Types of Director, Duties and Liabilities of Directors Under Companies Act, 2013 By Kausha Mehta

Dear Professional Colleagues,

Section 2(34) of the Companies Act, 2013 states that a director is the one who is appointed as a board member of a company. Director is someone who gives direction, who has the responsibility to manage the affairs and who plays the pivotal role in every kind of organisation. Director of a company is a person elected by the shareholders for managing the affairs of the company as per the Memorandum of Association and Articles of Association of a company.

Members of the company do not manage the affairs of the company on regular basis, thus they appoint directors to look after the business. As a company is a juristic person created by law, it requires the agent to act on its behalf. Thus only living persons can be Directors of the Company and the management of a company is entrusted to the Board of Directors.
  • Managing Director
Managing Director is a director who has substantial decision-making power and solely responsible for managing various activities of the company. He is a person, who by virtue of Articles of Association of a company or an agreement of a company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with managing various affairs of the company.
  • Ordinary Director
Ordinary Director means a simple Director who attends the Board Meetings of a company and participates in the matters put before the Board of Directors. They are neither whole-time directors nor managing directors. They are not regularly involved in the day to day operations of the company.
  • Additional Director
Additional Directors are appointed by the Board between the two Annual General Meetings subject to the provisions of the Articles of Association of the Company. Additional Director shall hold office only up to the date of next AGM.
  • Alternate Director
Alternate Director is someone appointed by the Board of Directors in a general meeting to act for a Director called the original director during his/her absence for a period of not less than 3 months. Generally, Alternate Director is appointed for a person who is a Non-Resident Indian or Foreign Collaborators of a Company.
  • Whole-time Director
A whole-time director is a director in the whole-time employment of the company. A director who devotes his whole time to the affairs of a company is called a whole-time director of the company. A whole-time director of a company cannot accept the position of a whole-time director in other companies, though he may accept the office of non-whole-time director in other companies.
  • Independent Director
An Independent Director is a director of a Board of Directors who do not have a material or pecuniary relationship with a company, except sitting fees.
  • Shadow Director
A shadow director is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. A founder or significant shareholder who wished to escape the disclosure requirements of a directorship might still be counted as a ‘shadow’ director and held responsible for actions as if he or she were a formal director.
  • De facto Director
A de-facto director is someone who acts as a director but who has not been formally appointed.
  • Rotational Director
Rotational Directors are those directors whose period of office is liable to retire by rotation in every Annual General Meeting and eligible for reappointment in accordance with the provisions of Section 152 of the Companies Act, 2013. Rotational Directors are also known as retiring directors or temporary directors.

The duties of Directors are as follows:
  • A director must act in accordance with the Articles of Association of the company.
  • A director must pursue the best interest of the stakeholders of the company, in good faith and to promote the objects of the company.
  • A director shall use independent judgement to exercise his duties with due and reasonable care, skill and diligence.
  • A director should always be aware of the conflict of interest situations and should try to avoid such conflicts for the interest of the company.
  • Before approving related party transactions the Director must ensure that adequate deliberations are held and such transactions are in the interest of the company.
  • To ensure the vigil mechanism of the company and the users are not prejudicially affected on account of such use.
  • Confidentiality of sensitive proprietary information, commercial secrets, technologies, unpublished price to be maintained and should not be disclosed unless approved by the board or required by law.
  • A director of a company shall not assign his office and any assignment so made shall be void.
If a director of the company contravenes the provisions of this section, such director shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs.

Following are the liabilities for which director can be held liable:
  • Dishonour of Cheques –
The official who is responsible for the cheque bounce is held liable instead of the whole company.
  • Labour or Employment Laws-
In case of any mismanagement with any of the dispute which concerns the employee provident funds or the factories act, the person in charge of the department shall be held liable. Directors who are not given the overall charge of the company and having domination over some cannot be held liable under criminal charges.
  • Income Tax Matters-
Any company found guilty of evading tax the agent of that company shall be held liable for the offence so committed.
  • Misleading Statement in the Prospectus-
A director can be held liable for the misleading statement in the prospectus. He shall be made to pay compensation to those who believe that a particular statement in the prospectus is true which is actually not.
  • Guilty of Negligence-
When directors are found guilty of signing any contract or when due to delay in the director’s decision, the company commits a fraud then the director is bound to compensate the company of the damages.
  • The commitment of a Breach of Trust-
If the director is found guilty of breach of trust, he shall be liable to compensate another party with the damages. There may be some cases where specific performance can also be compelled. Breach of trust can be against anyone wither shareholders, employees, co-directors or the consumers.
  • Misfeasance-
It refers to a situation when an act is legal but it is done in an illegal manner.
  • Buying Companies Shares-
When a director involves buying his company’s shares without the knowledge of the other directors this is known as Insider Trading.
  • Ultra Vires of the Director’s Powers-
Director is said to be in ultra vires the power when they act out of their powers which are not mentioned in the articles. This may include buying property or entering into a contract without the consent of other directors and shareholders.
Directors are solely responsible for the operations of the company and they hold a very powerful position in a company. There are chances that they may indulge themselves in activities which may harm the company’s status.
Hence a director must act in good faith and in accordance with the Articles of Association with due diligence.

Click here to read the disclaimer

Write a Comment