Kinnori
in Corporate Law RTI and PIL Contracts Law
Asked February 13, 2014

Directors: duties and liabilities

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I want to have a detailed analysis of the duties and liabilities of the directors under new companies act, 2013.

Answer 1

Stipulation and elucidation of the duties and responsibilities of the directors of a company, especially the public limited companies, are welcome and great contribution of the new company law of India, the Companies Act of 2013, to better corporate governance and security, and the best possible growth and prosperity in the corporate world of India. The former company law of India, the Companies Act of 1956, was disgustingly deficient in this respect. The new CA-2013 can be seen as offering a landmark piece of legislation in this regard, which duly and explicitly clarifies, redefines, and enlarges the ambit of duties and responsibilities of the directors. These newly introduced provisions by CA-2013 regarding the duties and responsibilities of the directors, including the independent directors, not only provide greater certainty to the directors regarding their conducts and responsibilities, and thus, ensuring better and impeccable corporate management and governance; but also enable and empower the beneficiaries, regulators, and the courts, to judge, regulate, and control the activities and obligations of the directors more objectively and effectively. Ours this well-drafted web-article offers very useful and fertile information exclusively about these new provisions of the Indian Companies Act of 2013, connected with the roles, duties, and responsibilities of the directors and independent directors of public limited companies.

This prudent legislation of the CA-2013 over the duties and liabilities of the directors, is further supported and supplemented by the revised corporate governance norms (Revised and New Clause 49 of the Listing Agreement) of SEBI [the Securities and Exchange Board of India], in order to bring the SEBI's corporate governance norms in connection with the listed companies, in close harmony and consistency with the provisions of the CA-2013.

While the several provisions of the CA-2013 related with duties of directors have been made effective from April 01, 2014; the revised SEBI's norms for corporate governance are likely to be in force from October 01, 2014.

Here, it may also be briefly just mentioned that the Directors are regarded as being the Key Managerial Persons of a company, with special importance to the listed companies. They can hold multiple high and responsible positions in the companies, such as the Managing Director, Manager, Whole Time Director, or an Independent Director. Thus, efficient, flawless, and rather progressive management of a company, and the desired growth and profitability of its businesses, are certainly largely dependent on the competence and trustworthiness of its directors. By the way, a Director means a Director appointed to the Board of a company; and, the Board of a company represents the collective body of its directors.

DUTIES AND LIABILITIES OF DIRECTORS UNDER THE NEW INDIAN COMPANIES ACT, 2013

The duties and responsibilities of directors stipulated by the Indian Companies Act of 2013, can broadly be classified into the following two categories: ---

 

[i] The duties and liabilities which encourage and promote the sincerest investment of the best efforts of directors in the efficient and prudent corporate management, in providing elegant and swift resolutions of various business-related issues including those which are raised through "red flags", and in taking fully mature and wise decisions to avert unnecessary risks to the company.

[ii] Fiduciary duties which ensure and secure that the directors of companies always keep the interests of the company and its stakeholders, ahead and above their own personal interests.

The following duties and liabilities have been imposed on the directors of companies, by the Indian Companies Act of 2013, under its Section 166: ---

A director of a company shall act in accordance with the Articles of Association (AOA) of the company. A director of the company shall act in good faith, in order to promote the objects of the company, for the benefits of the company as a whole, and in the best interests of the stakeholders of the company. A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment. A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. A director of a company shall not 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 to the company. A director of a company shall not assign his office and any assignment so made shall be void. If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one Lakh Rupees but which may extend to five Lac Rupees.

INDEPENDENT DIRECTORS

The liability regime of the Companies Act, 2013 not only imposes the above-mentioned duties and responsibilities on the directors of Indian companies, but also advocates for independence and equitableness of the board of a company, especially a public limited company. Consequently, the roles, duties, and responsibilities of the Independent Directors have also been stipulated by the new Indian Companies Act of 2013. An Independent Director is that member of the board of a company, who does not possess any financial relationship with the company (except the sitting fees), nor can own shares in the company. The earlier Indian Companies Act of 1956 had no explicit provisions for the independent directors, and only the Old Clause 49 of the Listing Agreement of SEBI contained prescriptions for induction of independent directors to the listed companies.

The new Indian Companies Act of 2013 dictates that every listed company must contain at least one-third of the total magnitude of its directors, as the independent directors; and it also empowers the Government of India to include other categories of companies within the scope of this provision or requirement (Section 149 of the CA-2013). Public limited companies composited as per the former CA-1956, are granted a transition period of one year for making strict compliance with this mandatory provision. Again, the independent directors are not permitted to hold office for more than two consecutive terms of five-year periods.

In the new regime, the roles and duties of the independent directors attained significant expansion, and many new other areas have been prudently covered. Broadly, they are intelligently assigned the highly responsible role of the arbiters among various constituencies within the corporation. Hence, the new provisions for the independent directors of the limited companies are certainly very constructive for transparent and sound corporate governance, and are hugely beneficial to the company and its all shareholders. Some of the most significant functions, duties, and liabilities of the independent directors, are the following (as per the Schedule IV of the CA-2013): ---

To assist in forwarding equitable and independent judgment to the board To secure and promote the interests of all stakeholders of the concerned company, particularly of the minority shareholders To conciliate and balance the conflicting interests of the stakeholders To attend actively and constructively most of the board and committee meetings To pay proper and adequate attention to Related Party Transactions (RPTs) To report concerns honestly and impartially about any unethical behaviour, violation of the code of conduct, or any suspected fraud in the company

CONCLUSION

Thus, the new Indian Companies Act of 2013 is certainly a very innovative and landmark legislation in respect of the duties and responsibilities of the directors (of companies) also. Both broad categories of directors, namely, the directors having pecuniary relationship with the company, and the independent directors, have been properly considered under this mature legislation for directors. It is quite obvious from above illustrations that the CA-2013 sincerely seeks to make the corporate management and governance in India rather efficient, fully accountable, transparent, and maximally beneficial to all stakeholders and related professionals, through this intelligent legislation over duties and responsibilities of directors in Indian companies.

 

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