Director – What is Your Legal Position?

BACKGROUND

The position of Directors does pose some ambiguity. It is very well possible that in the first instance even a director may not be able to give a clear reply about his legal position. To understand this intricate subject one has to fall back upon the basics of the corporate existence, where and how the directors fit in, and a plethora of court judgements constituting precedent laws.

CLASSICAL MODEL OF COMPANY

A company under the companies’ jurisprudence is a legal and a juristic person, separate from its members. A company has independent corporate existence, limited liability, perpetual succession, common seal, capable of holding separate property in its own name, has transferable shares and capacity to sue and being sued. The most path breaking, prominent and well known case in this context is that of Solomon v Solomon & Co {1897} AC 22 {1895-9}  ALL ER Rep 9  wherein it had been laid down that once a company is validly constituted under the provisions of the company law, it becomes a legal person separate from and capable of surviving beyond the lives of its members and it is immaterial whether any member has a large or small proportion of the shares and whether he holds those shares beneficially or as mere trustee. Manning, reviewing Livingstone’s “The American Stockholder” had stated that a company is an intricate, centralised, economic administrative structure run by professional managers who hire capital from the investor.

NEED FOR DIRECTORS

Thus, a company is an artificial person, existing only in contemplation of law and has no physical existence and cannot act in its own person.  It was held by court that a company has no mind or body of its own { Ref case : Lennard’s  Carrying Co v. Asiatic Co, {1915} AC 705 at 713}, and therefore humans are required to run the company. They are the directors and collectively constitute the highest decision making body under the Companies Act known as Board of Directors.

The word “director”, however in the wisdom of legislatures, has not been defined with any elaboration or clarity.

In the new Companies Act 2013, a director has been defined in Section 2 {34} and means a director appointed to the Board of a company. In the erstwhile Companies Act 1956, the definition was also not comprehensively laid down, stating in section 2 {13} that a director includes any person occupying the position of director, by whatever name called.

Thus it can be seen that the concept of director has undergone a change in the new Companies Act. As per the erstwhile Companies Act, a person would be a director if he is occupying the position of director by whatever name that position was called; generally he would be known as shadow director. Now, that has changed and his actual appointment to the Board is required to hold him as director.

The directors are therefore appointed in terms of the company law who collectively work together as a Board through meetings, physically or through circulation or electronically. They do not have individual authority and duty unless delegated by the Board through resolutions in terms of the company law. Or the director concerned is an executive director having powers through law and also by delegation.

DUTIES OF DIRECTORS

There exist well established judicial precedents laws that the directors have fiduciary obligations and also duties to act reasonably and in the best interests of the companies where they hold such positions. Their duties emanate due to holding positions which may be synonymous to agents as well as trustees of their companies.

DIRECTORS AS AGENTS

In view of the director occupying the position of an agent the general principles of agency would govern the relations of the director with the company and also govern the third parties who deal with the company through its directors.

1. In Ferguson v. Wilson (1866) LR 2 Ch LR 77, the court had held that the company has no person, it can act only through directors and the case is, as regards those directors, merely the ordinary case of principal and agent.
2. In the case of Elkington & Co. v. Hurter {1892} 2CH 452 it was held that where directors enter into contracts on behalf of the company, it is the company and not the directors who are liable there under.
3. Being in the position of agent, directors should display a degree of care, skill and diligence in the exercise of their power and function.
4. In the case of T R Pratt { Bombay } Ltd., v. M T Ltd., AIR 1938 PC 159 it was held that notice to the directors amounts to notice to the company in the similar way a notice to the agent in the ordinary course of business amounts to notice to the principal.

DIRECTORS IN POSITION OF TRUSTEES

In addition to the position of a director as an agent of his company, he is also considered as a trustee although not in the strict sense of the position. Following court cases may be referred:-

1. In Lands Allotment Co., Re, {1894} 1 Ch 616, 631, it was held by the court that although the directors are not, properly speaking, trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which are actually under their control and directors are held liable to make good monies which they have misapplied upon the same footing as if they were trustees.
2. In Selangor United Rubber Estates v. Cradock (1968) 1 WLR 1555, it was held that the directors were trustees of the money standing to the credit of the company’s bank account which they operated.
3. In Percival v. Wright (1902) 2 Ch 421, it was held that directors are trustees of the company and not of any individual shareholders.
4. In Baket v. Gibbons [1972] 1 WLR 693 it was held that the position of trusteeship of directors also extended to trade secrets and other items of intellectual property.
5. In Ramaswamy Iyer v. Brahmayya & Co {1966} 1 Comp LJ, 107, Madras, it was held that the directors are trustees with reference to their power of applying funds of the company and for misuse they could be liable, and on their death the cause of action survives against their legal representatives.
6. The Supreme Court had also recognised the fiduciary position of directors in companies in the case of Chevalier I. I. Iyyappan v. Dharmodayan Co., Trichur , AIR 1966 SC 1017.

DIRECTORS AS EMPLOYEES

Although directors’ position as agents and trustees have been beyond doubt through established judicial precedent laws, another query can be raised whether he is an employee of his company. It was held by the Supreme Court in the case of  Ram Prashad v. CIT {1972} 86 ITR 122, 127 {SC}  that  a director of a company is not the servant of the company by reason of holding the position of director. But he can work as a “director – employee” in the position of a whole time director or managing director. In the case of CIT v. Armstrong Smith {1946} 16 Comp Cas 172 it was held that a director is not prevented from entering into contractual relationship with the company so that apart from his office of director he becomes entitled to remuneration as an employee of the company. 

CONCLUSION

As can be seen from the aforesaid discussions that the legal position of a director of a company has multi-dimensional aspects. Many of his duties, obligations and authorities flow from such position. However it would be better if the position is laid down unambiguously by statute which would of course be guided by established judicial precedent laws.

(Author can be reached at [email protected])

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