Company law

1.What are the liabilities of Board of Directors towards the shareholders and stakeholders of a company?
(16) [2019]

Answer Liabilities of directors under the Companies Act, 2013 are a fundamental aspect of corporate
law, serving as a mechanism to balance the powers granted to directors with accountability. The
Companies Act, 2013, articulates these liabilities across several sections, categorising them into civil and
criminal liabilities, liabilities for fraud, breach of warranty, third-party liabilities, statutory duties and
liabilities for acts of other directors. This legal framework ensures directors act within the bounds of
their authority, safeguarding the interests of the company, its shareholders and stakeholders.

Key Liabilities of Director under the Companies Act, 2013

1. Liabilities of Directors Towards the Company

Directors have a fiduciary relationship with the company. They are expected to act in the best interest of
the company and its stakeholders. Key liabilities of directors towards the Company under the Companies
Act, 2013 include:

Breach of Fiduciary Duty: Directors must act with honesty, integrity and in good faith. Breaching these
duties can lead to personal liability, especially if the company suffers a loss due to their actions.

Ultra Vires Acts: Actions taken beyond the scope of authority granted by the company’s memorandum
and articles of association can render directors personally liable.

Negligence: Directors are expected to perform their duties with due diligence. Failure to do so can result
in liability for any resulting damages to the company.

Malafide Acts: Engaging in dishonest or fraudulent activities can lead to directors being held liable for
any losses incurred by the company.

2. Liability to Third Parties

Directors also bear liability towards third parties, particularly in cases involving:

Issue of Prospectus: Misrepresentations or omissions in a prospectus can lead to personal liability for
directors.

Allotment of Shares: Directors must ensure compliance with legal requirements during share allotment.
Non-compliance can result in liabilities to the allottees or other third parties.

Fraudulent Trading: Directors involved in fraudulent trading practices can be held personally liable to
creditors or third parties affected by such actions.

3. Breach of Warranty and Statutory Duties

Directors are bound by the powers vested in them by the company’s articles of association and the
Companies Act. Engaging in activities beyond these powers can result in:
Breach of Warranty: Directors may face personal liability for entering into transactions beyond their
authorised powers, causing losses to third parties.

Statutory Duties: The Act imposes various statutory duties on directors, with penalties for non-
compliance. These include duties related to filing financial statements, maintaining proper records and
more.

4. Liability for Acts of Other Directors

Directors may be held liable for the acts of their co-directors if they were aware of such actions and did
not act to prevent them. However, liability of directors under the Companies Act, 2013 is generally
limited to those who actively participate or consent to the wrongful acts.

5. Criminal Liability

The Act also outlines criminal liabilities for directors, which include:

Cheque Dishonour: Directors can be criminally liable for issuing cheques that are dishonoured.

Violation of Other Laws: Directors must ensure the company complies with all applicable laws. Ignorance
or negligence of laws like labour laws, environmental laws, etc., can lead to criminal charges.

Offences Under the Income Tax Act: Violations of tax laws can also result in criminal liability for directors.

6. Liabilities of Non-executive/Independent Directors

The Act provides some protection to non-executive and independent directors by limiting their liability
to acts of omission or commission by the company that occurred with their knowledge, attributable
through board processes and with their consent or connivance or where they have not acted diligently.

Conclusion

The liabilities of directors under the Companies Act, 2013 are essential for the integrity and
accountability of corporate governance in India. They ensure that directors exercise their powers
responsibly, with due regard for the law, the interests of the company and its stakeholders.

2. A director of a company stands in a fiduciary relationship award the company and shall observe
utmost good faith towards the company in any transaction with it or on behalf of it". Critically examine
the above statement and mention the other duties of directors with decided case law? (16) [2019]

Answer A company is an artificial person that exists only in contemplation of law and has a different legal
personality from its members. Because the directors have fiduciary responsibility for the company and
are entrusted with its governance and management, they have frequently been referred to as agents,
trustees, or representatives of the corporate body.

Examining Section 166 of Companies Act, 2013

A director of a company is required by Section 166(2) of Companies Act, 2013 to act in good faith to
further the company's goals for the benefit of all of its members. The director must also act in the
company's best interests as well as those of its shareholders, workers, community, and the environment.
Promoting the objectives of the company and defending the interests of its stakeholders are the two
main obligations to act in good faith, according to a straight reading of the statute. The common law
before codifications cast upon a duty of loyalty which included the duty to act in good faith in the best
interest of the company. Directors in India are now required to actively prioritize the best interests of
stakeholders and shareholders in the current scenario. This, however, raises questions about whether or
not interested parties are entitled to bring legal action if the fiduciary duty that the clause ensures is
violated. Section 166(4) of the Act codifies the common law principles of no conflict, no profit, as
established in Regal (Hastings) v. Gulliver, and the corporate opportunity rule, which was scrutinized in
Bhullar v. Bhullar. The sole Indian case examining the Corporate Opportunity Principle is Vaishnav
Shorůlal Puri v. Seaworld Shipping and Logistics Pvt. Ltd. in which the Court used Section 88 of the Indian
Trusts Act, 1882 to determine the fiduciary's obligations, thereby representing a nebulous application of
the UK and US positions on the principle.

