DUTIES OF DIRECTORS UNDER COMPANY LAW Under the Companies Act, 1956, the directors of corporate entities have

multifarious duties to be performed by them; while some are collective duties, there are others which are individual. This article recapitulates the whole lot of duties of directors under Company Law. INTRODUCTION 1. Directors occupy a key-position in the management and administration of the company. They are given wide powers. They owe certain duties to the company. These duties are partly statutory, partly regulatory and partly dependent on the law of agents and trustees or persons in a fiduciary position. Duties of directors vary from company to company depending on the size and its business activities, division of work between the directors and officials of the company. Generally speaking, duties of directors, include(i) to manage the business of the company well; (ii) to look after the property of the company properly; and (iii) to invest the funds of the company properly. For the sake of convenience, the various duties of directors under the Company Law can be classified under the following broad heads: 1. STATUTORY duties of directors under Company Law; 2. GENERAL duties of directors under Company Law. Directors are sometimes described as quasi-agents and sometimes as constructive trustees of the company. They may be regarded as agents in the transactions which they enter into with third parties on behalf of the company and the normal rules of agency apply to them. Hence, a director may not make a secret profit. Directors are trustees of the companys money and property. They are trustees of the powers entrusted to them.

STATUTORY DUTIES UNDER COMPANY LAW 2. The Companies Act, 1956, contains certain specific provisions with regard to the duties to be performed by the directors collectively as a Board. The most important of such duties are given below: 1. Investment of funds - An important duty of the directors is to see that funds of the company are properly invested and section 49 of the Act throws heavy responsibility on the shoulders of directors. They should invest the funds of the company by following section 292 of the Act, read with section 372A, and make investment in the companys name and fulfil the other requirements of these sections. 2. No mis-statement in prospectus - In the case of a public company, directors should see that no mis-statement is made in the prospectus (section 56). 3. To sign the prospectus - All directors should sign the prospectus issued by a public limited company (section 60). 4. Deposit share application money in bank - Directors should ensure that the application money received for shares issued to the public is deposited in a scheduled bank and is not withdrawn until the company obtains certificate of commencement of business or until it becomes repayable to applicants as provided in section 69. 5. Return of allotment - Directors should file the return of allotment of shares in Form No. 2 with the Registrar within 30 days from the date of allotment of shares (section 75). 6. Not to issue irredeemable preference shares or shares redeemable after 20 years - Directors should not issue irredeemable preference shares or preference shares redeemable after 20 years (section 80). 7. Issue share certificates - Directors should issue the share certificates to members within prescribed time after allotment of shares is made or registration of transfer is effected (section 113) 8. Keep statutory books - Directors should keep certain statutory registers like Register of Investments, Register of Members, Register of Debenture holders, Register of Directors shareholdings, Register of charges, Register of contracts, Minute Books, etc., as required under various sections of the Act (sections 49, 143, 150, 151, 152, 193, 301, 307, 372A, etc.). 9. To comply with requirement for commencement of business - Directors should pay for the shares subscribed for by them before the company commences business. A director/secretary should file with the Registrar a duly verified declaration stating that the requirements relating to commencement of business have been complied with (section 149). 10. Statutory report and meeting - Director of public limited companies should file the statutory report with the Registrar and send copies thereof to the members and hold the statutory meeting within the time prescribed (section 165). Note : The provisions relating to statutory report and meeting do not apply to private limited companies. 11. Annual general meeting - Directors should hold annual general meeting every year within prescribed time (section 166). 12. Annual return - Director should file the annual return every year with the Registrar within 60 days from the date of holding the annual general meeting (sections 159, 160 and 161). 13. Explanatory statement - Directors of public companies should append an explanatory statement in report of special business included in the agenda of annual general meeting and for all business placed before the extraordinary general meeting to the notice of the meeting [section 173(2)]. 14. Filing certain resolutions - Directors should file with the Registrar in Form No. 23, all special resolutions and certain ordinary2006] COMPANIES ACT 71 resolutions, within 30 days from the passing of the relevant resolutions (section 192). 15. Pay dividend within 30 days - If the company declares dividend at the annual general meeting, directors should pay it to members within 30 days (section 207).

