Roles & Responsibility of Directors

In India, the majority shareholders of a company, at their wish, appoint a director at the time of incorporation of the company.  If the shareholders, at any point, feel the need to change the director, they can do so by calling an Extra-Ordinary General Meeting/Annual General Meeting by giving notice to the Board expressing their opinion. The directors are allowed to excise the powers under the Indian Companies Act, 2013 & Memorandum and Article of Association of Company (“Charter Documents”). However, shareholders may restrict the power of the Board by putting restrictive provisions in the Article of the company.

Definition of Director: means a person appointed to manage Board of Director of the Company

There are three types of directors:

1. Additional Director: Meaning, the director appointed by the Board during the year to accommodate the emergency resignation or removal of any director and such  directors need to be regularized by the  shareholders of the  company at EGM/AGM, otherwise  they need to be removed at the conclusion of the next AGM and a new person to be appointed as Director.
2. Alternate Director: The Board of Directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint a person, not being a person holding any alternate directorship for any other director in the company, to act as an alternate director for a director during his absence for not less than 3 months.
   
3. Nominee Director: If articles of a company have the provisions related to the appointment of Nominee Director, the Board may appoint any person as a director nominated by any financial institution or Bank in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a government company.

Roles of Director:

• Agent: A company is an artificial person and needs people in the Board of Company to run the business of the company on behalf of and for the welfare of shareholders of the company. The director acts as an agent of shareholders and promotes the objects of the company so that the company can earn profits and increase the intrinsic value of the share and earning of the  company.
• Employee: Any Whole-time director appointed by the Board of Directors and approved by the shareholders of the company acts as an employee of the company by managing the day-to-day affairs of the company. All the directors operate the company in the contours of employment letter issued by the Board of Company.
• Officer: Director is treated as the main officer of the company and shall be liable for penal consequences under various statutes, if affairs of the company are not in compliance with the  Companies Act, Income Tax Act, FEMA provisions and other applicable Legal statues defined for various industries.
• Trustees: Director is treated as trustee of the company, money and property of the powers are entrusted to and vested in them only as trustees.

Responsibilities of Director:

• The director of the company must act per the AOA.
• The director of a company shall act in good faith to promote the objects of the company for the benefit of its members/ shareholders as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.
• The director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
• The 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.
• The director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates.
• A  director must ensure that all the affairs of the  company are carried out in the best possible way, without compromising on legal  compliances of the  company and not prejudicial to the interest of Company.

Liabilities of the director of a company:

The  liabilities of the  director of a  company are broadly defined in two categories:

1. Liability to Stakeholders: The directors are not personally liable to stakeholders if they act within the scope of powers vested in them. The general rule in this regard is that wherever an agent is liable, those directors would be liable, but where the liability would attach to the principal only, the liability is the liability of the company. The Director shall also be liable in case of negligence & fraud by the Company, knowingly making any misstatement or sharing false information with the stakeholder, Failure to repay deposits on time, payment of dividend out of capital and entering into a contract with related parties.
2. Liability to Company: The directors shall be liable to the company for the following:
   1. Where they have acted ultra-vires the company: Directors have powers subject to Companies Act, Memorandum and Articles of association. Whenever they exceed these limits, they are personally liable for the act being ultra vires. But if acts are intra-vires the company such acts can be subsequently ratified by the shareholders in the general meeting, otherwise, if a company suffers a loss on ultra-vires acts of its directors, the company can claim such loss from the directors.
   2. When they have acted negligently: Negligence may give rise to liability; there need not be a fraud. But they will not be liable where they have acted bonafide and for the benefit of the company. However, the error of judgement will not be deemed as negligence.
   3. Where there is a breach of trust: Directors are the trustees for the money and property of the company. They hold an office of trust and if they misuse their powers, they will be liable for breach of trust and may be required to indemnify the losses incurred to Company. They also need to make regular disclosures on their profits, if any, earned in course of the performance of duties. Director can also be held liable for misconduct, provided it is not wilful.  
   4. Misfeasance: Directors are liable to the company for misfeasance. The word misfeasance covers wilful negligence. Mere failure on the part of the director to take necessary steps for recovery of debts due to the company does not constitute misfeasance. If the company is in the course of winding up, the court may, on the application of the liquidator, creditor or contributory examine the conduct of a director for any misfeasance or breach of trust concerning the company.