What are the duties and liabilities of a director of a company?

As directors hold a key position, they are bound to comply with the provisions of the companies act. They shall carry out all duties placed upon them by either the act or the articles. The duties of the directors of a company have been laid down by load justice Romer in Re city equitable fire insurance company’s case and are summarized as under:

1. Duty of Reasonable care:

In discharging the duties of his position, a director must exercise some degree of skill and diligence. A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. The directors are not liable for mere errors of judgment.

2. Duty to act honestly:

A director must act honestly in the performance of his duties. He must not try to make personal gain out of a transaction in the name of the company.

3. A director is not bound to give continuous attention to the affairs of h is company. He is not bound to attend all board and committee meetings.

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.

Director’s duty of disclosure:

Section 297 provides that except with the consent of the board of directors, a director or his relative or any firm in which he or his relative has any interest or his relative or any firm in which he or his relative has any interest or any private company or which he is a member or a director shall not enter into any contract with the company for the sale, purchase or supply of goods, materials or services or for underwriting the subscription of any shares or debentures.

In the case of a company having a paid-up share capital of rupees one crore or more, no such contract can be entered into except with the previous approval of the central government.

Consent of the board of directors is not necessary in the following cases:

1. Sale or purchase of goods for cash at prevailing market prices.

2. Contracts entered into in the regular course of business involving Rs.5, 000 in the aggregate in any year.

3. Any transaction in the ordinary course of business of a banking or insurance company.

In the case of urgent necessity contracts may be entered into but consent therefore must be obtained within 3 months from the date of contract. Such consent must be supported by a resolution passed at the board meeting. If consent is not given, anything done pursuant to the contract is voidable at the option of the board.

It is the duty of every director to disclose to the board the nature of his concern or interest in any contract or arrangement entered into by or on behalf of the company. The disclosure must be made at the meeting of board of directors. An interested director cannot take part in the discussion of or vote on any such contract. His presence at the board’s meeting shall not be taken into account for the purpose of forming a quorum nor will his vote be counted.

In default of disclosure, the director is punishable with a fine of Rs.5,000, besides vacating office.

Liability of directors:

The liabilities of directors may be discussed under three heads:

1. Liability to outsiders:

The directors are not personally liable to outsiders if they act within the scope of powers vested in them. The general rule in this regard in 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 directors are personally liable to third parties of contracts in the following cases:

a. They contract with outsiders in their personal capacity

b. They contract as agents of an undisclosed principal

c. They enter into a contract on behalf of a prospective company.

d. When the contract is ultra-vires the company.

In default of statutory duties, the directors shall be personally liable to third parties in the following cases:

1. Mis-statement in prospectus.

2. Irregular allotment.

3. Failure to repay application money if the minimum subscription is not subscribed.

4. Failure to repay application money if allotment of shares and debentures is not dealt in on the stock exchange as provided in the prospectus.

2. Liability to company:

The directors shall be liable to the company for the following:

(a) Where they have acted ultra-vires the company.

It is not necessary to prove fraud in such cases or that they acted bonafide. For example, where they apply the funds of the company to objects not specified in the memorandum of association or when they pay dividends out of capital.

(b) When they have acted negligently.

Negligence may give rise to liability; there need not be fraud. But they will not be liable where they have acted bonafide and for the benefit of the company.

(c) Where there is a breach of trust.

Directors being the trusted of the company, they should discharge their duties in the best interest of the company; they should discharge their duties in the best interest of the company. Where they commit a breach of trust resulting in a loss to the company. Where they commit a breach of trust resulting in a loss to the company, they are bound to make god the loss. For example, where the directors apply company property of their own benefit they are guilty of breach of trust.

(d) Misfeasance:

Directors are liable to the company for misfeasance. The word misfeasance covers willful 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 in to the conduct of a director for any misfeasance or breach of trust in relation to the company.

3. Criminal liabilities of directors:

So far we have dealt with the civil liability of directors. For act of fraud, default in discharging their duties and misdemeanor, the act provides penalties by way of fine or imprisonment. Section 75, 95, 113,115, 143, 162, 168, 303, etc. impose penalties upon the directors for omitting to company with or contravening certain provisions of the act.