Directors of a company – Appointment, qualifications and powers
Directors of a company
A director isn’t a servant of any master, they’re rather the officers of the corporate . A director is, in fact, a director or controller of a company and he manages all the affairs of the company. However, a director can work as an employee in a different capacity. For instance, Lee v. Lee’s Air Farming Ltd.
Directors are basically registered under the companies act and are duly appointed by the company to direct and manage the business of the company. They are sometimes described as agents, as trustees and sometimes as managing partners.
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Position of directors
Directors as agents
In the eyes of law, directors are termed because the agents of the corporate . It was recognized in the case Ferguson v. Wilson, 1886. In this case, F(plaintiff) had an choice to subscribe for a few shares of the corporate and thus he applied for them. The directors of the company allotted the whole of the shares that are authorized capital to other people including themselves. Later on, the choice which was given to F was of no worth and he sued W who was one among the company’s directors to transfer a number of his shares to him and pay damages. However, the claim of F failed because the administrators were only acting as agents of the corporate and aren’t liable for personal liability.
However, the directors are not completely like agents as agents are appointed but directors are elected. Directors are more like managing partners.
The court said that the company is not a person, it acts through directors and in regards to this it is the case of principal and agent.
Directors are the agents of the corporate and he conducts the business. They act on behalf of the company and he makes the company liable not himself. In other words, directors cannot be held personally liable for any default of the company. The responsibility of an agent compels the directors to conduct the business of the company in the same way as agents do. They should handle the work with care, skill, and diligence. They are in charge of all the assets of the corporate that’s under their control and therefore the profits from the company’s assets.
Directors cannot deal with the company’s affairs on their own and they are required to disclose their personal interest if they have any in the transactions of the company. Directors represent the shareholders to conduct the business of the company on their behalf. Directors perform many roles during a company like allotment of shares, raising of loans and investment of funds within the company.
But, directors cannot bind other shareholders unlike partners. They are elected and should also retire.
Directors as trustees
Directors are also described as trustees of the company. They must account for all the money over which they have control. Directors must act and affect the advantage of the corporate . They should exercise with honesty and it should be within the interest of the corporate as they occupy a fiduciary position. They are trustees of-
- Money and property of the company that are under their control.
- The powers that are entrusted to them.
Directors are the trustees of the company and not of individual shareholders. This principal came within the case of Percival v. Wright, 1902.
In this case, the administrators purchased the shares of the corporate but before this company’s sale was undergoing without disclosing this. The plaintiff claimed that this non-disclosure was a breach of contract and fiduciary trust. It was held by the court that no fiduciary duty exists. Hence, the directors were not bound to disclose.
A trustee is that the owner of the property and deals with it as principal. He also deals as an owner and a master. On the other hand, the director is not the owner of the property and is only the agent of the company.
Directors as organs
The board of directors is also recognized as the primary organ of the company. Example, Bath v. Standard Land Co.
Personal liability of the organ
According to the businesses Act, 2013 a director is responsible for any loss, damages or costs suffered by the corporate either direct or indirect consequence, he or she is going to be liable if they have breached certain provisions of the company.
Appointment of Directors
A casual vacancy occurs when the director’s office is vacated before the expiry of the term of the director. Such a vacancy can be filled by the procedure or the process prescribed by the articles. If any clause is absent within the articles then the facility is given to the administrators in order that he can fill the vacancy at the committee meeting . The one that has been appointed by this procedure, hold the office until the expiry of the amount that the outgoing director would have held the office.
Considering the powers of the directors, additional directors can be appointed by the board. There can be an addition to directors but total members of the directors should not exceed the maximum limit as mentioned in the articles. If the strength of directors is below the minimum limit of the members then the addition of directors is valid.
However, the extra directors can hold the office only up to the date of subsequent meeting which is held annually. The additional director is exempted to satisfy the need of consent under Section 264.
Appointment by Central Government
The central government has the power to appoint directors for the purpose to prevent mismanagement under Section 408. This power is applied when a petition has been filed to the National Company Law Tribunal to stop mismanagement.