Further, the dividend should be deposited in a scheduled bank within 5 days from the date of declaration [section 205(1A)]. 16. Keep accounts - Directors should arrange for keeping proper books of account on double entry system of accounting and on annual basis as required by the Act (section 209). 17. Annual accounts - Directors should prepare balance sheet and profit and loss account every year, get them audited and place them before the annual general meeting (section 210). They should authenticate the balance sheet and profit and loss account in the manner prescribed by law (section 215). 18. Directors report - Directors should attach their report on the affairs of the company to the balance sheet (section 217). 19. File accounts with the registrar - Directors should file 3 copies of balance sheet and profit and loss account within 30 days of holding the annual general meeting with the Registrar (section 220). 20. To appoint first auditors - Directors should appoint the first auditors of the company within 30 days from the date of incorporation of the company (section 224). 21. To appoint cost auditor - If the Central Government orders cost audit of the accounts of the company, directors have to appoint a cost auditor at a Board meeting within the time prescribed and get the Central Governments approval for the cost auditors appointment (section 233B). 22. Produce books and paper for inspection - Directors should produce books and papers of the company to the inspector if investigation of the company is ordered by the Government (section 240). 23. Assist Government in prosecution - Directors should assist the Central Government in connection with prosecution of office who have committed fraud. (section 242). 24. Board meetings - Directors should hold at least one board meeting in every 3 months as required by section 285 of the Act (section 285). 25. Statement of affairs - Directors should furnish to the Court, statement of affairs if the company is wound up by court (section 454). 26. Declaration of solvency - Directors should file a declaration of solvency if the company goes into voluntary winding-up by members (section 488). Where a company has passed special resolution to buy back its shares or other securities, the directors should file with the Registrar and in the case of a public listed company should file also with the SEBI, a declaration of solvency in Form 4A verified by an affidavit to the effect that the directors have made a full enquiry into the affairs of the company as a result of which they have formed an opinion that the company is capable of meeting its liabilities and will not be rendered insolvent within one year from the date of declaration. Such declaration should be signed by at least two directors one of whom should be the managing director, if the company has a managing director [section 77A(6)]. 27. To accept deposits within the prescribed limits - If the company accepts deposits from the public, directors should see that the deposits accepted are within the limits prescribed by the Companies (Acceptance of Deposits) Rules, 1975 or the relevant direction issued by the Reserve Bank of India and comply with the relevant Rules (section 58A). 28. Appoint managing director - The Board has to appoint a managing or whole-time director, if the companys paid up capital is Rs. 5 crores and above and supervise and direct the managing director (section 269). 29. Extraordinary general meeting - Holding of extraordinary general meeting on the requisition of prescribed number of members (section 169). 30. Accounting standards - Directors should prepare the balance sheet following the Accounting Standards formulated by the Institute of Chartered Accountants of India and notified by the Central Government. There are 29 Accounting Standards at present.

GENERAL DUTIES OF DIRECTORS

3. The Companies Act imposes certain duties and obligations on every director individually. Important among such GENERAL duties are as under: 3.1 DUTY TO ATTEND BOARD MEETINGS - Many powers of the company are generally exercised by the board of directors at board meetings held periodically as required by section 285. Each director is expected to attend such meetings. Since section 275 of the Act allows an individual to become director of public companies, a director is not bound to give continuous attention to the affairs of each company in which he is a director (Re. City Equitable Insurance Company Ltd.). His duties are of an intermittent nature to be performed at periodical board meetings. He is not bound to attend all the meetings of the board though he ought to attend whenever he is reasonably able to do so. Section 283(1)(g) lays down that the office of a director will become vacant if he absents himself from three consecutive meetings of the board or from all meetings of the board for a continuous period of 3 months, whichever is longer, without obtaining leave of absence from the Board. 3.2 DUTY TO FILE HIS CONSENT - Before accepting the appointment as a director, the director should file his consent in Form No. 29 to act as a director with the company and the Registrar of Companies [section 264(1) and (2) and section 266(1)(a)]. 3.3 DUTY TO FILE FORM DD-A - Every director should give a declaration in Form DD-A prescribed under the Companies [Disqualification of2006] COMPANIES ACT 73 Directors under section 274(1)(g)] Rules to the effect that he does not suffer from any disqualification to act as a director every year. 3.4 DUTY TO ATTEND DUTIES PERSONALLY - Since the directors are the agents of the company, the principle delegates non-potest delegare applies to them. That is to say, the directors should perform their duties personally and should not delegate their duties. But having regard to the exigencies of the business, the directors may distribute the work among themselves and may leave some work for their subordinate officers. In such circumstances, the director will not be liable for the fraud of the co-director or of such subordinate officers if he had no reason to suspect the integrity, competence and skill of the officers to whom the work was delegated. In Dovey v. Cory, a banking company sustained heavy losses by reason of advances made to customers improperly. The irregular nature of the advances was concealed by means of fraudulent balance sheets, the work of manager and the chairman. The House of Lords held that a co-director was not liable for not having discovered the frauds, as he was not, in the absence of circumstances of suspicion, bound to examine entries in the companys books to see that the balance sheets were correct. A director may, however, delegate in the following two cases: (i) where such delegation is permitted by the Companies Act and the Articles of the company; (ii) Having regard to the exigencies of business, certain functions can be delegated to other officers of the company. For example, if a director is unable to attend a board meeting owing to illness, he may grant a power of attorney to a co-director to sign the prospectus for the issue of shares. Even if a director delegates some of his powers which he is allowed by the Act and the articles of association to delegate, he is not absolved of his duty to take care. 3.5 DUTY TO DISCLOSE INTEREST - No man, acting as an agent, will be allowed to put himself in a position in which his interest and his duty will be in conflict. It follows from this that if a director has an interest in a contract with the company, the company can avoid the contract, unless the prior sanction of the board of directors has been taken as provided in section 297 of the Act. A director who is in any way interested in a contract or proposed contract with the company is under a statutory duty to disclose the nature of his interest at a meeting of the board of directors. Section 300 further prohibits an interested director from participating in the discussions and in voting on any contract or arrangement in which he is directly or indirectly concerned or interested, and provides that his presence shall not count for the purpose of forming a quorum at the time of voting and that if he votes, his vote should not be counted.

