the stability and continuity of leadership within the company, preventing the arbitrary transfer of responsibilities to individuals who may not meet the requisite qualifications or standards.
  10. Directors are tasked with establishing effective systems to ensure compliance with all relevant laws, confirming the adequacy and functionality of such systems.

The Act outlines specific liabilities that directors may incur following a company’s incorporation, contributing to the regulation of their conduct.

  1. Personal Liability, a concept defined as holding an individual accountable for their actions, is typically not transferred from a company to its director. However, the Companies Act of 2013 introduces certain conditions under which such personal liability may be imposed, particularly concerning fiduciary responsibilities.
  2. Tax Liability: “Section 179 of the Income Tax Act 1961” stipulates that if dues from a private company become unrecoverable or the tax assessed is deemed unrecoverable, directors may be jointly liable for the same. The director must prove that the company’s default did not result from any breach of duty on their part.
  3. False Statements: Directors making false statements regarding their company may be personally liable unless they can demonstrate that these statements were made in good faith or publicly retract their consent to the falsehood.
  4. Company Debts: Directors are generally not personally liable for a company’s debts unless it can be proven that the debts arise from fraudulent activities undertaken by the director.
  5. Fraudulent Business Conduct: Personal liability may be imposed on a director engaged in activities contrary to the company’s interests, especially if such actions are malicious.
  6. Liability Regarding Shareholding: In the event of a company’s bankruptcy or liquidation, a director’s personal stakes and shareholding may lead to personal liability.

Criminal Liability can also be incurred under specific circumstances:

  1. Dishonoured Cheques: Directors knowingly signing dishonoured cheques may face criminal liability for abetting financial fraud.
  2. Directors may be held criminally liable for breaches of labour laws if such breaches occur under their supervision or instructions.
  3. Vicarious Liability stipulates that an individual may personally bear liability for the wrongful acts of another, but the Supreme Court[1] clarifies that a director cannot be held liable on behalf of the company without statutory backing. Specific liability can be imposed only if there is substantial evidence of active involvement in wrongdoing.

Conclusion

In addition to adhering to the responsibilities outlined in the Companies Act, a director is obligated to comply with duties stipulated in various other statutes. Given the pivotal and demanding nature of this role, directors must comprehend these duties fully. As a protective measure, directors should prudently engage in negotiations regarding indemnification clauses within shareholder and director agreements.

Understanding the significance of their position, directors should approach the negotiation of indemnification clauses with care. These clauses serve as a crucial protective mechanism for directors, offering them a shield against potential legal risks and ensuring their financial security. A well-crafted indemnity clause, resulting from careful negotiation, should encompass comprehensive coverage. This coverage includes indemnification for any legal proceedings initiated by third parties, encompassing both the costs associated with legal defence and any liabilities incurred throughout the legal process.

In essence, a properly negotiated indemnity clause acts as a robust safeguard, fortifying directors against potential legal challenges and reinforcing their ability to fulfil their duties with confidence. This underscores the need for directors to proactively engage in discussions regarding indemnification clauses, as these negotiations are integral to preserving their legal and financial well-being in the complex landscape of corporate governance.

[1] Iridium India Telecom Limited v. Motorola Inc (2011) 1 SCC 74

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