Ramit Chitkara
The Companies Act, 2013 (hereinafter as the Act) is certainly a very innovative and landmark legislation in respect of the duties and responsibilities of the directors. In this regime, the roles and duties of the directors attained significant expansion.
The Act has introduced several measures which have the effect of considerably enhancing the duties and liabilities of directors and imposition of stringent penal provisions in case of breach of any Statutory provisions.
As we all know that Directors hold a key position in any Company and they are bound to comply not only with the Act but also with all other applicable laws.
This article attempts to highlight certain basic responsibilities of the directors specifically under the Companies Act, 2013 as follows:
♣ WELL-DEFINED DUTIES
Directors are always in fiduciary relation with the Company and other stakeholders and have fiduciary duties towards Company. Unlike the previous legislation, the Act has codified the duties of the directors under Section 166 as follows:
- To act in accordance with the Articles of Association of the Company, subject to the provisions under the Act.
- To act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
- To exercise all his duties with due and reasonable care, skill and diligence and to exercise independent judgment.
- Not to involve in a situation in which a director may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
- Not to achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain of the company.
- Not to assign his office and any assignment so made shall be void.
These duties are not at all exhaustive, the act reposes several specific responsibilities under various sections of the Act.
♣ DON’T FORGET TO MEET YOUR OTHER BOARD MEMBERS ATLEAST ONCE IN 12 MONTHS
In case any director of a Company absents himself/herself from all the Board meetings during a period of 12 months his/her Office as Director becomes vacant, even if he/she takes leave of absence from the meetings during the said period.
It may turn out to be a concern for a few overseas directors, but the concept of concept of meeting via video conferencing relieves them from the difficulty to a large extent, except for certain agenda which are mandatorily to be taken in physical board meeting.
♣ YOU NEED TO MAKE SURE THAT PROPER SYSTEMS ARE INTACT FOR COMPLIANCE OF ALL APPLICABLE LAWS
The Board’s Report is required to be attached with the financial statements of the Company and the Board’s Report shall be laid before the Company in every Annual General Meeting.
The Board’s Report is required to include a specific statement from the Board of directors viz. Director’s Responsibility Statement confirming as follows:
“The directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively”
♣ PLEASE KEEP AN EYE ON TRANSACTIONS WITH YOUR RELATIVES
The term Director’s relative is extensively talked about in various sections under the Act with the intent to avoid any undue favour/advantage to the Director himself or through his/her relatives or associates, such as:
a) A director’s relative is covered under the definition of Related Party and any of the prescribed transactions by the Company with him or her (director’s relative) comes under the ambit of related party transactions under the Act.
b) Any Loan by the Company to director or any of his/her relative is also strictly prohibited under section 185.
Rule 4 under the Companies (Specification of definitions details) Rules, 2014 states the list of relatives as under:
(1) Father, including step father
(2) Mother, including step mother
(3) Son, including step son
(4) Son’s wife
(5) Daughter
(6) Daughter’s husband
(7) Brother, including step brother and
(8) Sister, including step sister
♣ ONE OF YOU MUST HAVE STAYED IN INDIA FOR ATLEAST 180 DAYS IN PREVIOUS CALENDAR YEAR
The Act brought in the concept of Resident director for every Company, wherein at least one of the director from the Board is required to be in India for minimum of 180 days in previous calendar year.
♣ YOU NEED TO REVEAL YOUR RELATED ENTITIES
Provisions under section 184 of the Companies Act, requires every director to disclose his concern/ interest in any Company incorporated in or outside India, firms, other association of individuals in the prescribed manner, in the first meeting of every financial year and thereafter upon any change in the disclosure made.
♣ EMPLOYEES APPOINTED AS DIRECTOR TO BE CONSIDERED AS WTD(WHOLE TIME DIRECTOR)
Every employee of a Company designated as director on the Board of the Company, shall be deemed as Whole-time director of such Company and the provisions governing the appointment and remuneration of managerial personnel(WTD/MD/Manager) shall be applicable in this case.
♣ YOU ARE ALWAYS THERE IN THE DEFINITION OF OFFICER IN DEFAULT
Every Director is considered as Officer in default in respect of a contravention of any of the provisions of the Companies Act, who is aware of such contravention by virtue of:
i) the receipt by him of any proceedings of the Board,
ii) the participation in such Board proceedings without objecting to the same
In consideration of the above, following are some practical references to the directors while discharging their duties:
i. The Directors must ensure that any concern raised by them or any dissent expressed in the Board meeting is being adequately recorded in the minutes of the meeting, since minutes are the conclusive evidence of proceedings of the Board meetings.
ii. The Directors should be aware of their duties in consonance with the provisions under all the applicable Act’s, Appointment Letters and Articles of Association.
iii. The Directors should make sure that they have obtained adequate directors’ and officers’ liability insurance safeguarding their interest while discharging their duties.
iv. The Directors should always consult and take legal advice in case of any doubt/ambiguity while being on Board.
The Board of directors need to understand the shift of paradigm under Companies Act, 2013 to self-disclosures and self-governance, which ultimately reposes more responsibilities on the Directors and Professionals as well.
In consideration of the above, it won’t be unjust to say that being a Director in any Company has become a very serious business and requires much more attention to be paid like never before.
Can you elaborate about officers’ liability insurance w.r.t directors?