Qualifications of directors
The articles of the corporate provides that each director should hold a particular number of shares. Such shares are known as qualification shares. A director must obtain the required number within two months of the appointment.
If a director is not appointed as a director he cannot be compelled to obtain qualification shares. Also within a period shorter than two months of the appointment, he cannot be compelled to obtain the qualification of shares. The value of the qualification shares cannot be more than five thousand rupees except when the nominal value of the share is more than the amount of the share. A director can hold only shares and not share warrants. A director may suffer if he fails to obtain his qualification shares as advised. He can suffer in two ways:
- His office can fall vacant.
- He will be liable to pay a penalty if he continues to act as a director. The director is required to hold the shares in his own right.
Disqualifications of directors
The minimum requirements for the eligibility of members are laid down in Section 274. A person is not capable of being appointed as a director in some cases that follow:
- When the person is of unsound mind and he is certified by the court.
- A person who is unable to pay his debts and it cannot be covered by his assets and he(director) has initiated proceedings against him.
- When the director is adjudicated as insolvent.
- When the director has been sentenced to imprisonment of at least six months for the offense that involves morally wicked behavior and five years have not passed from the date of expiry of the sentence.
- When he has not paid for call of his shares for six months.
- Where he has been disqualified for preventing fraudulent persons under Section 203.
If a private company is not a subsidiary of a public company can further add to disqualifications. In other words of the Supreme Court, a public company and its subsidiaries cannot add or increase any other disqualifications.
Powers of directors
Section 291 says the board of directors of a company is entitled to exercise all the powers as the company is authorized to do. The powers of the directors are co-extensive with those of the company mentioned in the memorandum and articles of the company. The director has almost all the power once he is elected for the operations of the company until he is removed. However, there are two important restrictions on the powers of the directors.
When the board is not competent to do what the act, memorandum, and articles require that is done by the shareholders in general meeting.
The directors are required to act according to Act, memorandum, articles and other regulations that are consistent with the general meeting.
Duties of directors
The powers vested with the directors should be regulated not only for public good but also for the protection of the investors.
Duty of good faith
Directors must act honestly, without negligence and in good faith in the bona fide best interests of the company. The presumption is that a Director, acting within his or her authority, has acted in good faith.
Liability for breach of trust
Initially, the duties of directors were not enacted by the statute. They were inherited from the common laws which mean developed through cases. But now legislation of companies of some countries have taken steps to remove this tradition. In a company the director stands in a fiduciary relationship towards the company and should have utmost good faith towards the company. The company demands that the directors should act honestly and with the greatest good faith in their duty. When a director earns a bonus from the other company by providing a business facility to the company, the director can be held liable for the profits although the company could not have earned the bonus.
Trading in corporate control
In the case of Regal (Hastings) Ltd v Gulliver, the plaintiff company was the owner of a cinema in Hastings. The directors wanted to acquire two more cinemas in Hastings. After acquiring cinemas, they would sell the whole property. The purpose was to acquire new cinemas and offered a lease of two cinemas. The landlords required a guarantee of rent by the directors. The intention was that the plaintiff company should hold all the shares in the subsidiary.
It was held that the directors other than chairman were in a fiduciary relationship and therefore liable to repay the profit they have made on the shares. The solicitor was not liable because he was not in a fiduciary relationship.
The plaintiff company had to establish two things:
- The directors were related to the affairs of the company and said to be in course of management and in the utilization of their opportunities and special knowledge as directors.
- What they did should result in profit for themselves.
Misuse of corporate information
If the director exploits any unpublished and confidential information of the company, it is a breach of duty and the company can ask the director to make good its loss. Any knowledge generated by the company is the company’s property commonly known as intellectual property. Profit margins, turnover of the business, list of customers and any personal use of such knowledge equivalent to misappropriation of property. The use of the company’s information can be restrained by an injunction.
Author: Pragya Sinha,
Symbiosis law college,nagpur . 1st year