Insight on the Duties and Responsibilities of a Director of the Company

Ashish M. Shaji

06 Sep, 2022

Corporate failures in the recent past such as in case of Satyam, Sahara, Kingfisher, Saradha Chit Fund brought out the fact that the Companies Act, 1956 which existed over a period of 50 years, was ineffective at handling some of the present-day challenges of growing industries.

The Companies Act, 2013^[1] has been introduced to meet the present day challenges and difficulties of Corporate Governance arising from stakeholders’ expectations by increasing the roles and responsibilities of the Board of Directors and protecting stakeholder’s interest.

Who is a Director of the Company?

 Directors are officers of the Company who are responsible for managing the Company and making the decisions as to its operation on a day to day basis, for the benefit of the shareholders. The Companies Act, 2013 provides different categories of directors, including whole time directors, managing directors, independent directors, nominee directors, alternate directors and women directors.

What are the Duties and Responsibilities of a Director of the Company?

Section 166 of the Companies Act, 2013 stipulates below-mentioned duties and responsibilities of Directors of the company:

• A director of a company shall act in accordance with the Articles of Association (AOA) of the company i.e. to act within the powers.
• 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 and for the protection of the environment.
• A director of a company shall exercise his duties with reasonable care, skill and diligence and independent judgment.
• A director of a company shall avoid direct or indirect conflicts of interest.
• A director of a company shall avoid undue gain or advantage either to himself or to his relatives or partners.
• A director of a company shall not assign his office to any other person.
• Apart from this, a Company Director is also required to take measures to ensure that the company’s financial statements are audited.

The penalty for contravention of Section 166 of the Companies Act, 2013

• If a director of the company contravenes the above provisions, then such director shall be punishable by fine which shall not be less than One Lakh Rupees but which may extend to Five Lakh Rupees.

Obligations to be performed by Directors

A part of the duties set out in section 166 of the Companies Act, 2013, directors are also responsible for various obligations provided as under:

• The directors of the Company require laying the financial statements for approval and adoption at Annual General Meeting (AGM) of the Company.
• A director is responsible for devising proper systems to ensure compliance with the provisions of all the applicable laws and to ensure that such systems are adequate and are operating effectively.
• A director shall ensure that the company complies with obligations relating to Corporate Social Responsibility.
• The directors are responsible for appointing first auditors.
• A director needs to disclose his interest in a contract with the company.
• A director is prohibited from engaging in forwarding dealing with securities.
• The board of directors is responsible for the appointment of whole time key managerial personnel.
• The directors are responsible for the issuance of notice for holding of board meetings and general meeting.

Duties and Responsibilities of an Independent Director

To ensure independence and equitableness of the Board, the Companies Act 2013 also casts various responsibilities on the Independent Directors. An Independent Director is a member of the Board of Directors but doesn’t own any share of the company nor have any financial relationship with the company other the sitting fees it receives. As per Schedule IV of the Companies Act 2013 the Duties and Responsibilities of Independent Directors are as follows:

• Protecting and promoting interests of all and especially for Minority Stakeholders
• Acting as a mediator in case of Conflict of Interest amongst the stakeholders
• Assistance in forwarding independent and equitable justice to the Board of Directors
• Adequate attention towards Related Party Transactions (RPT)
• Honest and impartial reporting of any unethical behavior, violation of the code of conduct or any suspected fraud in the company.

Penal Provisions

The minimum amount of fine that is imposed under certain sections is Rs. 25,000 and which in certain cases extends to Rs. 25 crores or even more.

Below is the list of few contraventions, where the penalties are Rs. 1 crore or more:

• Violation of the provisions relating to not-for-profit companies (Section 8)
• Violation of provisions relating to subscription of securities on private placement (Section 42)
• Issue of duplicate share certificates with an intent to defraud (Section 46 (5))
• Failure to repay deposits within specified time (Section 74 (3))
• Contravention of provisions relating to insider trading (Section 195 (2)).

Practical Recommendations to the Directors of the Company

To make directors more accountable and personally liable in case of any wrong committed by them, the act has provided with enhanced duties and liabilities for the directors of the company. To avoid stringent penal provisions for non-compliance, below are some of the practical recommendations which directors may find useful while discharging their duties:

• All directors need to attend as many board meetings as possible to ensure that they are fully aware of the company’s business.
• Directors should read all necessary papers and relevant background information made available to them for meetings to enable their meaningful participation and contribution.
• To provide prima facie evidence, in case the role of the director is questioned at any time, directors must ensure that any questions raised by them in a board meeting or any dissent expressed by them are recorded in the minutes of the board meeting.
• Directors need to ensure that they receive appropriate training/induction on governance and directors’ legal duties as and when required.
• Directors need to ensure that they take legal advice, in cases of doubt.

Conclusion

From the above information, it is quite clear that Directors under the Companies Act have a critical role to play for the success of a Company. Many are unaware of these information regarding duties and responsibility of a director of the company. If you wish to gain more information on the same, you are advised to go through our blogs.

Read our article: Non-receipt of Subscription Money under Companies Act, 2013