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ACCOUNTABILITY OF DIRECTORS IN A COMPANY

Introduction

A company is a legal person which has a separate legal entity but since it is not a natural person, it depends on its directors for its day to day operations. The directors of a company play a very important as they are the executive authority of a company. They are responsible for the operation, management and day to day affairs of the company. They also act as a trust as they are entrusted to act in the best interest of the company and to ensure the best interest of all other shareholders of the company. Being of such importance, the Companies Act, 2013 (hereinafter “CA 2013”) provides for certain duties and liabilities of the Director that make them accountable to the Company.

Meaning and Legal Provisions

The erstwhile Companies Act 1956 did not expressly provide for the duties and liabilities of the Directors through any of its provisions. They used to be deduced from the powers of directors as defined therein[1]. This gave rise to ineffective corporate governance as the directors used to betray the shareholders and stakeholders of the company by fulfilling their personal motives while hiding behind the corporate veil. This problem was resolved by enacting CA 2013 in which express provisions were made to describe the duties and liabilities of the directors. The term ‘Director’ has therefore been defined under the 2013 as a person who is appointed to the Board of Directors[2] and who is responsible to perform functions and duties of a director as provided under CA 2013.

Qualifications and Disqualifications

The first requirement for being appointed as a director of a company is that only a natural person can be appointed as a director. Any incorporation, firm, trust or any other legal person is not eligible to be appointed as a director. Further, the person to be appointed as a director must not be of unsound mind, undischarged insolvent, applied to be adjudicated insolvent while such application is pending, convicted and imprisoned for at least 6 months during last 5 years or imprisoned for 7 years at any time or otherwise disqualified under any other law in force in India. The director must also have a valid DIN (Director Identification Number) under S. 154 of CA 2013[1]. Also, the person to be appointed as director must have paid all the call on shares held by the Company and must have filed financial statements or annual returns in preceding 5 years continuously.

A private company can provide for any other additional qualification or disqualification of a director in its AOA (Articles of Association).

Duties u/s 166

The Director of a company is entrusted with certain duties as specified under S. 166 of CA 2013. These duties are as follows:

 

[1] S. 291 of Companies Act, 1956

[2] S. 2(34) of Companies Act, 2013

[3] S. 164 of Companies Act, 2013

[4] S. 152 of Companies Act, 2013

  1. Must act according to AOA of the Company;
  2. Shall always act in good faith to promote the objects of the Company and to protect the interests of all other shareholders, employees, the company and to protect the environment;
  3. Shall perform his duties with due care, diligence and by applying his independent judgment and skill.
  4. Shall not involve in any activity having direct or indirect conflict of interest with the Company;
  5. Shall not act to achieve any undue gain to himself, his relatives, partners or associates. In defiance of this provision, such director shall be made liable to compensate the amount equivalent to that of undue gain to the company;
  6. Shall not assign his office to anyone. Any such assignment shall be declared void under the Act.
  7. In case any director acts in contravention of any of the above provision, he/she shall be liable to an amount of fine which shall not be less than 1 lakh rupees but may extend up to 5 lakh rupees.
Other Obligations
  1. Apart from the duties mentioned under S. 166 of CA 2013 the director of a Company is also bound by certain other obligations mentioned under different sections of the Act. These obligations are:
  2. The board of directors is required to present the financial statements of the company in the annual general meeting before the shareholders in accordance with the provisions of S. 129 of CA 2013.
  3. The board of directors also need to present a report stating the details of operation of the company and if the applicable law and policies under AOA are being complied with and to device a proper method to comply by them. This report needs to be presented in the annual general meeting.
  4. Also, the directors need to ensure that the provisions of corporate social responsibility under S. 135 are being complied with.
  5. The board of directors is required to appoint the auditor in the annual general meeting in accordance with the provision of S. 139 of CA 2013.
  6. According to S. 184 of CA 2013 every director is liable to disclose his/her interest in any company/companies or any other association of individuals at his/her first meeting as director of a company and thereafter at every first meeting of company every year.
  7. The director of a company along with any other key managerial person is prohibited under S. 194 from forward dealing in securities of company.
  8. The directors are also responsible for appointment of key managerial persons of the company under S. 203 of CA 2013.
  9. Apart from these, the directors are also responsible for conducting general meetings, ad holdings, issuance of notices etc. For the company.

 

Liabilities

Apart from the liability of fine under S. 166 the director of a company can also be made liable to pay fine for certain contraventions[1] that may vary from Rs. 25ooo to Rs. 25 crores or more. There are certain cognisable and non cognisable offences mention in CA 2013 for which a director may also be awarded imprisonment apart from monetary penalties[2]. These offences are mostly related to fraud or intent to defraud. The company can also initiate suit against a director for breach of his duties or a class action may be brought against him under S. 245

Conclusion

The position of director in a company is very crucial as the company operates through its directors only. So, if a director does not perform his/her duties in good faith and for benefit of the company or tries to derive his personal benefits out of his/her position, strict provisions have been made under CA 2013 to discourage such act and to punish the offender.