Normally, people think that directors of companies are simply drawing fat salaries and enjoy their life on vacations / partying and so on. But, is it true in the real life scenario? The answer is “NO”. It involves painstaking responsibilities, duties and liabilities for being a director. For both the blessings and cursings, he becomes responsible. Anything that happens in the company, he is answerable to all those who are concerned. A wrong move will lead to many complications which might extend to closure of business itself (and this has proven record in the history).
Hence, all those people who already hold directorships and all who are going accept directorship can go through this presentation for a brief understanding of what needs to be known.
Duties of Directors:
The duties of directors vary according to the nature and size of the company. But in all cases in discharging the duties of his position, he must act honestly and without negligence, that is, with that amount of care which an ordinary person will be expected to take, as if the business of the company is his own.
1. A director need not exhibit in the performance of his duties a greater degree of skill that reasonably be expected from a person of his knowledge and experience.
2. A director is not bound to give continuous attention of the affairs of his company, his duties being of an intermittent nature to be performed at periodical Board Meetings or committee meetings. He is not bound to attend all Board and committee meetings, though he ought to attend all such meetings as he is reasonably able to.
3. In respect of all such duties as may be properly left to some other official having regard to the exigencies of business or the articles of association of the company, a Director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.
4. Though all books of account and other books and papers of the company are open to inspection by him, he is not bound to examine individual entries in the books.
5. While a director is undoubtedly liable for loss caused to the company through gross and culpable negligence on his part, he is not expected to take all possible care; his duty to the company extending only to the taking of such care as an ordinary man is expected to take in his own affairs.
6. Directors should ensure that the company’s fund are properly invested and not indulge in dangerous speculation.
7. In discharging their duties, directors must act honestly and must exercise such degree of skill and diligence as would amount to reasonable care which an ordinary man might be expected to take.
Liabilities of Directors:
It is very difficult to describe the liabilities of directors. The directors can not delegate their authority which specifically imposed on them, which involve the exercise of judgment and discretion.
Liability for illegal acts:
Where directors have used their powers to part with moneys of their company in a manner or for a purpose which the law forbids, it is not a defence to proceedings to make them liable for their act to plead merely that they acted in ignorance of law.
Director receiving secret commission or bribe:
A similar prohibition would also exist against the Director obtaining any secret commission or any illegal gratification for the award of a contract with the company.
Liability for negligence:
There are no objective standards of skill and care which will help in determining whether a Director has been negligent; instead, there are only general principles which may be applied depending on the facts of each case.
The director are not liable for negligence if they act honestly for the benefit of the company, and within their powers with such care as is reasonably expected of them, having regard to their knowledge and experience. The directors are not bound to bring any special qualification into their office. The mere omission to take every possible care will not amount to negligence.
A company Director who knowingly makes a false representation whilst acting as Director can be held personally liable not only in deceit, but also for negligent misrepresentation.
Liability for breach of warranty of authority:
A Director is not personally liable for his company’s failure to perform a contract which he had made on its behalf, but he is liable in damages to a person with whom he purports to make a contract which is not binding on his company at all. When a director representing a company negotiates a contract he impliedly represents to the other contracting party that he has authority to bind the company as its agent.
No personal liability under contracts signed for company:
Where all the contracts for services were in the name of the companies trading under their trade names and the Director sought to be made liable merely appended his name to authenticate the contracts on behalf of the companies, he could not be held personally liable. For the signatory director to be made liable there should have been an intention on the part of the parties that he should be a party to the various contracts.
Liability for fraud:
The Court of Appeal held that in an action for deceit against a company officer, it is necessary to show that the officer in question made the statements and the plaintiff relied upon them. There must also be an assumption of responsibility so as to create a special relationship between the plaintiff and defendant Director.
Liability in respect of company’s debts:
There is no provision in the Companies Act making the managing director of a company personally liable for the company’s debts. Such liability will turn upon the application of agency principles to the transaction in quest ion.
Liability in respect of breach of trust:
A director who assisted his company to commit a breach of trust, or procured it to do so, was held liable for any loss caused to the beneficiaries of the trust as a result of his actions. It was necessary for this liability to arise that those actions could be characterised as dishonest rather than negligent. It was not necessary that the company as trustee be acting dishonestly.
Liability for personal profits:
The Directors are liable to the company for all personal profits and gains made by them taking advantage of their position as directors.
Directors are not liable for incidental profits:
The directors are not liable for a profit they make incidentally as a consequence of exercising the powers for a perfectly proper purpose in the interests of the company.
Liability in case of statutory violations:
Liability under Pollution Laws:
The managing director and the members of the Board of Directors can be prosecuted under the respective Pollution Control laws and it is not necessary that the company should also be prosecuted along with them.
Liability under ESI, EPF, Gratuity and Minimum Wages Act:
There is no specific provision permitting the initiation of recovery proceedings against an ‘occupier‘ (Director ) in his personal capacity for the failure of the company to remit contributions under the laws like Employee’s State Insurance Act, 1948 and other personnel laws.