Fiduciary Duty in India and Judicial Trend

The concept of fiduciary duty stems from the notion of acting in good faith. Between two persons one is
bound to protect the interests of the other and if the former availing of that relationship makes an unjust
enrichment or unjust benefit derived from another, it is against the ethos of fiduciary duty. The idea of
behaving in good faith serves as the foundation for the concept of fiduciary duty. When two persons
(natural or juristic) are in a relationship, one has to protect the other's interests. A fiduciary obligation is
violated if the former takes use of this relationship to obtain an unfair benefit or unjust profit from the
latter. A director's fiduciary duty is frequently compared to a trustee's duties to a beneficiary. Directors
must act in the best interests of their beneficiary, which in this case is the firm or its stakeholders, in
their capacity as trustees.

In the case of the Central Board of Secondary Education and Anr. v. Adiya Bandopadhyay and Ors. the
Supreme Court explained the terms ‘fiduciary’ and ‘fiduciary relationship’ in para 39 as when someone
has an obligation to act in another person's best interests while exhibiting honesty and good faith, that
person is referred to as a fiduciary. This is especially true when the other party places exceptional trust
and confidence in the person performing the duty. A scenario or transaction in which one person
(beneficiary) fully trusts another (fiduciary) with regard to his affairs, business, or transaction(s) is
referred to as a "fiduciary relationship." A person who keeps something in trust for another (beneficiary)
is also referred to by this name.

To Whom Duty of Fiduciary Owned

As a general rule, a fiduciary relationship only applies to the company and is not assumed between a
director and a shareholder. The case of Sangramsing P. Gaekwad is a landmark case on the fiduciary
duties of the directors vis a vis the company and shareholders. The Court relied upon a variety of cases
to conclude that under special circumstances, such as, directors placing the onus upon themselves to
advice the shareholders, in case of takeover of bid, usage of powers for extraneous purposes, when
tenets of agency such as trust, confidentiality and loyalty arise, when additional shares are acquired to
benefit the company and in the process directors make a pecuniary gain with an ulterior motive, a
digression can be made from the settled position of law which recognizes fiduciary duty of a director
only in context of the company. As a result, the court established a special circumstance/special
arrangement exception to the Percival rule.
Directors are key decision-makers of a company and as such, they are entrusted with various
responsibilities and duties under the company law. These duties are of utmost importance for the proper
functioning of a company and to ensure that the interests of all stakeholders are protected. The
following are the key duties of directors under the company law:

1. Duty to act in good faith and in the best interests of the company: Section 166 of the Companies Act,
2013, states that a director of a company shall act in good faith to promote the objects of the company
for the benefit of its members as a whole and in the best interests of the company. This duty requires
directors to exercise their powers and duties in the best interests of the company and not for their own
personal gain or interests.

2. Duty to exercise due care, skill, and diligence: Section 166 of the Companies Act, 2013, also mandates
that a director of a company shall exercise due care, skill, and diligence while discharging his duties. This
duty requires directors to apply their knowledge, expertise, and experience to make informed decisions
that are in the best interests of the company.

3. Duty to avoid conflicts of interest: Section 184 of the Companies Act, 2013, lays down the duty of
directors to avoid situations that may result in a conflict of interest between their personal interests and
the interests of the company. Directors must disclose their interests in any contract, arrangement, or
transaction entered into or proposed to be entered into by the company to avoid any conflict of interest.

4. Duty to maintain confidentiality: Directors have access to sensitive information regarding the
company, its operations, and its stakeholders. As such, they have a duty to maintain confidentiality and
not disclose any information that may harm the company’s interests.

5. Duty to prevent insider trading: Directors have a duty to prevent insider trading in the company’s
securities. They must ensure that no insider, including themselves, trades in the securities of the
company on the basis of any unpublished price-sensitive information.

Interesting case law: One interesting case that illustrates the importance of directors’ duties is the
Satyam scandal. In 2009, Satyam Computer Services, one of India’s leading IT companies, was embroiled
in a major accounting scandal. It was revealed that the company’s founder and chairman, Ramalinga
Raju, had manipulated the company’s accounts and inflated its profits for several years. The scandal
resulted in the loss of billions of dollars of shareholder value and severely impacted the reputation of the
Indian IT industry. In this case, the directors of Satyam were found to have failed in their duties to
prevent the fraud and protect the interests of the company and its stakeholders.

The Satyam scandal highlights the importance of directors’ duties in ensuring the proper functioning of a
company and the need for directors to act in the best interests of the company and its stakeholders. It
also underscores the need for robust corporate governance practices and the role of independent
directors in overseeing the company’s affairs.

In conclusion, directors’ duties are of utmost importance for the proper functioning of a company and to
ensure that the interests of all stakeholders are protected