Company Law: Director Duties Explained
A company acts on a couple of basic bodies that are made by two types of people - the shareholders and the board of directors. It is the board of directors who take the baton of charge for managerial roles in a company. They are responsible for making operational and strategic decisions of a company and also ensure that the establishment meets the statutory obligations. The role of an individual director is to participate in the meetings held by the board and enable the same to reach the decisions, and all the obligations are fulfilled.
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Effectively, the directors are the agents of a company who are appointed by the shareholders for managing everyday affairs. The primary rule is, all the directors performing under a board must act together to fortify the base of the establishment. Also, individual members (directors) have certain powers to form a committee within the board. A person who is a shareholder and an employee of a company gets additional rights in creating a connection with the office. However, it is pivotal to draw a distinction between the separate roles of stakeholders and employees to wear the perfect occupational hat in the workplace. To know more about the elements of company law consider the following elements of company law-II: duties of directors.
Duties of Directors in Company Law
Acting Within Powers
Directors must work according to the company’s constitution and should only exercise the powers for the appropriate purposes.
Promoting the Success of a Company
The duties of directors of a company also include the right way of promotion when the establishment reaches a milestone.
Exercising Independent Judgement
Director’s duties include exercising independent judgement and stick to their own decisions. This does not force them to go against the constitution of the company.
Exercising Skill, Care, and Diligence
It is the rights and duties of directors to exercise the same care, skill, and diligence within the establishment and secure the workplace with the utmost professionalism.
Avoiding Conflicts of Interests
When it comes to the duties and responsibilities of directors of a company, staying away from conflicts is a wise choice.
Non - Acceptance of Benefits from Third Parties
The perfect function of director is not to take benefits from third parties who are working along the company line.
Declaring Interests in Proposed or Existing Transactions
The role of director in a company says a lot. Therefore, it is crucial to declare the extent and nature of interests with the other directors.
What are the Codes of Conduct for a Director?
The codes of conduct for a director determine the director’s duties and responsibilities. These include:
The duties of the board of directors do not include taking advantage of the power of authority.
The director’s responsibilities include diligently following the terms of the company and the orders of the senior executive officers.
The duties of directors in company law state, not to use company information for personal achievement.
The duties of directors of a company include attending all the meetings held by the board and providing company-centric ideas and insights.
The director’s duties do not illustrate in getting indulged in a conflict only to gain personal interest or that of the company.
The rights and duties of directors are to respect the authority of the employees and the workplace.
The duties and responsibilities of directors of a company are to conclude in a logical debate with the approval of the majority.
Why are the Codes of Directors so Important?
The directors of a company play a governing role on behalf of the shareholders and the members of the entity. Directors’ duties are associated with various legislations, and they outline some legal duties to uphold during the tenure. However, there are several laws and other requirements for which the directors are liable for. Setting up a good behaviour standard is also pivotal apart from the legal arrangements, and thus, it is considered as a good governing practice to set up high expectations in the future.
FAQs on Company Law: Director Duties Explained
1. What are the primary duties of a company director as defined by the Companies Act, 2013?
As per the Companies Act, 2013, a director's duties are legally mandated to ensure good corporate governance. Key obligations include: acting in accordance with the company's articles, acting in good faith to promote the company's objectives for the benefit of all members, exercising due and reasonable care, skill, and diligence, and avoiding any situation that creates a direct or indirect conflict of interest with the company's interests.
2. What are the main statutory duties of a director that a commerce student should know?
For a commerce student, it's crucial to understand the specific statutory duties outlined in Section 166 of the Companies Act. The most important examples include:
- To act within powers: A director must act according to the company's constitution (Memorandum and Articles of Association).
- To promote the success of the company: Decisions must be made for the benefit of the company and its stakeholders.
- To exercise independent judgment: Directors must not be swayed by external pressures or the influence of others.
- To avoid conflicts of interest: A director must not enter situations where their personal interests clash with the company's interests.
- To not accept benefits from third parties: Accepting gifts or bribes that could influence their decisions is strictly forbidden.
- To declare interest in transactions: Any personal interest in a proposed or existing company transaction must be disclosed.
3. Why is it so important for a director to exercise independent judgment?
The importance of a director's independent judgment lies at the core of effective corporate governance. This duty ensures that a director's decisions are based on their own skill and a rational assessment of the situation, free from the domination of a majority shareholder or any external party. It acts as a safeguard against groupthink and ensures that diverse perspectives are considered, ultimately leading to more robust and ethical decisions that serve the best interests of the company as a whole, not just a select few.
4. How is a director's legal position typically described in company law?
A director's legal position is unique and cannot be defined by a single term. They are described in a threefold capacity:
- As Agents: When they act on behalf of the company and enter into contracts with third parties, they bind the company, similar to an agent binding their principal.
- As Trustees: Directors are considered trustees of the company's money and property and must exercise their powers for the benefit of the company. This is a fiduciary position.
- As Managing Partners: Since they are entrusted with the ultimate responsibility of managing the company's affairs, they are often viewed as the most senior officers, akin to managing partners.
5. What is the difference between an Executive and a Non-Executive Director?
The primary difference relates to their involvement in the company's day-to-day operations. An Executive Director is a full-time employee of the company, such as a Managing Director or a Whole-time Director, who has significant managerial responsibilities. A Non-Executive Director, on the other hand, is not an employee. They attend board meetings and offer independent perspectives and oversight, helping to challenge executive decisions and improve corporate credibility.
6. What are the potential consequences if a director fails to perform their duties?
A failure to perform duties can lead to severe consequences. If a director breaches their duty, they can be held personally liable to compensate the company for any loss incurred. For example, if a director approves a transaction with a related party without proper disclosure (breaching the duty to avoid conflict of interest), the transaction may be declared void. Furthermore, the director may face fines and penalties as prescribed under the Companies Act, 2013, and in cases of serious fraud, it can even lead to imprisonment.
7. Why must a director avoid accepting benefits from third parties, even if it seems harmless?
A director must avoid accepting benefits from third parties because it can compromise their objectivity and create a serious conflict of interest. Even a seemingly harmless gift could be interpreted as a bribe intended to influence a decision in the third party's favour. This violates the core duty to act in the company's best interests. Such actions can damage the company's reputation, erode shareholder trust, and expose both the director and the company to legal action for unethical practices.