3.6 DUTY TO TAKE QUALIFICATION SHARES - It is the duty of every director of a public company who is required by the companysarticles to hold a specific share qualification and who does not already hold the requisite number of shares in the company to obtain his shares within 2 months from the date of his appointment as director (This requirement does not apply to the director of a private limited company). 3.7 DUTY TO DISCLOSE PARTICULARS - Every company is required by section 303 of the Act to maintain a Register of Directors and enter therein, the prescribed particulars. Section 305 imposes an obligation on each director to disclose and furnish such particulars to the company. To enable the company to maintain the Register and update it, directors should promptly notify the company of any changes in their particulars. 3.8 DUTY TO DISCLOSE SHAREHOLDING - The Act requires each director to disclose his shareholdings in the company to enable the company to keep and maintain the Register of Directors shareholdings. Directors of listed companies should disclose to the company number of shares or voting rights held by them in the company within 4 days from the date of becoming directors [Regulation 13(2) of the SEBI (Prohibition of Insider Trading) Regulations, 1992]. 3.9 DUTY TO KNOW CERTAIN BASIC THINGS - A director cannot throw up his responsibility and say: "I know nothing and believed that everything was all right". Sometimes he has a duty to know. Honble P.T. Raman Nair, J., of the Kerala High Court in Palai Central Bank Ltd. v. Joseph Augusta observed to the effect relying on one observation of Lord Simonds in Morris v. Kanssen: that "the account of a company in liquidation showed that taxes and dividends were paid for as many as twenty-two years (i.e., from 1936 to 1958) on profits not really earned, but made to appear firstly by fictitious entries, and subsequently by showing interest, which there was no prospect of even realizing, on the bad and irrecoverable advances. The length of time by itself was a sufficient proof of the deliberateness of the falsification." The court rejected the directors plea that they had relied on competent staff and auditors who always certified the accounts as true. So, a director cannot close his eyes to what must be obvious to everyone. 3.10 TO ABSTAIN FROM DISCUSSION AND VOTING - At the meetings of the Board, the director should abstain from discussion and voting on any contract or arrangement in which he is or may be deemed to be directly or indirectly concerned or interested (section 300). DIRECTORS DUTIES UNDER AUSTRALIAN COMPANIESACT 4. Section 124 of the Uniform Companies Act of Australia states that: 1. A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office. 2. An Officer (which term includes a director) of the company shall not make use of any information acquired by virtue of his position as an officer to gain directly or indirectly, an improper advantage for himself or to cause detriment to the company.

CONCLUSION 5. Directors should see that the duties and obligations imposed on them as well as on the company by various sections of the Companies Act, are carried out properly and in time. For example, they should as far as2006] COMPANIES ACT 75 possible attend board meetings, call and conduct annual general meeting every year, file with the Register of Companies balance sheet, profit and loss account which should be prepared as per the Accounting Standards and the other documents and returns prescribed by various sections of the Act within the time prescribed therefor, see that proper accounts, statutory registers and other records are kept at the Registered Office or at such other place as required by the Act. If they fail to perform their duties or fail to comply with certain requirements of the Act, they are liable to penalty or prosecution as provided in the Act. If the company has no managing director or whole-time director or manager (as defined in the Act), and the board of directors have charged a particular director with the responsibility of complying with the provisions of the Companies Act, that director will be an officer in default as provided in section 5 of the Act and such director will be primarily liable to penalty or prosecution if the company does not comply with certain provisions of the Act. Section 621A of the Act lays down that the Company Law Board and the Regional Director can compound certain offences punishable with fine by imposing penalty in lieu of prosecution. If there is any breach of duty by directors and the company thereby suffers loss, directors may be asked to compensate the company for such loss. An example is payment of dividend out of capital. If the directors are prosecuted for certain offences under the Companies Act, directors may apply to the Court for granting them relief as provided in section 633 of the Act, if they can show to the Court that they have not wilfully committed the offence, that they were not negligent in their duties and they ought fairly to be excused.