In a very contradictory fashion, Section 2(10) of the Companies Act, 1956 defines the “Board of Directors” of a company as “the collective body of the directors of the company”. Section 2(34) in turn defines a Director as “a director appointed by the Board of the Company”. So neither section actually sheds any clarity on who a Director is, or what his/her duties are!
A few tenets exist as regards the position of a Director. For instance, Directors owe their essential duties to the corporation, and not to individual shareholders, employees or creditors; A Director's core duty is to remain loyal to the company and avoid conflict of interest; A Director owes a fiduciary duty to fellow directors and to the company.
While companies today have thus defined the rights, powers and duties of Directors in their Articles of Association, a need was felt for legal clarity on this issue. The Dr J.J. Irani committee report has suggested that the list of duties of a Director should be “inclusive, and not exhaustive in view of the fact that no rule of universal application can be formulated as to the duties of the directors.”
Clause 166 of the Companies Bill, 2011
The Clause included in the Companies Bill is broad and sweeping. Clause 166 is the new provision introduced to define the duties of a Director. It reads as follows:
“(1) A director of a company shall act in good faith in order to promote the goals of the company and in the best interest of the company, its members as a whole, its employees, the shareholders, the community and for the protection of environment.
(2) A director of a company must exercise his duties with due and reasonable care, skill and diligence and must have an independent judgment.
(3) Directors of a company shall not involve themselves in a situation where they may have a direct or indirect interest that can conflict with the good of the company.
(4) The directors of a company must not misuse or attempt to misuse the resources of the company for any undue gain either for themselves or to their relatives, partners, or associates
(5) Directors of a company cannot decide the successor to their position. A director has to be elected democratically. Any such allocation shall be void.
(6) If a director of the company is found guilty of violating the provisions of this section such director shall be punished with a fine which shall not be less than Rs 5,000 and may extend to Rs 25,000 a day, for every day after the first day during which the violation continues.”
Apart from Clause 166 listed above, a few other changes have been introduced.
For example, the concept of compulsory Independent Directors for some companies has been introduced, and some classes of companies have to compulsorily have women directors.
Are these changes enough?
There are two opposing points of view here. The first advocates that there be minimal legal restrictions on the role of the Directors, their powers, rights and duties. The company, according to this view, should be free to decide what exactly its directors should and should not do.
The other point of view believes that good corporate governance requires that at least the basic duties, responsibilities and powers need to be spelled out in law, and the company should be allowed to fill in the details.
Clause 166 broadly adheres to the former point of view but also gives a gentle nod of acknowledgement to the latter – Overall, it brings no great advance to the law, nor does it go far beyond the tenets we have already spelled out earlier.
(To be continued)
( This column has been contributed by vakilsearch (www.vakilsearch.com), an online legal guidance and legal solutions provider .)